Compound Startups from India

For the last decade or so, the accepted wisdom for SaaS companies was, do one thing, and do it well. VCs would advise founders to ruthlessly solve a single high-value customer problem, and not spread themselves too thin or explore too many adjacencies. Startup best practices were all about focus and discipline.

We believe this advice is no longer valid. Point solutions – solutions to very narrow problems – work well initially, but they fail to satisfy customer needs over the long term. Large organisations with broad software requirements inevitably fall victim to “SaaS fatigue” – having to install, integrate, maintain, and pay for dozens if not hundreds of independent and often silo-ed apps.

We believe “compound startups” are the remedy to this unwieldy proliferation of point-solutions. Compound startups are the opposite of narrow and focussed; they aim to solve multiple customer problems with a single “compound product” that addresses all their needs.

As with traditional SaaS, compound startups can be both vertical and horizontal. Vertical compound startups try to solve many problems for a single industry. A good example is Toast, which offers end-to-end software for restaurant management – point of sale, kitchen order management, reservations, payment processing. Vertical compound startups are often framed as “the operating system for industry X”.

Horizontal compound startups try to solve many problems for a single enterprise function (typically, owned by a CxO), but can be used by multiple industries. A good example is Rippling, which offers end-to-end software for all aspects of HR – hiring, onboarding, payroll & benefits, expenses – everything that the CHRO is responsible for. This replaces buying individual SaaS apps for each of those tasks.

Compound startups have long been a feature of the Far East consumer ecosystem (in the form of “super apps” like WeChat, LINE, KakaoTalk and Gojek), and they are rapidly spreading in the US B2B ecosystem. We believe there is an attractive opportunity for Indian startups to build the next generation of compound startups for the world.

Compound solutions offer advantages to both customers and vendors versus the status quo.

For customers, compound solutions often have a lower overall cost. Compound vendors can amortise sales and marketing, R&D, and other costs across multiple products; this allows them to undercut the price of each component bought separately. They are easier to maintain, since customers don’t have to stitch together multiple apps or navigate fragmented data silos. Since the integrations are already done by the vendor, they make fewer demands on IT. There’s also a lower operational burden, given that they typically have one set of commercials, one point of contact, and fewer concerns about compliance, data sharing and security. Finally, compound startups aspire to offer a better integrated user experience, thanks to shared design patterns, UX components and data models; this implies hence easier onboarding and higher productivity.

For vendors, compound solutions have the potential for structurally better economics. As mentioned, vendors can amortise certain shared costs – sales & marketing, product R&D, enterprise fixed costs – across multiple products. The bundled offering can thus be created at a lower cost than the aggregate of competing point-solutions; at the same time, the benefits of bundling can be used to charge a high “convenience price” to customers. Compound solutions are also extremely defensible: once deployed at a customer, they’re hard to displace. Piecemeal solutions are an inadequate substitute for an existing platform with a large surface area; there’s a heavy switching cost especially if the compound startup acts as a ‘system-of-record’ for critical enterprise data, and users simply don’t like changing their daily workflows especially if the different components are tightly integrated. And finally, compound solutions usually have a larger TAM, since they provide the tooling for the entire CxO/function, rather than just one piece of it.

Of course, all these advantages come at a price. Compound startups are harder to get off the ground than point-solution SaaS startups. Their MVPs are a lot more complex, thanks to all the bundled use cases, integrations, and unified data layer that give them their value. Running multiple products under the same umbrella necessitates multiple senior leaders across product, technology, design and customer success. High ACVs mean that sales cycles are slower. All of these make building compound startups an intimidating proposition for many founders.

Which is where India has an advantage. Building a compound startup in India is substantially easier than elsewhere, thanks to the country’s depth of high-quality, relatively affordable talent. (It’s no coincidence that Rippling, one of the earliest and best-publicised compound startups, has an Indian co-founder and substantially all their product/engineering in India). As such, we believe there is a terrific opportunity for Indian founders to build compound startups to serve global markets.

We also believe that we are well-placed to support such founders, because of our experience and expertise backing deep-tech founders. We think there’s a strong analogy between early-stage compound startups, and deep-tech startups: both are complex, require domain expertise, and need time and resources to get going. But this is precisely what makes such startups attractive and lucrative over the long run – “my hard work is your barrier to entry”.

Our philosophy on investing in compound startups is therefore exactly parallel to our approach to deep-tech companies: we do the work to understand each space well; we partner with expert founders with exceptional product vision; and we are ready to support them through long development cycles over multiple funding rounds.

We’re especially interested in compound startups attacking markets or industries which are fragmented or “over-tooled”, with lots of point-solution apps; compound startups built on a foundational data layer that can act as an enterprise system-of-record; and compound startups with a compelling strategic vision that can be parallelized across product owners.

Finally, we believe that compound startups, more so than almost any other category or business model, are all about execution. The problems, solutions and customers are all known, and there are rarely any major technical risks; instead, it’s all about building and selling. This favours strong product leaders and domain-expert founders. As with all our investments, founders always come first. If you’re a founder building a compound startup in India, with ambitions to serve global markets – please reach out!