Deal focus: China SaaS gets specific

Chinese software-as-a-service (SaaS) start-ups have experienced feast and famine over the past two years. Now, though, they appear to be back on the menu, albeit at more reasonable valuations and with a more nuanced view as to which industry verticals can generate the most traction.

The enduring SaaS question was whether domestic enterprise customers would be willing to pay for standardised, subscription-based products. Investors appeared to put all doubts to one side during the post-pandemic technology boom of 2021, with consumer internet specialists picking SaaS as they made their first forays into business services.

These investors left abruptly last year following a string of public market corrections that wiped billions off the market capitalisations of leading US players like Snowflake, Shopify, and Atlassian. New investment activity in China came to a virtual standstill.

“SaaS was overheated in 2021 and then it became too cold last year and this year – so cold that many local investors stopped looking at the industry,” said Qizhi Guo, a senior partner at CDH Venture and Growth Capital.

“But I believe in the SaaS business model. It means efficiency gains and zero maintenance costs for customers; it generates stable cash flows and strong growth for suppliers; and entrepreneurs can make headway if they focus on service quality to retain customers.”

CDH recently led a Series B round of nearly CNY 200m (USD 29.2m) for 1Data, a China-based robotic process automation (RPA) start-up that provides software to logistics specialists and supply chain managers. Convivialité Ventures, IDG Capital, and Eastern Bell Capital also took part in the round. The process was relatively protracted, having launched in August of last year.

Going hyper

1Data, which was founded by Tommy Bian in 2016, previously secured CNY 100m in Series A funding from SIG China in 2020. A CNY 200m extension, featuring SIG, IDG, Eastern Bell, and Sequoia Capital China, closed the following year.

Bian noted that the Series B valuation was higher than that of the Series A extension. He joked that had 1Data raised additional capital during the bull run of 2021, the valuation might be even higher.

The company’s fundamentals remain strong: 100% revenue growth for each of the past two years and a net customer retention rate of 90%. Expansion has come despite minimal marketing expenditure. Guo of CDH noted that about 30% of 1Data’s overall spending went into sales and marketing in 2022, much lower than the 40%-60% median range for general-purpose SaaS companies in China.

Inspired by the success of UiPath, a global leader in RPA, Guo’s team screened the local industry in search of a would-be equivalent. Among the multitude of general-purpose SaaS solutions that can be applied across various industries, they found 1Data. Its vertically integrated offering aimed at cargo owners, shipping companies, freight forwarders, and airlines stood out.

“The company combines technology with processes and know-how from the logistics industry, creating a sizeable barrier to entry. It can deliver truly automated solutions, rather than tools that improve manual work efficiency,” Guo added.

At the heart of 1Data’s offering is an integrated platform-as-a-service (iPaaS) driven by RPA and artificial intelligence (AI). The objective is to enable “hyperautomation,” which involves digitalising every operational aspect of a business and reducing the human role to a minimum. 1Data has developed a string of bots tailored for tasks such as order dispatching, bill reconciliation, and tax preparation.

Notably, iPaaS integrates with a range of existing customer relationship management (CRM), warehouse management system (WMS), and enterprise resource planning (ERP) software. In this way, freight forwarders can supply price quotes to customers without human intervention: 1Data tracks pricing offered by shipping companies in real-time and sends out alerts on identifying opportunities that meet the right criteria.

Another use case involves optical character recognition (OCR) whereby 1Data automatically captures information from the likes of business cards, images, PDFs, and Word documents so that everything from bills of lading to customer complaints can be accessed via ERP and WMS systems.

“Regarding automation, an important aspect is the ability to connect. We looked at many industries, including finance, energy, and pharmaceuticals, and we chose supply chains because it requires strong upstream and downstream connections so there is an inherent need and natural scenario for automation,” said Bian.

This view is endorsed by CDH’s Guo. He cited research conducted by the private equity firm that found the average price-to-sales (P/S) multiple for SaaS companies focused on specific industry verticals is twice that for general-purpose players.

Lego solutions

General purpose SaaS is aimed at either large corporates that prefer customised solutions, offering limited margins and growth potential to providers or small and medium-sized enterprises (SMEs) that accept standardised products but may not have the ability to pay. Moreover, high SME closure rates in China lead to low customer retention rates and high customer acquisition costs.

By focusing on a specific industry, it is possible to develop what Guo describes as Lego-style modules of different functions that can be pieced together in different ways, effectively delivering customised solutions through standardised products. The commercial logic is plain to see.

“From the investor's point of view, we need to return to the essence of business. No matter what kind of company you are, ultimately you must make money. We have a clear standard for SaaS companies: they must have a net profit margin of at least 15% when entering the relatively mature stage,” said Guo.

1Data is not alone in pursuing this model. Shanghai-listed Glodon Software has achieved a near monopoly position in China’s construction SaaS space, with revenue rising 41% year-on-year to CNY 5.6bn in 2021. Meanwhile, CDB Capital recently led a CNY 500m Series C for Kingsware Information Technology, an RPA specialist that brings automation to financial services.

1Data will use the Series B proceeds to upgrade its universal large language models (LLMs), which Bian believes will take user experience to the next level by enabling natural language prompts. Different LLMs are currently undergoing trials. OpenAI’s GPT-4, which supports chatbot ChatGPT is a priority, but 1Data is also preparing solutions based on Baidu’s Ernie. Ultimately, regulators will decide which path to take.

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• Topics
• Greater China
• Technology
• Early-stage
• China
• enterprise software
• CDH Investments Management
• IDG capital
• Eastern Bell Venture Capital