Fernway DiarySM

Jan 20, 2022

According to a recent report by management consulting firm Bain & Company, Indian Software-as-a-Service (SaaS) companies are on track to reach $30 billion in revenue by 2025, capturing 8 to 9 percent of the global SaaS market. Investment in SaaS increased 170{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} over 2020 and is expected to reach $4.5 billion in 2021. Growth in this area has primarily been driven by an increase in the number of $50 million+ deals. This investor interest encompasses both early and later-stage SaaS companies, with an 85 percent increase in average value of seed rounds and a 20 percent increase in share of Series D+ funding rounds over 2019, the report shows.

The Indian SaaS landscape features a growing number of maturing companies. In 2021, over 35 SaaS companies had annual recurring revenue (ARR) of $20 million+, with 7 to 9 of those companies hitting $100 million ARR. By contrast, only 1 to 2 companies hit the latter figure five years ago. The firm’s analysis points out that Indian SaaS companies have excellent ARR-to-funding ratios, which are in line with their global SaaS peers, and that a select few outperform their US counterparts in terms of capital efficiency.

The past few years have also seen a growth in exits among Indian SaaS firms, increasing from 6 in 2018 to 12 in 2021. Notable among the current year’s exits was business software provider Freshworks’ $1.03 billion initial public offering in September. The country now has 13 SaaS unicorns, up from only 1 in 2018.

Also of interest is the degree to which success in this segment is setting the stage for further growth, by increasing the available talent pool of SaaS professionals in India. In 2021, SaaS companies employed 62,000 people. Five thousand new jobs have been created by ex-employees of top Indian SaaS companies who have gone on to found 250 new companies.

India has one of the top startup ecosystems in the world, behind only the US and China. In the SaaS realm in particular, more than 400 SaaS investors, over 500 incubators and accelerators, and many communities and government initiatives foster growth and innovation.

Horizontal business software is the largest subsegment of Indian SaaS, accounting for more than half of all funding. Vertical business and horizontal infrastructure software make up the rest. Horizontal business software growth has been driven by higher-than-average deal values, while vertical software growth has been due to a larger number of deals.

Noteworthy themes among subsegments of the Indian SaaS market include enterprise collaboration, events tech, conversational artificial intelligence, and human resources tech in horizontal business software; cybersecurity, DevOps and dev tools, and data management and observability in horizontal infrastructure software; and EdTech, healthcare tech, logistics tech, and e-commerce enablement in vertical business software.

In the last two years, Indian SaaS has attracted a diverse group of investors. Across 2019 to 2021, the top 10 investors’ share of total deal value was 30 to 35{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. Over 2020 to 2021, Tiger Global was most active by value, while Sequoia was most active by volume. The country has seen the emergence of dedicated SaaS-focused funds as well as participation from new investor categories such as corporate venture capital and sovereign wealth funds. Because founders have also come to expect greater involvement from investors, investors are seeking to add value by providing operational support on go-to-market, product growth, expansion, and recruitment on top of their commitment of capital.

The report concludes that India has an opportunity to develop a true niche in horizontal business software, vertical business software, and SMB-focused SaaS companies going forward, and that ample opportunities for growth still lie ahead.

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