The Indian Software-as-a-Service (SaaS) industry is poised to grow by 2.5X to reach a revenue if $26 billion by the end of 2026 despite a current slowdown due to tight macroeconomic pressure and a stiff funding winter.
“Though concerns of a recession loom large, the Indian SaaS industry has displayed remarkable antifragility to withstand turbulent times. An overwhelming 93 percent of the founders surveyed, anticipate an increase in revenues in the next 12 months,” said a report by the latest edition of the India SaaS report, jointly done by VC firm Chiratae and Zinnov, a management consulting and advisory firm.
Indian SaaS companies are doubling down on growth (revenue generation) while ensuring operational and capital efficiency, the report said. Indian SaaS equity funding rose by 30 percent to $419 million in 2022 with 2,780 deals as against 2,605 deals in 2021 with a total funding of $319 million.
Despite a widely acknowledged funding winter in the Indian start-up ecosystem, seed-stage funding witnessed a 1.5X increase, while early-stage funding experienced a notable 1.6X surge in value during 2022, the report said. In fact, Indian SaaS start-ups secured 3X more funding in 2022 compared to 2019, demonstrating a steady CAGR of 47 percent.
“However, the decline in SaaS company valuations in the public markets has greatly affected private markets, driving down late-stage funding,” The report said.
“With 38 SaaS companies in our portfolio, Chiratae remains dedicated to supporting and nurturing the growth of this dynamic industry, solidifying our position as a key player in India’s journey towards global SaaS leadership,” said Venkatesh Peddi, Managing Director at Chiratae Ventures.
Challenges for SaaS
The report said that delayed sales cycles is a key challenge for founders as customers spending caution increases as they aim to optimise cloud costs. “There is a risk of decreased customer demand in 2023 due to a recession-like situation which may reduce gross margins,” it said.
The Indian SaaS ecosystem has exemplified remarkable adaptability and resilience in the face of recessions and external disruptions. This ‘herd immunity’ indicates that Indian SaaS companies are not just equipped to survive in challenging times but are poised to adapt, evolve, and emerge stronger, said Atit Danak, Partner at Zinnov.
Outlook for 2023
The SaaS report said that both founders and investors are optimistic about valuation multiples bouncing back to pre-pandemic levels in the next 12-18 months.
“Investors are being more prudent with their investment decisions and have directed their focus towards investing in entities that exhibit efficiency and profitability in addition to growth,” the report said. Investors also expect an upsurge in both deal activity and exits over the next 12 months due to sustained interest in the space.
“The India advantage also extends to key opportunity areas – DevOps, Cybersecurity, and Vertical SaaS – which will lead the next phase of growth and innovation across SaaS categories,” the report said.
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