As we come up on the next round of Indian VC fundraising from their Limited Partners (LPs), one of the biggest questions for fund managers are the kind of exits they have to show from their past investments. LPs are the entities who invest in Venture Capital funds and evaluate their investments in these funds on the basis of returns and exits that the fund managers have been able to give them. Given that public markets have not seen too many IPOs, and prominent secondary exits have been few and far between, funds are potentially starting to look at investments, which can balance their portfolio in terms of exits. B2B and SaaS businesses being inherently revenue-oriented with a focus on profitability make them exit-friendly within the VC investors’ time frame (typically 5-6 years for any investment).

On an average, investors invest in between 10-15 companies, out of which 5-6 are perceived as key investments with the potential for multi-bagger exits. In the past few years, given the growth and prominence of the Indian consumer story, most of these investments have been in B2C startups, which are perceived to have higher chances of providing multi-bagger returns and greater chances of going global. B2B startups, being oriented towards slower but surer growth, have traditionally been looked upon as less attractive in a market with one of the fastest-growing consumer demographics. However, with the changing business landscape, this is changing as well.

Investors are looking for new segments to balance growth and exit risk in their portfolios, and B2B-SaaS businesses are starting to seem more attractive. However, just like the B2C segment has seen models that work and models that don’t, B2B also has inherent risks. And as investors are now starting to evaluate a segment they have not paid much attention to in the past few years, it would be important to understand some of the key pressure points to watch for.

Receivable cycles can kill a business. B2B businesses suffer from a different risk profile than their B2C counterparts. While there are positives of having a sticky and paying customer base for their product or service, there are also inherent negatives to working with enterprises. Enterprise payments are almost never cash and carry, resulting in long receivables cycle management, with little to no working capital support. Many startups have limited negotiating power with their enterprise clients and are subject to these long working capital gaps, despite their best collection efforts. Not being able to manage this can mean no cash in the bank for paychecks, even while revenues are booming.

Efficient capital allocation in B2B businesses is a critical must for investors. The need for capex in a B2B business is to fund product development and growth and not so much for customer acquisition. At the unit-level, B2B businesses need to make money or they are unsustainable. Therefore, multi-year payback periods for acquisition costs and high levels of marketing spend may not be the most efficient use of capital. For most B2B businesses, enterprise customers are not only repeat customers but have a strong potential for cross-selling and up-selling different products or further services. And therefore, to get these additional revenues, key account management is where good B2B businesses invest time and resources. Overall, this can also make for better margins and returns for the business in the long term. Businesses that do not do this may find themselves on a treadmill with ever-increasing acquisition costs with no way to recoup them from their customer set.

What’s the proportion of annuity vs. one-time revenues? With the advent of business models such as SaaS, B2B businesses (especially in the technology space) are starting to de-risk their cash flows by converting one-time revenues for product versions into annuities that they can count on. Steady and predictable cash flows can help focus sales infrastructure on growth rather than building topline from scratch each year, thereby also reducing the pressure on capital for growth. One-time revenues can see spikes and troughs, however, a good B2B business will always focus on driving high renewal rates for annuity revenues.

There are obviously other levers that can affect the long-term growth potential of B2B businesses such as levels of fixed costs and having an experienced management team, however, keeping these critical ones in mind can hopefully help differentiate good B2B businesses from others.

(Kamalika Bhattacharya is Co-Founder of QuoDeck Technologies, a global B2B SaaS product in the Enterprise Learning space. Before founding QuoDeck, she has been a career investment banker and has led deals in both late and early stage investing.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author.