SaaS startups gain favour as funding slows down for other companies

According to the Venture Intelligence data, year-to-date, SaaS start-ups have raised almost $1.8 billion

One of the biggest merger-and-acquisition events for software-as-a-service (SaaS) came when NYSE-listed Zendesk was acquired for $10.2 billion.

Though the deal size was lower than the earlier $17 billion offered by the same consortium of investors, it shows the interest and potential of SaaS companies across the globe.

SaaS start-ups are attracting big investment even when the picture in other equivalent sectors is not so encouraging.

According to the Venture Intelligence data for CY22 (year-to-date), SaaS start-ups have got $1.8 billion. The funds raised until June 16 by them is higher than the $1.54 billion in 2021 (January-June), and much above the $374 million scooped up in the first six months of 2019. In terms of volumes too, the SaaS sector tops the charts with 143 deals.

Industry players and venture capitalists say the Indian SaaS market has reached an inflection point as the product eco-system has matured, and, with cloud adoption both globally as well as in India, the acceptance of SaaS players has grown multifold.

In the past three and a half years, the number of SaaS unicorns in India grew from a mere two to 20. And in the first four months of 2022 alone, India saw four added to this list. A Bessemer Venture Partners report projects the Indian SaaS market will be valued at $50 billion by 2030.

This is evident from the fact that the number of software product start-ups has increased to 2,000 in 2021. Of these, 1,000 were SaaS companies.

Nasscom expects revenues of almost $13.3 billion in FY22 coming from the software product start-ups, propelled by SaaS, enterprise digitisation, and small and medium businesses.

The report by Bessemer Venture Partners says when compared to their global counterparts, Indian SaaS players are efficient and quick in building products, which is also attracting investors.

For instance, Indian SaaS businesses tend to be more efficient than their US counterparts. Best-in-class SaaS companies in the global market have approximately 70 per cent sales efficiency at $10-30 million annual recurring revenue (ARR). As a business grows its revenue, efficiency drops to 30-40 per cent by the time the company reaches scale (e.g. $100 million ARR).

“When we look at the BVP Nasdaq Emerging Cloud Index, the median efficiency is 35-40 per cent. Most Indian SaaS companies run at 80-100 per cent or higher sales efficiency even when these businesses approach $100 million ARR,” said Anant Vidhur Puri, partner, Bessemer Venture Partners India.

Best-in-class early-stage Indian SaaS companies usually have 150 per cent plus efficiency. This means most Indian SaaS companies will spend less than $100 million to get to $100 million in revenue. Take the case of Zoho, which has crossed $500 million in revenue without raising funds from investors and they have built a full suite of products.

Puri pointed out most Indian SaaS companies went to the market with near final versions of their products rather than a minimal viable product (MVP) and they often did so by burning less than $3 million.

Another unique trend in SaaS businesses in India is that they build products faster and earlier in their lifecycle.

“Often US SaaS companies will wait for one product to get to approximately $30-40 million ARR before thinking of new products. India businesses often start creating their second and third products even before the first product has reached $5 million,” Puri added.

Rather Puri shares that investors and founders should take a few learnings from the SaaS ecosystem and not be obsessed with unicorns but on ARRs. “Last few years we have been seeing that the focus is on unicorns. We believe that being a unicorn is a metric that is not in the control of the founders. And as a founder one does not want the value of their creation being brought down because markets in some other country are down. Rather focusing on revenues that customers give is a much more tangible parameter,” added Puri.

Puri terms that it is time for the Centaur’s to get more prominence than unicorns. Centaurs are SaaS businesses that have crossed the $100 million ARR mark. BVP estimates that of the 44 new unicorns minted last year, about eight private cloud companies have the Centaur status such as Zoho, Icertis, highradius, druva, BrowserStack, among others.

In an earlier interview with Business Standard, Sridhar Vembhu, co-founder and CEO of Zoho on what is making India SaaS click, said: “What you see today is based on the foundations that were laid almost 15 years back when we started off. Also the revenue traction that you are seeing in some of these players is real, which then attracts investors too. Next we have to scale up from the million to billion dollar companies.”

But he also cautions the SaaS startup founders: “My advice to SaaS startup players is to assume that the funding environment will stay tough. Focus on running a tight ship focus on customers, being profitable and growing based on our profit.”