Case 002Company pitchHard

Pitch a company that is not in our portfolio: Sutrana Payroll, payroll software for Indian SMEs. The fund already owns an HR software company. Why is this a fit, and what has to happen for the round to return 5x?

Insight PartnersNew York · 2022

The situation

Sutrana Payroll sells payroll and statutory compliance software to Indian businesses with 5 to 200 employees: salary runs, provident fund and state insurance filings, professional tax, and a basic attendance module. ARR is Rs 24 crore, up 80% in the last year. Net revenue retention is 110%, gross margin 74%, and the company burns Rs 2 crore a month.

It is raising Rs 60 crore at Rs 400 crore post-money. The fund already owns a horizontal HR software company that sells recruiting, performance reviews and attendance to firms with more than 200 employees. Assume the fund holds its stake to exit with no further dilution, and that a payroll software company sells at 10x ARR at exit.

Your task

Pitch Sutrana in the room: why it complements the existing holding rather than competes with it, what multiple the fund pays, and how much ARR Sutrana needs for this cheque to return 5x.

Quick check

Roughly how much bigger must ARR get for a 5x on this cheque, at a 10x exit multiple?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Sutrana complements the existing holding: it sells compliance-heavy payroll to small firms, the portfolio company sells talent tools to large ones, and they overlap in a single cell. The fund pays 16.7x ARR for 15%. A 5x needs Rs 200 crore of ARR at a 10x exit, 8.3 times today, about six years of steadily slowing growth. It is investable if retention holds above 110% as customers grow.

Step 1Why start with the portfolio conflict rather than the company?

A tea shop owner who already runs a snack counter next door wants to know one thing before opening a juice stall: will it steal from the snack counter or bring it customers? A fund asks the same. A pitch for a company outside the portfolio fails in the first minute if it competes with a company the partners already sit on the board of, because the fund owes that company its loyalty and its confidential board information. So answer the conflict before the partner asks.

Map both companies on two axes: who the customer is and what the software does. Sutrana sells payroll, statutory filings and basic attendance to firms of 5 to 200 staff. The portfolio company sells recruiting, performance and attendance to firms above 200. The only shared cell is attendance for firms of 50 to 200 staff, and there the products want to be integrated, not compared: attendance data feeds payroll, so each can hand customers to the other as they grow.

Where Sutrana and the fund's HR software company sell: one cell of overlapPayrollStatutory filingsAttendanceRecruitingPerformance1 to 50 staffSutranaSutranaSutrana50 to 200 staffSutranaSutranaBoth200 to 1,000 staffPortfolio coPortfolio coPortfolio coOver 1,000 staffPortfolio coPortfolio coPortfolio coSutrana: payroll, small firmsFund's HR company: larger firmsBoth: integrate, do not fightA shared attendance feed can carry one product's customers to the other.
Sutrana sells payroll, statutory filings and attendance to firms of up to 200 staff, and the fund's HR software company sells attendance, recruiting and performance to firms above 200, so the two overlap only in attendance for firms of 50 to 200 staff.
Step 2What is the fund paying, and what does a 5x need?

Rs 400 crore post-money on Rs 24 crore of ARR is 16.7x ARR. The fund's Rs 60 crore buys 15%. Work backwards from the return: 5x is Rs 300 crore of proceeds, which on a 15% stake means Rs 2,000 crore of company value, which at 10x ARR means Rs 200 crore of ARR. The multiple also compresses from 16.7x to 10x on the way, so the ARR has to grow faster than the value.

The relationship
ARR needed=5×60/0.1510=2,00010=20020024≈8.3×\text{ARR needed} = \frac{5 \times 60 / 0.15}{10} = \frac{2{,}000}{10} = 200 \qquad \frac{200}{24} \approx 8.3\times
5 x 60the 5x target on the Rs 60 crore cheque, Rs 300 crore
0.15the fund's stake, Rs 60 crore of a Rs 400 crore post-money
10the assumed exit multiple of ARR
What it says in wordsDivide the proceeds you need by your stake to get the company value, then by the exit multiple to get the ARR the company must reach.
ARR needed for a 5x, against a plausible path, Rs croreNeeded for 5x: Rs 200 crore of ARR (8.3x today)24Today43Year 169Year 2100Year 3135Year 4176Year 5220Year 6Growth assumed: 80, 60, 45, 35, 30, 25% a year
Sutrana needs Rs 200 crore of ARR for the Rs 60 crore cheque to return 5x at a 10x exit multiple, 8.3 times today's Rs 24 crore, and a path of growth slowing from 80% to 25% a year reaches it in about six years.
Step 3Why is the pitch credible, and what could break it?

Three numbers carry it. Retention of 110% means the existing base grows without new sales, which in payroll usually comes from customers adding staff, so Sutrana grows with its customers. A 74% gross margin is software economics, not services dressed up. And efficiency is acceptable: last year it added about Rs 10.7 crore of ARR on Rs 24 crore of burn, a burn multipleCash burned divided by net new ARR added in the same period. Below 2 is usually read as efficient; above 3 as expensive growth. of 2.25. The round funds 30 months at today's burn.

Then say what would break it, because a pitch without a risk sounds like a sales deck. Payroll for small firms is a crowded, price-sensitive market, and small firms fail often, which caps retention. The Rs 200 crore target also assumes no dilution; if later rounds take 30% of the fund's stake, the target rises to about Rs 286 crore. Close with the view: invest if the cohort data shows retention holding above 110% for customers over two years old, because that is the number the whole return rests on.

Where candidates lose it

Most candidates pitch the product and never mention the portfolio company, which the prompt put there on purpose. The partner hears a candidate who did not think about who is sitting across the table.

The second loss is quoting the 80% growth rate and stopping. Without converting the round into the ARR a 5x needs, you have described a company, not an investment.

What the interviewer asks next

  • What if the exit multiple for payroll software is 6x rather than 10x?
  • How would you check that the 110% retention is not driven by a handful of large customers?
  • Would you rather take the round at Rs 400 crore post or pass and wait for the Series C?

Asked at Insight Partners, Software, New York, 2022 (Wall Street Oasis): Pitch me a company that's currently not in our portfolio that we should invest in.

Company names and figures are illustrative.