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SaaS Accounted For 20 % Of Total Venture Capital And Growth Equity Investments In H1-2020

Over the last five years in India, the number of funded SaaS companies has doubled while companies drawing Series C or later stage capital have quadrupled

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SaaS (Software as a service) companies founded by Indian entrepreneurs are poised to reach between $18 to $20 billion in revenue, with the potential to capture a 7 to 9 percent share of the global SaaS market by 2022, according to a new report by Bain & Company titled, “India SaaS Report 2020 - an insight into the India SaaS ecosystem and the future roadmap for founders and investors”, released today. The report analysed a wide range of Indian SaaS companies, which have since 2010, evolved from the rise of a few upstarts to a multibillion dollar industry today. 

The report highlights companies such as Zoho, Druva, Icertis and Freshworks, who have breached the $100 million annual recurring revenue (ARR) mark, with a healthy pipeline of companies well placed to follow over the next 12 to 18 months. Acclaimed first-gen founders, such as Sridhar Vembu of Zoho and Girish Mathrubootham of Freshworks, have played a pivotal role in India’s SaaS journey by actively engaging to build a community of budding entrepreneurs, which led to the development of many new ventures and immense job creation. For example, Freshworks created an entrepreneurship cascade of more than 25 companies, including Voonik, Revv and SurveySparrow, which in turn have already created 500 to 1,000 jobs. 

Commenting on the report, Arpan Sheth, partner and leader of Bain & Company’s Asia-Pacific Technology, Vector and Advanced Analytics practices, said: “The Indian SaaS landscape is on the cusp of a transformation. We now have a thriving ecosystem of enablers comprised of both domestic and global SaaS investors, over a hundred SaaS angels with four or more investments, incubators and accelerators and SaaS development events and initiatives sponsored by communities such as SaaSBOOMi. The impact of these enablers can be witnessed in SaaS companies’ faster trajectory to scale in recent years, with over 50 companies having breached the $10 million ARR milestone and many more are expected to follow.” 

Indian SaaS companies today have different areas of focus, classified across multiple vectors such as size of customer, type of solution and geography of focus. Bain expects four key archetypes of companies to emerge which include SMB (small and mediumsized businesses) focussed SaaS companies targeting global shores, vertical-specific companies which have the potential to upend underserved verticals like healthcare and logistics, globally competitive companies in emerging tech and India initiators with SaaS and B2B tech products tailored for the domestic market. 

The domestic Indian market has traditionally been challenging to monetise, owing to lower awareness and higher price sensitivity compared to global markets. However, Indian SaaS companies are trying to scale through specific initiatives such as investment in market creation via freemium offerings, innovative monetisation models and clear articulation of benefits to the customer with tangible return on investment (ROI) metrics. Companies such as Yellow Messenger and are closing large, global-sized contracts by targeting marquee customers in the Indian market. 

The report highlights critical abilities which Indian SaaS companies must have, if they want to win in a post-Covid world: 

  • Embracing remote sales, as Covid-19 is pushing enterprises to become comfortable with completing large deals over digital channels 
  • Setting up an effective enterprise sales engine to focus on moving upmarket and expanding to large global markets at an early stage 
  • Creating a strong product-market fit to solve a specific use case by working with early customers and sharpening the value proposition in an increasingly competitive market 
  • Fostering employee success and innovation within the organisation even as the workforce becomes more distributed and remote in nature

From an investor’s lens, founders can prepare by upskilling their strategies to play in a large and growing market, implement a clearly differentiated ‘product-led’, ‘distribution-led’ or ‘pricing-led’ approach, create a business model that ties revenue expansion to customer growth and have a strong founding team with complimentary skill sets. 

Lalit Reddy, partner and leader in Bain India’s Private Equity and Digital Delivery practices said: “SaaS in India has recently witnessed significant funding traction, surpassing $1.3 billion of annual investment in 2019. Horizontal business software was the largest sub-segment, accounting for two-thirds of all SaaS investment and vertical-specific SaaS grew the fastest, albeit on a small base. Even amidst Covid-19, SaaS has been a prominent investment theme with a growing share of venture capital (VC) and growth equity (GE) investments. SaaS investments were 15 percent of VC and GE investments in the first half (H1) of 2019 versus 20 percent in H1 2020. SaaS also emerged as the top priority technology sub-sector of focus in an investor survey, we conducted last year.” 

The report concludes with Bain’s analysis of this momentum and the six investment themes which will become more prominent moving forward: 

  • Infrastructure management tools and platforms will continue to proliferate. The DevOps community provides an attractive opportunity given its high degree of standardisation, strong network effects and large local developer base to build and test tools. 
  • Increase in remote working with strong Covid-19 tailwinds will continue to drive salience for select categories such as collaboration and productivity tools. 
  • Tools fuelling the API economy will continue to grow and expand as APIs become central to modern application development. 
  • Intelligent automation of business processes enabled by advancements in artificial intelligence (AI) and cognitive computing will drive use cases such as speech recognition and chatbots, and allow for automation of contact centre functions. 
  • B2B tech platforms and marketplaces leveraging software are expected to entrench and disrupt existing value chains. 
  • E-commerce enablement solutions will continue to grow to address the needs of a rapidly growing e-commerce market

SaaS founders also believe that investors can meaningfully add value to their businesses. Before investment, founders appreciate investors who evaluate different companies with a customised assessment lens, taking into consideration how metrics like growth and adoption vary by target customer segments and industries. Post-investment, founders value investors who mentor in making critical decisions (e.g. international expansion), facilitate prospective customer introductions in new geographies and segments, support with hiring key leadership roles particularly in sales and product, and encourage portfolio companies to experiment and solve complex challenges through innovation.

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saas ecosystem development investment equity investments