India could be on the cusp of unlocking a $1 trillion opportunity for SaaS companies, creating nearly half a million new jobs by 2030 – says a report released by SaaSBOOMi, McKinsey & NASSCOM
SaaS Market Overview
The global SaaS market is expected to grow from $272B in 2021 to $437B in 2025 at a CAGR of 12.5%. About 51% of this market is ruled by the top 5 players: Microsoft (17%), Salesforce (12%), Adobe (10%), Oracle (6%), and SAP (6%). India is strengthening its position in this globally exploding market. India has long been an attractive strategic location for the outsourcing of IT services, and now it is gearing up to meet the new age demand of enterprises for SaaS.
India has well covered the SaaS spectrum with startups spurring across the board. Investor enthusiasm has fueled startups with funding to scale their businesses. Currently India homes about 10 SaaS unicorns and over 1000 other SaaS startups. While 70~72% of India’s revenue is driven by new-age pure-play SaaS companies, traditional IT service providers have also started building SaaS capabilities in-house or through strategic acquisitions of SaaS startups. TCS has developed SaaS suite Ignio, Infosys has launched Finnacle SaaS offerings for US banks and acquired SaaS automation company Panaya. Similar ventures are seen across other large-cap IT services companies.
In this article, we will dive deeper into India’s SaaS landscape covering strategic positioning, ecosystem, market dynamics and future outlook. Before we explore the booming space of the SaaS startup ecosystem, you may want to ask: What exactly is a SaaS? Why is there so much buzz?
Cloud has enabled businesses to worry less about technology while leveraging the latest technology to grow their business. Cloud offered services can be categorized as IaaS (Infrastructure-as-a-Service), PaaS (Platform-as-a-Service) and SaaS (Software-as-a-Service). To understand the difference, let’s look at the IT chain.
IaaS as the name suggests provides the infrastructure, the first layer, of servers, storage and networking parts of the IT chain. PaaS provides the development ecosystem layer as well: runtime, middleware, O/S and virtualization in addition to infrastructure. However, SaaS covers the entire chain including the end application and data.
So, SaaS is software that runs on the cloud, stores data on the cloud and can be accessed through a device connected to the internet. The simplest example of SaaS could be an email application or even Netflix. Essentially we are surrounded by SaaS.
However, SaaS has far more reaching use cases in the B2B space. It is an attractive solution for business growth as it provides a pay-as-you-go model. This means the businesses practically don’t incur Capex (saves hardware costs) but have Opex (subscription costs) for tech capabilities – SaaS enables asset-light business models. Apart from costs, SaaS provides agility, as businesses can scale up depending on the demand/traction they achieve.
Businesses also have the advantage of staying up with emerging technologies. Multi-faceted benefits of SaaS for B2B customers essentially help them to grow and be more profitable. SaaS helps businesses scale and attain higher profitability levels. Every $ invested in SaaS companies leads to growth in businesses across sectors other than SaaS, creating a multiplier effect. Thus, SaaS makes the entire business ecosystem more lucrative.
SaaS companies function either horizontally or vertically – they may have expertise in a particular service which they provide across sectors (horizontally) or they may have expertise in a particular sector and provide various services for that sector (vertically). BFSI, retail and healthcare verticals are major verticals for SaaS. CRM (Customer Relationship Management), ERP (Enterprise Resource Planning) and CCC (Content, Collaboration & Communication) are major SaaS services.
India has always been characterized as the land of IT call centres. Post-liberalization, India served as a very attractive place for global companies to outsource BPO and IT needs. Fueled by cheap talent who can communicate in English, flux in engineering and rapid globalisation – India became an important cog in the global IT services and BPO.
India has a conducive environment for the growth of SaaS companies that can serve the growing global demand. India houses a huge labour workforce. In 2019 more than 3 million software developers and over 100 thousand SaaS developers were employed in India. The wages for Indian developers is around $10~20K against over $100K in the USA and about $60-70K for European countries.
