Change of heart: Indian SaaS firms prefer Dalal Street over Nasdaq for IPOs

SaaS major Freshworks, which went for a Nasdaq IPO in 2021, made its trading debut at $43.5 per share, up 21 percent from the listing price of $36, giving it a market capitalisation of $12.3 billion. However, the shares now trade at about $18, almost 50 percent lower than its listing price.

Several founders told Moneycontrol that companies that are well-established in India with Indian founders have better leverage and brand value recognition in the domestic market.

“Companies that have been built in India have greater brand value and recognition here in India than in the US, no matter where their market is. The industry is much bigger in the US, and Indian companies will be relatively smaller fish in a large market,” said Arvind Parthiban, co-founder of SuperOps, a software provider for IT management services.

The trend comes as startup IPOs get more active, with Ola Electric, FirstCry, and Swiggy gearing up for IPOs.

Zaggle Prepaid Ocean Services, which offers fintech and SaaS products and services, went for an IPO in India in September last year. Its shares touched a record of Rs 389.45 on the National Stock Exchange on March 4. The stock of Hyderabad-based Zaggle has more than doubled from its IPO and listing price of Rs 164.

Push from investors

Venture capital investors who used to insist that a company needs to be based in the US to be able to grow are now changing their stance.

“Many investors earlier had a rule that you need to be registered in the US to get funded. However, that has changed now. Now investors just look at whether you are profitable, you have a path to profitability,” Krishna Depura, co-founder of Mindtickle, said during Moneycontrol’s Pune AI Alliance held in March.

Many founders are even mulling flipping back to India, as PhonePe, Razoapay, and Groww are doing, and in some cases, their VCs are pushing them to consider flipping back.

“We are an Indian SaaS firm based in the US and we took this decision to get better funding and most of our clients are also in the US, so it made sense. However, now looking at the Indian public markets, we are mulling flipping back, but it is a costly affair,” said the founder of a top SaaS firm in the US.

Many investors said the next set of startups preparing for IPOs will actively consider the Indian market. Expectations of annual recurring revenue (ARR), an important metric to evaluate growth in a SaaS firm, are more reasonable in India than in the US, founders said.

“Far better multiples are available here. Companies in India are listing close to a 10X multiple at $50m in revenue, whereas those aiming for the US have to get to $400m in ARR and get a 6X multiple. The risk versus effort tradeoff is too big to ignore,” Thiyagarajan Maruthavanan, co-founder and managing partner of Upekkha, wrote in a blog post.

Reasonable growth

The Indian SaaS market is expected to more than double to about $25 billion by 2025 from its 2022 value of $13 billion, according to a recent report by venture capital firm Bessemer.

Also Read: Indian SaaS companies to reach $35 bn 2027: Report

“It is much easier to go for an IPO in India and one might get a lot of visibility in India… A company can go for an IPO with $50-60 million revenue in India. However for US, a company will have to show an ARR of a minimum $100-$200 million,” said Saravana Kumar, founder and CEO of enterprise software firm Kovai.

Investors said the markets in India will be more welcoming for SaaS startups that are financially sound and have solid unit economics.

“SaaS firms wanting to go public in the US have a pretty hard and long road. There are only a few companies that can do it, and scaling is key,” said Bala Srinivasa, managing director at Arkam Ventures, an early-stage venture capital fund that invests in SaaS, fintech, Agritech and Manufacturing tech startups.

“Public investors are looking for a few things - predictability in terms of growth, profitability, and more - and if a company can show that, which most SaaS firms do, then they can do very well in India.”

Challenges ahead

While the Indian market is conducive for many startups, there are challenges including cost and complex enterprise business models, customer bases in the US, and complex metrics that investors must understand.

Icertis, which delayed its IPO plan, will list on the Nasdaq.

“We don’t have a choice, but we will be going public on the Nasdaq because most of our customers are global. Contract management is a very horizontal business, and our big market is in the US. However, what India is getting to be or becoming is incredible and this will help us expand in the Indian market and expand our existence here,” said Monish Darda, co-founder and CTO of Icertis.

While business-to-consumer startups are welcomed by investors because their models are quite easy to understand, business-to-business and especially enterprise software still need time to evolve, said Milind Borate, co-founder and chief development officer at Pune-based SaaS firm Druva.

“India as a market is open to B2C but for B2B the market is yet to open up and it is still pretty hard. It is also that investors or stock market participants don’t understand certain concepts like ARR, and valuation of IP. So how we value a product company takes a little bit more time…Software-enabled services markets understand but software services and software products still take time to evolve in the Indian market,” Borate said.

Investors and founders have also spoken about tax implications and the high compliance cost of flipping back to India. PhonePe’s investors had to cough up almost Rs 8,000 crore in taxes when the company decided to domicile in India.

“Demand for purchasing software in India is slowly picking up, but it is still nowhere close to what US demand is,” Upekkha's Maruthavanan said.