Bellwethers of Indian SaaS: Indian SaaS growth

The large-scale digital adoption brought on by the epidemic and the rise of ambitious, young Indian entrepreneurs together are propelling the SaaS sector in India to new heights. Indian SaaS startups have not only caught up with their global counterparts but have also demonstrated the capacity to outperform them and become trendsetters in this area. The Indian SaaS market is predicted to account for almost 7-10% of the worldwide SaaS market, up from 2-4% presently. SaaS revenues in India are already growing at a 20% annual rate, due to increased adoption of software-as-a-service solutions by Indian SMBs and businesses across industries, as well as strong growth from worldwide markets. In the first quarter of 2022, SaaS businesses raised US$ 2 billion across 93 transactions. The overall funding for Indian SaaS startups is estimated to reach US$ 6.5 billion this year, up from US$ 4 billion in 2021, a 62.5% rise. Almost 15 SaaS companies have achieved unicorn status in the last four years alone, indicating an upswing in the Indian SaaS space.

Indian SaaS startups are maturing quickly, generating greater interest at all stages of the investment process. They help promote capital efficiency, establish talent pools, and improve growth prospects for employees and employers, making them extremely revolutionary in driving value development. Despite economic difficulties, the Indian software-as-a-service business is gaining traction, with record-high investments in 2022, and is expected to reach US$ 35 billion in annual recurring revenue by 2027. More than 35 Indian SaaS firms had US$ 20 million or more in annual recurring revenue (ARR) in 2021, and investments in the field surged by 170% over 2020, reaching US$ 4.5 billion in 2021. Furthermore, the government has established a number of incentives for software companies to develop a wide range of software products that address socioeconomic challenges. There are already over 1,650 funded SaaS businesses in India. Since 2019, the figure has more than doubled to 800. Employees of 21 Indian SaaS unicorns have started 186 SaaS firms during the last three years, with 60% of them originating within this time span.

The Rise of SaaS in India

Software-as-a-Service (SaaS) is a cloud-based software delivery paradigm that enables end users to access software applications online. In a SaaS model, the software is hosted on remote servers, maintained, and updated by the service provider, and made available to clients via web browsers, mobile apps, and APIs. SaaS offers several advantages over traditional software distribution models, including lower upfront costs, scalability, flexibility, and accessibility. Since the software is hosted on the service provider's servers, consumers do not need to invest in costly infrastructure to use the software. End users instead pay a subscription fee to access the programme as an on-demand service.

Indian B2B SaaS enterprises have a competitive advantage over their international competitors due to cheaper labour costs and a talent pool with experience, inside sales, remote customer engagement, and customer support that aid in higher capital efficiency leverage. They have clearly demonstrated inventiveness in balancing rapid growth with prudent capital management. This, combined with a quickly increasing and maturing Indian B2B SaaS ecosystem, makes the industry particularly profitable due to its ability to generate long-term value. Focusing on global markets, deepening inside industries, and product innovation while keeping financial discipline are potential areas that might further push growth and capitalise on the opportunity. Indian B2B SaaS startups are also projected to emerge as appealing M&A targets for global software corporations aiming to expand their product capabilities in niche areas. The Indian software-as-a-service (SaaS) ecosystem is rapidly expanding. The combination of digitization and the pandemic provided a boost to the SaaS sector. The Indian SaaS ecosystem is expected to grow its worldwide share by 4-5% by 2030, resulting in a US$ 50-70 billion revenue opportunity. Freshworks, Zoho, Postman, and Druva had created high-growth businesses selling to enterprises in the United States and Europe. Postman, a tool for developing application process interface (API), the building blocks of software, received US$ 200 million in June 2022, catapulting it to unicorn status at a price of US$ 2 billion. The majority of SAAS businesses operate in finance, big data analytics, human resources, and customer relationship management.

Source: Bessemer Venture Partners

Macro Forces of the India SaaS Market

• Digital rails

The emergence of digital railways for large industries has accelerated development in a variety of large industries, including financial services (Aadhar and UPI). This means that over one billion people in India have unique digital identities, and all banks and financial institutions are linked via a common transactional back end that is also linked to the same identity. Based on these widely established protocols and standards, software businesses are developing products and solutions for banking and financial services. A similar trend is occurring in other areas, such as healthcare via the national digital health stack, retail via ONDC, logistics via e-way bill and FastTag, etc. Software businesses can design products and solutions for Indian enterprises on top of widely established rails and standards, resulting in speedier acceptance and rapid growth.

• Smartphones

Due to the growth of mobile internet, over 700 million people in India now own smartphones, and like people in other countries, they utilise them both for personal and professional purposes. Smartphones are being used by more Indians than laptops or desktop computers. As smartphone use for business grows more common, cloud software companies are rising to develop mobile productivity and business enablement technologies.

• Digitization

Due to the global pandemic, the rapid pace of digitization across all industries has boosted digital sales of goods, services, and software. During the epidemic, practically all cloud software sales were virtual (conducted via Zoom or similar platform), ushering in a new era of software sales. This means that Indian SaaS companies can now target global consumers while still based in India, eliminating the requirement for a complex global office setup. Many worldwide SaaS leaders from India, including Zoho, Freshworks, Browserstack, and iCertis, have benefited greatly from virtual selling.

