Exclusive: SaaS startups struggle with high attrition due to WFH, funding boom

Two leading Indian software-as-a-service (SaaS) entrepreneurs were left scratching their heads recently. An engineer joined a SaaS startup, left it after one week to join another. He left the second one after a week as well to join a third startup.

In three weeks, he increased his salary 150 percent by jumping jobs thrice. And this happened in the relatively quiet and sedate SaaS startup space, far from the hullabaloo of consumer internet companies with their slick apps, sky-high valuations and doting customers.

The entrepreneurs, who would be seething under normal circumstances, chalked it up to an ecosystem that’s enjoying the highest of highs. Both founders let the engineer go without even exercising his notice period because they felt that someone who wanted to jump on a whim wouldn’t fit into their culture anyway. They only vowed to make their hiring and filtering process better to weed out such oddities.

Indian SaaS startups have been growing at a dizzying pace. They have raised money at valuations 2-3 years ahead of plans and have mostly never looked better. But employees – across sales, marketing, product and engineering – are leaving in droves, struggling to feel comfortable or fit into global companies while working from home and lured by quick pay increases from other startups, a chance that may not have been available a few years ago.

Employee attrition for SaaS startups rose 25-40 percent in 2021 from levels in 2020, with some companies having had to replace as much as a quarter of their workforce in a single year, according to founders and investors who spoke to Moneycontrol. For new employees who joined in the past 18-20 months, the attrition is as high as 50 percent in some startups. While startups are engaged in an all-out war for talent across sectors, SaaS companies face some particularly thorny issues.

SaaS-specific issues

Employees in SaaS companies are distributed globally because most of their customers are from the US, Europe and, in some cases, Latin America and Southeast Asia. These global teams have been working from home for almost two years – every time a company plans to reopen offices, it is spoiled by another wave of Covid-19. India-based consumer internet startups, on the other hand, have had employees coming to the office for months between the first and second waves and between the second wave and the current outbreak of the Omicron variant.

“SaaS is the hottest sector today. While we enjoy global talent from the US and Europe, the paucity of talent and competition is real. Because of working from home, many employees do face productivity issues,” said Khadim Batti, co-founder of SoftBank-backed Whatfix, which helps digital adoption in enterprises.

Employees have often felt isolated or disconnected from an organisation, especially when they have joined during the pandemic. One employee said that if he were working in the office, he could have vented his frustrations at a colleague or taken a break with workmates for a snack. But when he is frustrated and at home, he is tempted to take a recruiter’s call and be whisked away – his way of dealing with a bad day. Even some senior hires face productivity issues while working from home, affecting the company’s overall strategy as well as team morale.

“New employees often don’t connect with the organisation, having worked remotely for the entire time. So they leave,” said Rohit Chennamaneni, co-founder of Darwinbox, which helps companies manage HR processes digitally. “On the other hand, when we held regional parties and offsites, some people even withdrew their resignations.”

“When the pandemic started, I thought if companies don’t resort to work from home, employees would leave. Now, it is the opposite – employees are leaving because of WFH,” an SaaS company founder said, requesting anonymity.

High attrition is of particular concern to SaaS startups, which typically employ far fewer people than consumer internet firms. A $10 billion SaaS company may have less than half the employees that a $10 billion consumer internet firm may have, making each worker that much more important.

Employee costs

Software startups, which enjoy gross margins of 70-80 percent, are seeing these margins hit by the high cost of replacing employees more frequently. Even though companies can afford to pay an exceptional employee an outsized salary, this would break their overall structures.

“We are also very diligent in maintaining compensation bands. That’s part of why we lost a few people, because if you make an exception and pay a crazy salary to one person, it sets a precedent and pre-empts poor culture,” Chennamaneni said.

Indian SaaS startups raised $4.5 billion from investors in 2021, almost three times the amount raised in 2020, giving companies more ammunition to poach candidates who were previously out of reach.

India’s SaaS community is a closely knit one, with a number of gatherings and forums to discuss trends and challenges and a dedicated venture capital fund recently cofounded by Freshworks founder Girish Mathrubootham. Founders have started agreeing on verbal no-poaching agreements, especially for senior candidates. But such agreements only go so far.

A fintech unicorn recently poached an engineer from a SaaS startup by offering him Rs 80 lakh per annum, quadrupling his previous salary, said a person aware of the matter.

The scramble for talent though is expected to continue. “The talent demand-supply gap is a key constraint for future growth, with SaaS-specific talent demand expected to grow two to three times in the next 5 years,” a 2021 Bain report on India’s SaaS industry said.

Founders and senior leaders try various ways to motivate employees and keep them connected to the organisation, including having to turn on the video during team calls, holding planned yet supposedly informal catchup sessions, and offsites in resorts laced with games and alcohol – the only activity that seems to have worked.

Finally, as the talent war intensifies in India, companies may start relying on hiring workers from far-flung countries.

“We are looking at some non-traditional countries like Ukraine and the Philippines for talent, especially in technology and customer support. We think this widens the pool and helps our cost structure too,” Whatfix’s Batti said.