India has established its position in global IT markets with about 75% revenues sourced from exports, of which the US is a major consumer. The onshore-offshore play works very well with the industry, establishing a high correlation of India SaaS Revenue with the US economy. This model provides a natural hedge to the Indian industry. The model works in a way that most revenues are sourced in USD but the costs are incurred in INR.
The high correlation benefits were well evident in the COVID era during which India experienced a threefold jump in IT sector FDI to $26B in FY21. The luring of foreign investors was driven by persistent depreciated levels of INR vs USD and near-zero fed rates. Both facilitated the availability of cheaper capital for investments and operations. The quick recovery of the US from COVID also led to the strong momentum of the India SaaS industry as compared to other industries.
India has now come a long way from the early BPO years. It is now creating SaaS solutions for the global markets leveraging its IT and BPO services capabilities. To understand the success of SaaS in India, we’ll need to first understand the ecosystem
The Indian SaaS Ecosystem
The entire SaaS ecosystem in India can be traced back to Zoho – the godfather of the Indian SaaS. Till date 41, startups have been founded by the Zoho mafia, including Freshworks and Chargebee. To know more about the world of startup mafias and Zoho mafia, you can check our earlier piece: Startup Mafias: Dons of The New Era.
If we can take liberty, Sridhar Vembu of Zoho and Girish Mathurbootham of Freshworks are as pivotal to the Indian SaaS ecosystem as Steve Jobs and Bill Gates (no particular order) were to the PC industry.
Both the leaders created a culture of intrapreneurship in their organisations and built a community of budding entrepreneurs. A testament to this is SaaSBOOMi, a Chennai based SaaS consortium of founders and product builders, which help the Indian SaaS founders to collaborate and learn from each other.
Bangalore is called the tech capital of India, but when it comes to Saas, it is Chennai that will be crowned as the “SaaS Capital” of India. Chennai based startups have generated $1bn+ in revenues out of the total Indian SaaS market of $3.5 Bn in 2020.
Since Zoho and Freshworks originated from Chennai, it was imperative that most of the new founders from Zoho Mafia set up their base, making Chennai a unique ecosystem.
Chennai is heaven… It is the city, the air, its people and much more – Girish Mathrubootham, Co-Founder Freshworks
Apart from the close-knit community and a city that breathes SaaS, there are other forces that are acting as tailwinds for the ecosystem – market and investors!
India Market and Players
Indian SaaS market size was $3.5Bn in 2020 and it is growing at a CAGR of 30%. Indian SaaS market is expected to bring $13bn-$15bn in revenues by 2025.
Large and growing market, scalable tech solution, profitable unit economics, recurring revenue, upfront payments – getting all these packaged into one is like a wild dream for a venture capital investor. VCs are showering money left and right on the Indian SaaS ecosystem to bet their horse in the race which can emerge as a unicorn in the end. India has nearly 1000 funded SaaS startups. The number of SaaS companies drawing Series-C or later stage has increased 4x in the last five years. India has currently 10 SaaS unicorns, with 6 becoming unicorns during the pandemic.
The thing with SaaS is that it touches everything. So you can essentially make a SaaS solution for any company whether it is big or small OR it is Indian or American OR it itself is an IT company or a manufacturing company. This makes the categorisation of the SaaS a little difficult exercise. On the basis of the geography of customers, we can have:
- India for India – Indian companies with Indian clients like Yellow Messenger, OkCredit
- India for the World – Indian companies with global clients eg Zoho, ChargeBee
We can also categorize the size of clients they serve: Small-Medium Business focused (like Khatabook) and Enterprise focused (like Postman).
Bain 2020 India SaaS report classifies it into Vertical-specific, Infrastructure specific and Horizontal SaaS solutions.
