Software as a service (SaaS) startups are suddenly all the rage. New unicorns are popping up more frequently than ever before, valuations are at historic highs, and both stock markets and venture capitalists seem to have a new favourite thing. But while consumer internet firms such as Flipkart, Uber and the like are well known, their enterprise counterparts often remain out of the spotlight, despite being just as promising and more profitable. Moneycontrol breaks down what is really happening out there — what SaaS companies do, why they are different, what the hype is about, and more.
What exactly is SaaS?
Software as a Service works as a monthly or annual subscription that a company takes for a specific service, say an HR management tool, or a tool to track marketing and sales performance. SaaS companies provide niche and specialised cloud technology services to their clients. These companies can be vertical — focusing on a specialised area such as sales-enablement or ecommerce — or they can be horizontal — one company operating with solutions across the board — for marketing, employee management, and customer experience.
Who are their customers?
Indian SaaS companies are broadly divided into “India for India”, and “India for the world” categories. Some companies make software mainly aimed at Indian companies (eg. Seekify, Fleetx, Khatabook), while some build solutions aimed at US and Europe-based enterprises — mid market firms as well as Fortune 500 companies (eg. MoEngage, Chargebee, Whatfix).
There is a debate within large companies over buying/subscribing to software versus building it. Companies are increasingly choosing to buy or subscribe to services that are needed but not core to their business, rather than building these internally. So, if a food-delivery app wants to track customer loyalty using technology and improve on it, it would use a SaaS product that provides this service, rather than building such a function internally.
Why would companies want to use SaaS products?
Many companies would rather devote time and money to their core business and activities and use a specialist where needed for specific services. SaaS also gives companies the flexibility to cancel a subscription whenever they want to, and upgrade or downgrade plans. The reams of data generated from their activities are on external servers and can be used as needed. Even if a company were to build something on its own, time and money aside, the specific services with various permutations and combinations that a SaaS firm provides may not be possible.
Which are the big Indian SaaS startups?
The term Indian SaaS startup also needs to be decoded a little. Many of the startups that are booming today, such as Zenoti, Freshworks, Druva and Icertis, are all headquartered in various parts of Silicon Valley. Many of them started out in Bengaluru, but since the US is the biggest market for these companies, they quickly either set up offices in the US, or shifted headquarters there for more visibility and comfort among their clients and prospective investors.
The founders are still Indian and many of them have large teams working from India, which helps reduce employee costs. India currently has five SaaS unicorns (valued at over a billion dollars): Freshworks, Druva, Icertis, Zenoti and Postman. At least two more are on the way in Chargebee and Innovaccer.
Why does this matter? What makes SaaS unique?
A lot of reasons. SaaS has taken over very important aspects of people’s lives. For example, Zoom, Slack and Amazon Web Services, directly and indirectly, have an enormous impact on people’s everyday life. AWS for example hosts the platforms that run Netflix, Reddit, Unilever and more. It is critical to the existence of many companies.
Compared to consumer internet firms such as Uber, WeWork, Oyo and Paytm, many of which have been blamed for endless losses despite being mature businesses, SaaS companies have a distinct and obvious advantage. They have paying clients from day one, can go global from day one, and do not burn money for growth. Their unit economics are inherently better, they can earn large contracts from large companies, and while they may not grow at the explosive rate of a food-delivery app or stock trading platform, SaaS is seen as a more reliable, stable bet for investors.
Why does this matter *now*? Has anything changed?
Well, the SaaS proposition has gotten even better, if deals and valuations are any indications. Over the last year, SaaS IPOs in the US have performed spectacularly, popping (rising sharply) and creating billionaires overnight. The listings of Snowflake, Zoom, Cloudflare and Palantir — already-large private companies becoming even larger public companies — has sparked a new wave of enthusiasm from venture capitalists, private equity funds and hedge funds.
The Covid-19 pandemic has also turbocharged digital adoption. Upgrading software or switching to a cloud solution was on the horizon but not a priority for many businesses; that has now become critical. Many SaaS startups also enable remote working and remote access to key tools — another huge opportunity in the post-pandemic world.
What does this enthusiasm look like?
SaaS startups are raising funds at 25-30 times their projected revenue 12 months from today. While forward revenue is an accepted metric, and is stable and recurring for SaaS companies, such a high multiple was unheard of until recently. While listed and private Silicon Valley companies fall in this valuation bracket, Indian firms such as Zenoti, Mindtickle, Postman, Chargebee and Innovaccer are all valued at 25-30 times their revenue as well.
For context, not even consumer internet unicorns are valued at such rich multiples. For example, Byju’s, valued at $12 billion, and Zomato, at $5.4 billion, are both valued at 16-17 times their revenue. This makes the current SaaS boom unique.
Is this boom justified?
It depends on whom you ask. The investors paying these rich valuations say that the sector has never looked better, companies are executing faster than ever, their clients are more willing to pay for this technology than ever before, and most importantly, the stock markets — the final dream destination for many of these startups — seem to be thinking these valuations are justified.
Whether these valuations are based on business fundamentals or just market exuberance, is anyone’s guess at the moment.