Fernway DiarySM

Dec 08, 2022

While 2022 has been marked by a notable cool-down from the record-setting levels of venture capital investment in 2021, certain segments of the tech market are still showing resilience despite the atmosphere of renewed investor scrutiny and caution. Although the SaaS sector in India has been affected by the decline in the global funding environment that has impacted startups in the region, investors and industry experts there continue to express optimism.

A 2022 report by Bessemer Venture Partners noted the firm’s conviction that India’s SaaS market had reached an inflection point in growth. In 2021, $4.8 billion in venture capital was invested in the sector, up three times from 2020 and six times from 2018. (It remains to be seen if predictions made elsewhere that funding would surpass the 2021 level in 2022 will prove accurate, given the widespread downturn in deals in recent quarters.) It forecast that the India SaaS market would reach $50 billion in ARR by 2030.

The report defined India SaaS as companies building cloud software in India, whether they primarily served a domestic or global market, while pointing out that many now-global companies began by selling to the India market before expanding into other regions. Three key conditions were identified in helping to drive cloud computing innovation in the region: the emergence of commonly accepted digital rails and standards in large industries like financial services, which allow companies to build new software products on top of those rails; the growing use of smartphones for business as well as personal use; and rapid digitization in all industries, accelerated by the pandemic.

According to the firm, India-based SaaS businesses were characterized by a few trends that differentiated them from similar countries in other parts of the world. First was a “culture of efficiency” that requires less capital for companies to get up and running and scale up, allowing early funding rounds to last longer. Indian SaaS companies tend to go to market with products close to a final version rather than a minimal viable product, often by expending less than $2–3 million. These businesses also tend to have a higher sales efficiency than their US counterparts across growth stages; while the median efficiency in the BVP Nasdaq Emerging Cloud Index is 35–40{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}, most Indian SaaS companies have an 80–100{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} sales efficiency even when they near $100 million ARR. Indian SaaS businesses also begin building new products earlier in their growth trajectory rather than waiting for a single product to hit a high level of ARR; the report cited both Freshworks and Zoho as examples of companies that successfully used a multi-product strategy to drive customer engagement and growth.

In a recent Livemint article, SaaS executives in the region echoed similar themes in predicting ongoing, if slowed, growth. One noted that both large companies and SMBs have fueled demand for SaaS; large companies are attracted by the ease of use and value of having unified systems, while SMBs gain the advantage of technological solutions without large capital expenditures. Another cited a large domestic talent pool and peer networks that enable knowledge sharing as an industry strength. Healthcare technology, supply chain management, and B2B were all identified as areas for potential growth in 2023.

The New Normal

The global economy continues to be characterized by geopolitical instability, inflation, and market volatility, making it more likely that the investor caution seen in 2022 will persist into 2023. These factors add to the challenges international startups typically face in expanding into the US market. Expert advice on cross-border structuring, tax planning strategies, and compliance in the US can assist businesses in navigating these challenging conditions.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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