1Mby1M AI Investor Forum: Manu Rekhi, Managing Director at Inventus Capital Partners (Part 2)

Sramana Mitra: Let me ask you what you are seeing and how you’re processing this exception, which is usage-based pricing, right? SaaS became so popular because it was subscription pricing, and subscription business models are very attractive to investors, whether it’s public market investors or private market investors. It’s extremely popular because of its predictability and the fact that it’s recurring.

So you book something, it stays on the book, and then you add on top of that, and that stays on the book for years and years and years. So from a P&L point of view, it’s a very attractive model, but usage-based pricing does not have that same level of predictability.

What are you seeing?

Manu Rekhi: Yes, you’re correct. I think predictability is important. As more budgets get shifted, CIOs and especially CFOs would want predictability.

Even going back to the SaaS world, the founders found a solution

that I could do monthly pricing for a seat license, and it was easy to predict. But most of VCs insisted that you should do 12-month contracts, right?

Sramana Mitra: Yes.

Manu Rekhi: So, they were still paid upfront. So, I think, even though it was built for their flexibility, cash was important and most companies ended up doing annual prices and pushed customers to do annual license pricing. It was similar to our previous models as well. I think there’ll be multiple ideas that will come through depending on the solution you’re solving, right?

For example, I’ll give you an idea. I’ve been talking to a company we’re looking at invest in. It does sales automation – it makes the entire sale happen from finding the leads to making the phone call, closing the lead, and actually booking the revenue, right? It’s all the way through. What the founder has come up with is like, “Hey, I will charge you X dollars per month just like an employee, right? For this person, based on the number of phone calls made, you can count the number of hours. You’ve 40 hours a week equivalent to the hours a regular employee works, so I’m gonna charge you accordingly.”

So there is predictability in that model.

It’s a thousand dollars a month, for example, and I’m going to work 160 hours a month and that’s my pricing. You may be paying $5,000 or $10,000 for a salesperson and then commissions on top. I think in that situation, that pricing model works well.

Sramana Mitra: Yes.

Manu Rekhi: But if you look at agents across the board, if I can do a hundred employees’ work, I can’t just charge you for one thing.

So, we can have other models. For example, I have a minimum pricing,

and then I have usage on top of that.

So I can predict, and I can buy these bands, right? I can buy 10,000 credits and if I consume the credits, I could buy more credits. I think pricing is separate than the value being delivered, right?

Sramana Mitra: Yes. The pricing is derived from value, though.

Manu Rekhi: Yes, exactly. So I think, I think there’ll be experimentation. I’ve seen lots of different ideas coming through.

It could be that you pay for your processing power. You use your open AI license or your Gemini license, and then I’m going to charge you on top of that so that I’m not taking the underlying model cost, right?

I’ve been seeing all these models being tested across our portfolio, and I think two or three will come through, but usage base is not new.

This is how we started, right? When you look at supercomputers, if you wanted to buy time, it was based on how many hours or how much usage you had. Cell phone pricing in the 1980’s and early 1990’s was all usage based. Based on the number of minutes you called, you were charged accordingly.

In some sense, I think we’ve seen this music before, so it’s not new.

Sramana Mitra: Yes, but if you look at Wall Street, Wall Street likes predictability in revenue recognition. So, it’s not like the cell phone companies get valued at the same level as the Atlassians and the ServiceNow.

This segment is part 2 in the series : 1Mby1M AI Investor Forum: Manu Rekhi, Managing Director at Inventus Capital Partners
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