Indian Business-to-Business (B2B) Software-as-a-Service startups will have to upgrade and integrate artificial Intelligence, especially generative AI, into their operations to escape obsoletion and to also raise funds in 2024, said a report titled ‘SaaS Outlook 2023’ by SaaS accelerator fund Upekkha.
The report dated December 14 also highlighted the shift in the funding landscape, noting how the era of easy access to capital has ended, emphasizing the importance of product-market fit for early-stage startups.
Series A (around $5 million) investments might see a significant dip and increased stringency in metrics and Large language models (LLMs) are poised to have a significant impact, similar to mobile operating systems in 2009, it said.
“The capital that was available in 2021 and before for SaaS firms, as many investors rushed to invest in good deals, might not happen in 2024. Investors are very keen on firms’ product market fit (PMF), path to scale and many more metrics before putting money,” Said Thiyagarajan Maruthavanan, Managing Partner at Upekkha.
SaaS is a category that is crowded and as an industry it is becoming commoditized and there are segments like MarketingTech and Healthtech that are getting crowded. Entrepreneurs entering SaaS business should either offer something very new within this space or come up with a new idea,Maruthavanan added.
The report comes at a time when investors are increasingly backing SaaS AI firms. In fact, Upekkha announced on September 26 that the fund will focus on and invest in startups that are developing innovative generative AI software applications.
Generative AI is a type of AI technology capable of producing various types of content, such as text, imagery, and audio, through input prompts, much like asking a question. Some notable Gen AI SaaS startups from India include Composio, Workhack and Rapidclaims.
Amid rapid adoption and rising demand for Gen AI tools like ChatGPT, the number of Indian GenAI-based 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 said.
In fact, from around 18 AI-centric startups as of 2021, there are around 60 GenAI startups in India as of Q2 of 2023 and the number keeps growing.
“For 2024, what we will see is that founders should use their marketing dollars wisely, and founders should think how to build their whole brand itself wisely and it should stand out,” Maruthavanan said.
Upekkha’s The report highlights that the sentiment for long term investment is positive and there will be cautious but quality investments.
“When we see the trend from 0 unicorns in 2017 to around 19 now, and few tens of millions of SaaS exports in 2015 to billions in 2023, this return to the basics will turn out to be beneficial for founders building grounded solid businesses,” Maruthavanan added.
Talking about sectors that did well in 2023 within SaaS, the report said that AI SaaS took the centre stage, followed by healthtech, marketing tech and fintech SaaS firms.
While 2023 saw zero SaaS companies entering the public markets, either in India or in the US, Maruthavanan said that SaaS companies listing in India may become a possibility in 2024.
“While there is not enough data to prove this the trend that we are witnessing is post Nykaa and Zomato’s listing, going public in India for SaaS firms is also a possibility. If a company needs to list in Nasdaq, it may have to have atleast $100 million ARR firms, however in India it is around $50 million. This opens up opportunity for smaller SaaS firms to go public in India itself,” Maruthavanan said.
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