Indian SaaS (software-as-a-service) startups—known for being frugal and capital-efficient—have raised about USD 4.3 billion in funding in the last 20 months. In a way, they have stolen the thunder of their consumer-oriented contemporaries, garnering attention from investors, who are writing them bigger and more frequent checks even at sky-high valuations.
API development platform Postman is one such Indian SaaS upstart benefiting from the current SaaS investment frenzy in the country. It raised a total of USD 375 million from two rounds in 2020 and 2021. In comparison, the company only managed to amass USD 58 million in three rounds across the first five years since its inception in 2014. From a moderate 350 million US dollar valuation in 2019, it has rapidly risen to become the country’s most valued SaaS startup at USD 5.6 billion.
The seven-year-old company isn’t the only SaaS startup winning affection from VCs. Online sales management software company MindTickle raised two USD 100 million rounds—in November 2020 and August 2021—just nine months apart. BrowserStack, a web and mobile app testing service, received USD 200 million in funding earlier in June. Subscription billing platform Chargebee raised USD 125 million in April, barely six months after its last USD 55 million round. It is hardly a surprise that seven out of 11 B2B SaaS unicorns have entered the elite billion-dollar-plus club in the last 18 months. These include spas and salons software provider Zenoti, healthcare data platform Innovacer, and fintech SaaS firm HighRadius, aside from Postman, MindTickle, Browserstack, and Chargebee.
The euphoria around local SaaS startups notched up this week when Silicon Valley- and Chennai-headquartered Freshworks made a stellar debut on Nasdaq, raising over USD 1.03 billion in its initial public offering (IPO) and crossing USD 10 billion in market capitalization. Backed by marquee investors like Sequoia, Accel, and Capital G, the customer engagement software provider is the first Indian SaaS company to go public in the US.
“Freshworks’ listing has validated investors’ bet on this space,” said Arun Natarajan, founder of Venture Intelligence, a Bengaluru-based research firm tracking startup investments. “Indian SaaS companies now have even more momentum behind them.”
A December 2020 report by Bain & Capital puts the number of SaaS companies in India at 7,000–8,000, almost doubling from 4,000–5,000 from five years ago. Up until last year, only 15% of them have ever raised from venture capitals. However, the relatively low dynamics in the SaaS sector are changing, with more of them receiving an influx of capital.
Pratip Mazumdar, co-founder and partner of early-stage VC Inflexor Ventures, which has SaaS as one of its focus areas, believes that Freshworks has set the bar high for local SaaS entrepreneurs, who are now becoming more ambitious.
A humble start
SaaS startups in India often bootstrap their businesses or raise small investments to fund their operations through the first few years. Their deep-pocketed consumer internet peers, by contrast, burn VC money all the way through their growth. Before 2018, limited venture capital went into the segment, and big-ticket rounds were rare, according to KrASIA’s research.
For instance, BrowserStack bootstrapped its business in 2011 and raised its first funding seven years later in 2018, when Accel pumped USD 50 million into the company. Similarly, HighRadius raised its first-ever round of USD 50 million in 2017—11 years after it was founded. On the other hand, for each of the other Indian SaaS startups that grew into unicorns since last year, their early funding rounds totaled up to no more than USD 50 million.
“Most SaaS companies raise a small round to get their products up and running to land some early paying clients,” explained Pratip Mazumdar. “Once the initial funding of the company is done, and it has proven product-market fit and onboarded clients, it won’t need much external capital to grow because enterprise clients pay in advance in the overseas markets.”
“Money from a cash flow perspective is available to companies to spend on further product development or go-to-market strategies, hence the incremental requirement of capital reductions,” he added.
But it’s not an easy feat for SaaS startups to raise money, find the right product-market-fit, and then onboard enterprise clients. It takes at least six to nine months for them to onboard a customer, Pratip Mazumdar believes. For this reason, Zetwerk, which recently entered the unicorn club, had to pivot from a supply chain management software provider to a marketplace that connects manufacturers and suppliers.
Despite the difficulties in raising capital and keeping a business humming, Freshworks’ unicorn anointment in 2018—the first SaaS unicorn in India—and flamboyant public debut this year have successfully piqued the interest of the country’s VC community that for all these years devoted most of its attention to the consumer market. Between 2018 and 2019, SaaS companies in the country raised USD 2.9 billion in venture capital, compared to USD 900 million in the previous two years, as per the Venture Intelligence data.
Two SaaS companies—Druva and Icertis—received USD 100 million-plus checks in 2019 and became unicorns. Many others, like Postman and MindTickle, raised the capital needed to grow to the next level.
