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SaaS companies to bypass PE and VC funding slowdown induced by COVID-19: Bain & Co

SaaS (Software-as-a-service) is expected to grow to USD 20 billion by 2022, may turn out to be the sweet spot for investors in India.

Investments photo. Source: Shutterstock.

Despite novel coronavirus slated to negatively impact the overall investment in the country, a joint report by Bain & Co. and Indian Private Equity & Venture Capital Association said, Indian SaaS (Software as a Service) market is expected to grow around 50% annually from nearly USD 6 billion in 2019 to over USD 20 billion in 2022.

According to the report, the PE and VC investment value in SaaS companies rose to USD 1.3 billion, a 60% increase over the last year’s USD 840 million, the report said. Notable large investments included funds raised by Freshworks, Druva, Icertis, Near (Allspark), and OkCredit.

“SaaS is expected to drive investments in the coming years in India,” the report noted, as 81% of respondents surveyed said they expect their firm to focus on SaaS in the next three to five years. The majority of surveyed investors cited SaaS and cross-sector technologies as the most attractive opportunities in the next three to five years.

“Annual investments in SaaS companies grew across all three distinct archetypes—horizontal business software, vertical-specific business software, and horizontal infrastructure software. Horizontal business software was the largest sub-segment growing in deal volume, with the top 10 deals accounting for about 65% of the total deal value in 2019,” the report said.

Fintech continued to be the largest cross-sector technology segment in India last year, both in terms of deal value, at USD 2.4 billion, and deal volume, at 83. In comparison, the sector saw USD 0.7 billion investment across 49 deals in 2018. Within fintech, lending and payments contributed nearly 80% of fintech investments in 2019 and witnessed maximum growth over the last year.

A majority of investors believe the fundraising environment in the next 12 months will be more challenging than in 2019, it said, primarily due to a decline in fundraising, a slowing economy, and highly selective limited partnerships (LPs) as a result of increasing competition. The ongoing healthcare pandemic is further expected to slow down investments.

“From an investment perspective, we will likely see a reduction in investments in H1 2020 along with a price correction across the board,” it said. “Investors could act differently according to types of industry consumption patterns to minimize the Covid-19 impact.”

This comes at a time when the Asia-Pacific (APAC) region’s share in global fundraising dropped from more than 26% in 2016 and 2017 to 13% in 2019 because of the Chinese government’s tightened restrictions on PE investments, the report said.

However, there is a silver lining.

“Based on the global financial crisis (GFC) experience, deals invested during or after a downturn tend to do well,” the report said. “The market disruption caused by Covid-19 will likely lead to growth in select pockets (e-commerce, enterprise technology/SaaS, healthcare, on-demand services) and create investment opportunities.”