When we started working on SahiGST in late 2016, GST was a huge buzzword in business & political circles. In the months to come, some startups started to show up who were focused on this opportunity. Some of them got angel funded while some have much larger VC backed war-chest. As we started SahiGST, we too considered the angel funding route. But those ideas were shot down very early for various reasons. Here is an attempt to explain why we think it is not a good idea to raise funds for SahiGST.

Broadly the factors for our decision making are divided into two buckets, one market scenario and the other being founders own journeys.

Let’s look at the market first.

We were dealing with Government policies & systems

Our CA told us during the run-up to GST implementation in the country. The policy changes that you expect to be chaotic often turns out to be calm and the calm ones turnout to be chaotic. Our experience of trying to decode the model law and prepare a product around GST had made one thing clear, it won’t be a smooth ride. Given the volatility around GST & its implementation, we knew that things would be much clearer in 6-9 months and deploying any funds (specially borrowed) in an aggressive manner might be a gamble that we do not want to take. We could build a great product with two technical co-founders & three founders focussed on marketing, sales and support.

So we hired very few people and ran a lean ship instead of expanding prematurely. In hindsight, that went just perfect, had we invested too heavily, we would have burnt a lot of money in vain by now given that the tax filing due dates were extended by two full months!

The market size was not clear & historically fragmented

If you run a business In India, you would know by now that there are many Payroll processing & HRMS solutions that keep fighting for your time. If you ever looked around, you would know that the same is true for ERPs as well. In fact the tax compliance market has a dozen or more players, all profitable and range between $200k to $3M in revenues. The market itself is small, fragmented and the consumer set isn’t in a habit of paying a lot of money for better products.

A lot of chatter inside VC firms & startups who look at this market would be around the market size. With one questions, will GST expand the market? Will GSTN’s technology give an opportunity to make a large business around this change?

There are several ways to look at this. We concluded early on that this won’t be a winner takes it all market and would most likely remain a fragmented play with several unknowns that can sway the market in any direction. If we are to attempt finding the market size, here are some potential math.

i) There would be 90 lakh taxpayers. If each of them pays Rs 1000 a month, you have a huge business at hand. That seems like a good opportunity with ~Rs 11000cr worth of revenue potential.

This assumes:

• Everyone does their compliance themselves and hence would own the software themselves.

• Indians would pay Rs 12,000 annually for a DIY compliance software, making it more expensive than their accounting software (which only 10-20 million businesses use) and OS itself.

ii) There would be 90 lakh taxpayers, some of them would use a good software to do their filings themselves. That could be a good opportunity with ARPU of Rs 5,000 from 20% of the market. Market size of INR 1000cr.

This assumes:

• There would be some competition with the accounting platform they use, but most of them may not use the same for return filing. Or you would create a software that does both, book-keeping & compliance.

• Potential market size would be 9 – 18 lakh SMEs. The paying capacity for them could be anywhere from Rs. 3000 to 10,000 a year.

iii) There are 50,000 to 100,000 addressable CAs who would do compliance for over 50 lakh taxpayers. So almost all of these CAs would need a software. Average revenue can again be Rs 10,000 to Rs 15000 a year. That’s seems a very small eventual market for helping sever 50 lakh taxpayers. But the challenge with desktop softwares dominating the market has been that people pay once for unlimited use. There isn’t as much variable usage based cost for the developer.

This assumes:

• Compliance would continue to be dominated by CAs and they would adapt to handle the amount of work that GST filing demands.

• That the existing desktop based players would do a poor job of going to the cloud. However the market would be forced to use a more efficient online system given that GSTN itself promises quality APIs.

iv) Roughly 100,000 CAs would do compliance for over 50 lakh SMEs and would charge anywhere from Rs 10,000 to Rs 40,000 annually for GST alone. That’s an opportunity to make a marketplace for this whole transaction to work. So a ~ Rs 20,000cr market where we can make 1-10% cut as a platform.

This assumes:

• A large portion of CA – Client relationship would move to a cloud platform and they would do their dealings via this platform. OR this could become a Practo for CAs.

• It would be feasible to take a cut from CAs revenue or charge for the software in such a manner that it leads to 1-10% of CA fees.

While you choose any of the above math and add your own analysis, we believe the market lies between ii & iii option. Software & compliance tools today attract a certain amount of spending from the business community. A new tax regime can’t disproportionately increase the expenditure SMEs do on this software segment. And hence our conservative view of the market size. There are a lot of stories sold around lending based companies leveraging GST to make a business, for that one need not make a compliance software, a simple OTP entered by a business on a lending platform would enable this platform to access ALL their business transactions on GSTN.

So while the shaky market size discourages us from leveraging the angel investor relations we have to raise money for this business, we do see that this can be a good market with up to $1M in revenues and decent profits. And may be there would be avenues to grow this further over time.

The second part of our reasoning is who we are, the founders own journey.

We are five co-founders at SahiGST and that has its own implications. We already run another venture Pricebaba which has its own set of investors and revenue streams. With the lean team at SahiGST we have been able to go cash flow positive within 2 months of launch and the initial investment was sourced from within the founders group.

While SahiGST’s initial promise could attract angel investment, we had our reservations. Firstly, we wouldn’t be looking for a Series A which may not be aligned with angel investors. Secondly, in the fast paced GST domain, we did not want to defocus to raise funds or put differently, we did not see the impact of these funds on our business numbers. And if we may add, additional dilution after existing five shareholders (founders) is also something that demotivated us from raising.

I hope this thought process relating to fundraising would help you think through your startup idea, its potential and decision making around fundraising.

About the author:
Annkur P Agarwal is the co-founder of Pricebaba & SahiGST. Pricebaba is a product research engine that helps you research and shop consumer electronics. SahiGST is a SaaS platform for Indian SMEs to effectively manage their GST compliance.