“When Postman raised USD 50 million in 2019, compared to the total of USD 8 million it had raised before that, it was a great infection point. (By that time) they had created a great product-market fit. They realized if they could raise a right-sized round, they could get traction and revenue scale faster,” said Pratip Mazumdar.
The pace change
Freshworks’ success isn’t the only factor that’s driving the country’s SaaS enthusiasm. In early 2020, when the pandemic struck, everything changed for everyone.
“At the beginning of COVID-19, it was not very certain how SaaS companies would get impacted because the immediate beneficiaries were consumer-focused segments like edtech, healthtech due to the lockdowns,” said Natarajan. “But gradually, the whole digitization in India and overseas drove adoption of enterprise solutions, and hence the demand for these guys,” he added.
The change in the business environment has led to more investments in performing SaaS firms. For instance, the USD 55 million round raised by Chargebee in October 2020 was driven by its existing backers, including Tiger Global.
“They didn’t need it since the money from the previous round was still sitting in their banks,” said an industry insider, wishing not to be named. “Their existing investors came and said the demand for your services is growing, so take the money because it is time to press the peddle. This was purely investor-driven.”
As global liquidity became better and better over the last year and digitization expanded the markets for consumer and enterprise tech companies, SaaS emerged as one of the hottest sectors for the first time.
“Aside from the availability of cheap capital, the public market outcomes of US-based private SaaS companies turned out to be better than what investors had expected,” said Pratip Mazumdar. “This created FOMO (fear of missing out) in investors and resulted in a herd mentality.”
“Many VCs want to catch them young, so they were happy to pay top dollar to join the cap table of Indian SaaS companies at high valuations,” he added. “They are eyeing rich public market valuations that these companies can get at the time of listing.”
The reason secondary market investors are valuing private SaaS companies so highly is that even during the pandemic when consumer sentiments were at an all-time low, these companies still made money.
“The SaaS business model works on an annual or multi-year contract basis, so these companies are resilient. When digitization picked up due to physical restrictions, these companies saw their market explode. So they not only survived but also grew rapidly,” Pratip Mazumdar explained.
Full speed ahead
Amid the funding deluge that started in the last quarter of 2020, bigwigs like SoftBank, Tiger Global, and Steadview have thrown their weight behind SaaS firms. Meanwhile, homegrown SaaS companies, which were already enjoying steady organic growth before the pandemic, have witnessed the business growing at a breakneck speed.
“It’s like fuel into the fire. Earlier, these companies might have been getting, say, ten queries a week. They are now getting 1,000 queries a week,” said Pratip Mazumdar. “SaaS companies have realized they are in a sweet spot where they have the right product-market fit, massive opportunity due to digitization, and capital to go all out.”
Most SaaS companies are utilizing fresh funding to cater to ballooned incoming demand as well as to going after bigger and better-paying clients, something they wouldn’t have done if there was no crisis.
“With the higher capital raise, SaaS companies will have the potential to capture a disproportionately larger market share available today,” said Pratip Mazumdar.
He further explained that before the pandemic, a SaaS company might only be able to scale its business by 10x on a certain amount of financing. Now with COVID-accelerated digitization, a SaaS company’s revenue potential is likely to double to 20x. This signifies the bigger deals in India’s SaaS sector.
Moreover, the pivot to remote go-to-market models is “reducing barriers for Indian SaaS companies to tap overseas markets,” as the shift fundamentally “levels the playing field for them” in access to customers, decision-makers, and end-markets, a recent report by SaaSBoomi and McKinsey & Co noted.
“Being India-based is no longer a constraint. Global enterprises are now ready to opt for Indian SaaS companies, and if the service comes at India prices versus Silicon Valley prices, the India model will take off like a rocket,” Natarajan said.
With money sitting in their banks and local market buoyancy, many local SaaS startups are looking for a bigger playing field beyond India and the US, usually the primary market where Indian SaaS startups expand. Chargebee, for instance, is in the process of setting up a base to tap the European market.
It opened an office in the Netherlands after its funding round earlier this April. On job search platform Glassdoor, ChargeBee has listed eight local job openings in the European country.
“Europe is not the typical customer base for Indian SaaS startups. It’s different than the US market where you don’t necessarily have to be on the ground to sell to customers,” said Natarajan. “The fresh funds can provide them with a cushion for such new experiments.”
Furthermore, Natarajan believes that while many SaaS firms are bulking up money since it is available, it is not likely to create a bubble in the SaaS space because of their sustainable business models. “Even if liquidity dries up in the startup ecosystem, nothing is going to come crashing down on the SaaS industry,” he said.