Investment Landscape

Despite market obstacles, the Indian Software-as-a-Service (SaaS) ecosystem has grown to become a global leader in scale and maturity, trailing only the United States. Total annual recurring revenue (ARR) of US$ 12–13 billion in 2022, up four times over the previous five years; or investment (US$ 5 billion in 2022, up six times); Indian SaaS development is undeniable and its future trajectory promising. This momentum is being powered by a mutually reinforcing flywheel of SaaS firms and investors, with a profusion of new SaaS startups with proven growth strategies, backed by investors who are investing greater cash in Indian SaaS across stages. Of the 1,600 Indian SaaS businesses that have been funded in the last five years, around 14 have exceeded US$ 100 million in ARR (compared to approximately five in 2020) and are rapidly approaching this growth milestone. Indian SaaS enterprises triumph through a range of strategies, including product leadership, appealing pricing, and service quality—emerging as global best-in-class in a number of categories. Investment in Indian SaaS hit an all-time high of US$ 5 billion in 2022, boosted by a record US$ 1 billion investment in Securonix. Over the next five years, Indian SaaS companies will jointly exceed US$ 35 billion in ARR and capture 8% of the global SaaS market.

Nearly US$ 4.8 billion was invested in India’s SaaS startups in 2021, nearly thrice more than in 2020 and a stunning sixfold more than in 2018. The number of SaaS unicorns in India has increased from two to twenty. In the first four months of 2022 alone, India had four new names added to this list. 40% of Unicorns in the India SaaS sector are recognised on the 2021 Cloud 100, demonstrating the strength and quality of these enterprises. Centaurs are SaaS companies with more than US$ 100 million in annual revenue, representing a new level of success in the cloud world. Eight companies- Zoho, Icertis, Highradius, Browserstack, Druva, Eightfold.ai, Billdesk, and Gainsight, are known to be members of this elite cohort of cloud enterprises in India.

The majority of SAAS businesses operate in finance, big data analytics, human resources, and customer relationship management. According to the research, India currently houses over 1,650 sponsored SaaS firms.Since 2019, the figure has more than doubled to 800.Employees of 21 Indian SaaS unicorns have started 186 SaaS firms in the last three years, with 60% of them originating within this time span.

The expanding cohort of mature firms is another major indicator of traction in the India SaaS market. Since 2015, the number of private SaaS enterprises in the region with US$ 100 million ARR has progressively climbed from two to slightly under ten. Global and local public market investors are also showing interest in these scaled-up SaaS enterprises. Indian SaaS industry has witnessed 2 IPOs from both the domestic and global markets (e.g., Freshworks and RateGain) as well as a number of global strategic M&As.

Source: Bessemer Venture Partners

Source: Kotak Securities

Government Initiatives

National Policy on Software Products (NPSP)

The National Policy on Software Products seeks to establish India as a worldwide software product hub through innovation, increased commercialization, long-term Intellectual Property (IP), and the promotion of technology start-ups and specialised skill sets. Furthermore, the Policy seeks to link with other government initiatives such as Start-up India, Make in India, Digital India, Skill India, and others in order to build a strong Indian software products ecosystem. The National Policy on Software Products-2019 is implementing the following major programmes:

• Start-up Accelerator Programme of MeitY for Product Innovation, Development and Growth (SAMRIDH)
  The SAMRIDH programme was developed to assist existing and new Accelerators in selecting and scaling potential product-based start-ups. The programme focuses on boosting start-ups by connecting them with customers, investors, and worldwide opportunities. MeitY Startup Hub (MSH) oversees carrying out the programme. Currently, 22 Accelerators are being supported under the scheme.
• Innovation Challenge for Development of Indian Video Conferencing Solution (Software Product)To develop unique Video Conferencing solutions, an Innovation Challenge project for development of Video Conferencing solutions has been launched. The project aims to promote Indian software goods in accordance with the National Policy on Software goods. The programme has declared one winner and three runners-up. Furthermore, the winning product is being used by the government under contract.
• ICT Grand Challenge (ICTGC) under National Policy on Software Products
  In accordance with the National Policy on Software Products, at least 20 Grand Challenges must be carried out in order to create a diversity of software products that address socioeconomic issues. An ICT Grand Challenge (ICTGC) programme has been developed to generate new software solutions through four rounds of challenges in the specified domain. Recently, the Ministry of Electronics and Information Technology (MeitY), in collaboration with the National Jal Jeevan Mission (NJJM), the Department of Drinking Water and Sanitation, and the Ministry of Jal Shakti, concluded an ICT Grand Challenge to develop a "Smart water supply measurement and monitoring system."

Road Ahead

The global shift towards digitalization has opened new opportunities for Indian enterprises in the Software-as-a-Service (SaaS) industry. Software-as-a-service adoption is accelerating around the world as sectors and enterprises migrate to cloud-based infrastructures. SaaS firms launched in India have seen substantial development in recent years, with digitalization expanding year after year as a result of an increasingly hybrid environment. India’s SaaS sector has reached a significant inflection point, with venture investments deployed in the region reaching US$ 4.8 billion in 2021 and is expected to be valued at US$ 50 billion by 2030.  In the coming decade, the Indian SaaS market is expected to become one of the world's leading innovation hubs. With a rising entrepreneurial ecosystem and greater venture investment, Indian entrepreneurs will not only build household names for the country but also expand them into the next generation of global Centaurs.