Since the SaaS industry is very different from other startup sectors like consumer, e-commerce or healthcare, both PE/VCs and SaaS companies have some interesting metrics to track. Here is a list of some metrics crucial for SaaS, though some of these are universal.
|ARR||Annual Recurring Revenue||Scale and sustainability|
|T2D3 framework||Growth should be Triple, Triple, Double, Double, Double each year from the end of the year ARR.||Can you grow from $1Mn in revenue to $100Mn in 6-7 years?|
Used for early-stage companies
|Rule of 40||Growth Rate + Profit Margin > 40%||Is growth at the expense of discounts?|
Used by late stage investors
|LTV/CAC||Life Term Value / Customer Acquisition Cost |
Ratio > 3X for SaaS
|Value generated by a customer should be more than it cost to acquire|
(All VCs across industries use this)
|SaaS Quick Ratio||Ratio of New Revenue due to growth & upsell to Loss in Revenue due to churn & downgrades||Can the company grow despite churn?|
Quick Ratio >4 will make your VC happy
(generally used by early-stage investors)
|Average Contract Length||Average duration of all signed contracts||Sustainability of revenues|
Enterprise SaaS have long durations. Early SaaS companies generally have a duration of 1 month.
|Average Sales per Customer||Total Sales divided by number of customers |
If the ratio increases over time, the company is successfully upselling and cross-selling.
|Tracks cross-selling and upselling performance|
SaaS Future Outlook
COVID crises like the past Y2K and GFC crises have played a pivotal role in boosting India’s position in the IT industry. Crises push enterprises to a cost-cutting mode which is facilitated by Indian industry due to the cost arbitrage advantages it provides. COVID crises not only demanded India’s cost arbitrage advantage but also demanded agility in terms of shifting demands.
Business demand was majorly driven due to: accelerated digital adoption and shift to hybrid work models. The shifting demands amidst COVID unravelled the theme of 3Cs – Cloud, Collaboration and Cybersecurity. The 3Cs helped SaaS companies stay buoyant amidst COVID.
As the digital transformation initiatives paced up, more and more businesses started shifting their operations on Cloud – and subsequently increasing the demand for SaaS as end-to-end operations are now being digitized on cloud platforms.
We have experienced a rise in meeting platforms such as Zoom, Google Meets, Teams, etc. to tackle the challenges of immobility during COVID. Businesses too experienced a higher & deeper adoption of such communication and collaboration SaaS tools. With higher adoption of cloud, remote working, Bring Your Own Device (BYOD) models the demand for cybersecurity has grown now more than ever.
The 3Cs offerings of the SaaS industry enabled business continuity amidst COVID across verticals. The adoption of digital models is expected to push the demand for 3Cs in the SaaS industry.
Another theme that emerged during the pandemic is the adoption of SaaS by SMBs (Small and Medium Businesses). Though SMB-SaaS is a category in itself, the pandemic definitely accelerated SaaS adoption by SMBs by some years. The second tailwind for SMBs is the democratization of tech. Indian giants like Zoho and Freshdesk have made their fortune by focusing on SMBs compared to the enterprise focus of global giants like Salesforce. An interesting point to note is that the Indian SaaS companies are targeting the domestic market as well.
For kirana stores, we have Khatabook, OkCredit, for teachers and tuitions we have Classplus, Teachmint, for processing payments we have Instamojo and so on. Taking it a step further, micro and small businesses which have been neglected till now will provide new opportunities for the next set of startups.
However, it is not all green. It is very difficult to extract money from Indians (and Indian small businesses) and that too on a recurring basis. That is why players like Khatabook don’t have an iota of revenue till now. Another challenge is if you want to create a truly scalable SMB SaaS, then you must have an inside sales edge with a self-serve model, which doesn’t need large sales teams like enterprise SaaS players.
The focus of this piece was to view the SaaS world from a business lens, however, this world revolves around technology and customers. We would like to bid adieu with two quotes by two SaaS pioneers:
“The only constant in the technology industry is change” – Marc Benioff, Co-founder of Salesforce
“If our customers aren’t successful, neither are we” – David Nevogt, Co-founder of HubStaff
This piece has been co-contributed by Nevil Kathiria