Indian Gen-AI startups more than double in 2023 raising $590 million in funding

Generative AI on the boom

Amid the rapid adoption and rise in demand for Generative Artificial Intelligence (Gen AI) tools like ChatGPT, the number of Indian GenAI-based Software-as-a-Service (SaaS) startups has more than doubled since 2021, raising $590 million in funding as of May 2023, according to a report by SaaSBoomi and McKinsey released on July 27.

“India’s SaaS is moving towards what we call ‘SaaS.AI’; this is a revolution, and India is very well-placed. We have the capital, we have the people and great market opportunities,” said Manav Garg, CEO of Eka Software Solutions and a member of SaaSBoomi, a collective of SaaS founders and operators in India.

From around 18 AI-centric startups as of 2021, there are around 60 Generative-AI startups in India as of Q2 of 2023.

"Globally, we are witnessing an explosion in the number of Gen AI-native SaaS companies and a surge in investment capital, with over $12 billion funneled into 60+ emerging domains in FY23 alone," Garg said, citing data from the report.

The report titled ‘India’s SaaS Revolution: Exploring global opportunities in a dynamic market’ highlighted the disruptive effects of generative AI and how India SaaS is poised to leapfrog to SaaS.AI.

Generative AI is a type of AI technology that can produce various types of content, including text, imagery and audio by feeding prompts into the platform like a question. A few pure-play Gen AI SaaS startups from India include Composio, Workhack, and Rapidclaims.

It has been the buzzword and has even attracted software giants like SAP, Salesforce, and IBM to explore this space. While the West has been fast to adopt the same, Indian SaaS and tech companies are now getting on the generative AI bus.

Hotspots of activity around Gen AI are emerging, particularly in horizontal applications space like marketing automation, sales and customer support, audio-video design tools, and productivity tools, the report said. “Early-stage SaaS companies in heavily disrupted areas are encouraged to pivot and remodel their businesses around Gen AI. Larger incumbents can adopt a dual approach: integrating Gen AI into their existing operations while simultaneously building new AI-centered businesses,” the report said.

The report also highlighted that the India-centric SaaS ecosystem could achieve $50-70 billion of revenue and $0.5 to $1 trillion of enterprise value creation aspirations by 2030.

In 2020, the revenue clocked by Indian SaaS firms was around $2.6 billion, and in 2022, it reached around $7 billion. SaaSBoomi’s report also projected that the 2025 estimates will be around $15-20 million.

The report said that there are around 3,500 SaaS firms in India, with 19 unicorns and around 80 SaaS companies with more than $10 million ARR (Annual Recurring Revenue), as shown in the report.

“Despite macroeconomic pressure, we are seeing healthy growth…If we look at the data, there are around 3,500 SaaS startups, and around 40% of the revenues are from mid-market firms. We are touching not just large enterprises but even SMBs and mid-market enterprises. This is significant,” said Noshir Kaka, Senior Partner, and Global Head of McKinsey's TMT practice, addressing the media.

Gen AI Opportunity for Indian SaaS Firms
The report said that the Indian SaaS companies stand poised to embrace this wave of Generative AI by building AI-powered products leveraging the depth of domain and functional expertise available in India.
Together Fund which launched its Fund II on Thursday with a total corpus of $150 million is looking to invest in companies that solve using Generative AI.
“We had been investing in DevTools (Developer Tools), SaaS and a few artificial intelligence (AI)-based startups from our Fund I and now the difference is that AI has come on top. We will continue to focus on the Business-to-Business (B2B) segment and within that AI and SaaS are the main focus areas for us,” said Manav Garg in an interaction with Moneycontrol on Jun 26th.
From creating new AI or artificial intelligence capabilities to integrating AI chatbot ChatGPT into customer-centric operations, India’s top software-as-a-service (SaaS) firms are investing and exploring Gen AI to attract investors and eventually bring down their customer acquisition costs.
In fact, Girish Mathrubootham, the CEO of cloud-based software services company Freshworks, said in an interview that the firm will make significant investments to integrate AI, especially generative AI, into its operations. Indian SaaS giant Zoho also announced the launch of 13 generative AI application extensions and integrations, powered by ChatGPT.
However the growth of Gen AI will also have an impact on the workforce and companies will have to invest in training and upskilling, Garg said in the media briefing.
E-commerce startup Dukaan’s founder Suumit Shah faced huge flak online after he wrote about replacing 90 percent of his customer support team with an AI chatbot that went viral on Twitter.
“We had to lay off 90% of our support team because of this AI chatbot. Tough? Yes. Necessary? Absolutely,” Shah wrote.
However, Garg also said that for India to tap the Gen AI opportunity there are factors like Government Support in terms of making capital and public data goods available for enterprises.
“This lofty vision requires concerted efforts from key stakeholders: industry associations, government, investors across stages, and corporations. Each plays a unique role, with specific actions that can power the Indian SaaS ecosystem,” Garg said.Macroeconomic pressure to have a short-term impact on SaaS demand 
Navigating the current complex macro-economic climate with multiple global disruptions and rapid technological changes will require founders to build a mix of offensive and defensive moves, the report said
The Russia-Ukraine war and its impact on supply chains, high inflation rates, and the US Federal Reserve’s aggressive interest rate hikes are causing fears of a recession in the US, adding to the sector’s worries.

In fact, large SaaS firms have undertaken layoffs and cut down on their marketing and other spending drastically to brace for the macro pressures. SaaS major Freshworks undertook at least three rounds of performance-based layoffs, while many other SaaS firms like Zoho have cut down on hirings including placement hirings.

“There is definitely a bit of slowdown as the macroeconomic environment is not in favour of the companies yet we are seeing growth. For 2030 we even took a conservative approach to say that we will grow by around 30-40% and reach $50 billion of revenues but things may change,” Garg said.