A trillion-dollar manifesto reframing the SaaS opportunity for India
As India celebrates 75 years of independence, it offers us an opportune milestone to introspect and reflect on the India SaaS journey so far and to contemplate our future.
Over the last decade, the rise of SaaS has been both dramatic as well as transformational. Almost every industry in the world has progressively become more technology-centric, SaaS has emerged as the de facto software-delivery model of choice in this digital transformation journey. A drastically lower cost of entry, minimal infrastructure requirements, and simple implementation made moving to a SaaS tech stack the clear choice. This paradigm shift to an on-demand, cloud-based model has opened up a world of possibilities for ambitious SaaS startups to create iconic global businesses. In this race, Indian SaaS startups have a first-class seat at the table.
It merits noting that SaaS is only a five-year journey in India. While there were other SaaS startups in India earlier, our “coming of age” moment arguably arrived when Freshworks became the first Indian SaaS unicorn in 2018. In 2019, two more SaaS unicorns were added – iCertis and Druva. Since then, 15 more unicorns have been added from India to the SaaS stable in the subsequent 2.5 years. A perfect storm of scaled startups like Zoho and Freshworks combined with abundant risk capital and deep talent pools established India as a SaaS powerhouse in the global sweepstakes.
By any measure, 2021 was a landmark year for SaaS in India. Indian SaaS startups attracted $4.5 billion in total funding up 3X over the previous year. As of today, there are nearly one thousand funded SaaS companies in India and a robust pool of 3,500 SaaS startups overall – up from just 800 companies in 2018. These startups now generate nearly $3 billion in total revenues and employ 40,000 people. Freshworks went public on Nasdaq and over 70 companies have crossed the $10 million annual revenue milestone.
A major driver of this growth has been the secular trend toward digitalization triggered by the pandemic. Over the last two years, the pandemic has changed the way companies operate in a fundamental manner, altering every aspect of work life. This digital transformation has impacted all types of companies across all sectors, from Fortune 500 behemoths to every small-scale business. So much so that the total global spend on software has now hit the $3 trillion mark. And as “software eats the world”, SaaS is eating software – SaaS now comprises $600 billion of the $3 trillion global enterprise IT and communications spending market. But with an 8% annual growth rate, its upward trajectory is almost twice the pace of the overall market. Should this remarkable growth continue, the SaaS market is expected to be worth about $1.3 trillion by 2030?
While this ambitious target might have seemed achievable last year, 2022 has witnessed some momentous changes.
The pandemic might be all but over, morphing into an endemic that rears its head from time to time but one that can be managed without resorting to the kind of large-scale and total lockdowns that were inevitable earlier. There has also been a drying up of venture capital right from public market multiples and IPOs down to early-stage investments.
Will these developments impede the growth of SaaS?
While the pandemic might no longer be as prevalent as before, there is no doubt that many changes that it precipitated are likely to be long-term, if not permanent. Hybrid work environments are the norm now with companies allowing team members to work remotely along with appearing in person. Buyer preferences, especially in the B2B market where most SaaS companies play with, have moved to a digital-first approach irrevocably. According to a recent survey, more than 70% of buyers are comfortable purchasing software that costs more than $50,000 online. In 2021, Deloitte estimated that 94% of organizations were using at least one cloud-based SaaS product with the average enterprise organization doubling its SaaS outlay since 2018 to spend $35,000 on nearly 300 different tools. On average, a mid-size company in the US consumes more than 25 SaaS solutions. So while the pandemic tapering might hit growth rates and valuations of SaaS startups, the long-term trend is still very positive.
This bullish outlook has also meant that despite funding having dipped precipitously on an overall basis in 2022, SaaS startups in India have still managed to attract meaningful funding. As per a recent report, SaaS was the second-ranked segment in terms of the number of funding during H1 2022 with more than 90 Indian SaaS startups mopping up $1.76 billion. If anything, the global tightening of capital availability plays to the strengths of Indian SaaS startups that have traditionally been more capital-efficient than their global counterparts.
Given these underlying strengths, our analysis shows that if Indian SaaS providers can execute to their full potential, they could potentially generate annual revenues of $50-$70 billion by 2030 representing 4-6% of the global market – a value-creation opportunity of $500 billion to $1 trillion. India is already the third largest SaaS ecosystem in the world, behind the US and China, and if it tracks this rate of growth, there is a real possibility that it could emerge as the second largest player overtaking China within the next few years.
While this is a laudable goal, we should not take it for granted that we will get there automatically. There are several systemic issues around talent and domestic capital availability that we need to actively solve.
More importantly, is the goal of “Indian SaaS startups” reaching “6% of the global market” the right way to frame this narrative?
For one thing, in the post-pandemic era, startups are not just “born digital”, they are also “born global”. A global outlook is baked into their DNA right from birth – not just in terms of servicing global markets but also in terms of having a global network of talent, capital, and partners. In a sense, in this brave new world, Silicon Valley is becoming unbundled – cross-border, trans-national collaborations with the best resources are as common across Bangalore and Berlin as it is between Boston and Beijing as ecosystems have become more interconnected and teams have become more international. While this means that SaaS startups in India can access talent globally, it also implies that companies outside India can access talent in India just as easily – democracy in its truest form. A bunch of engineers, domain experts and product managers can now sit and create world-beating products from anywhere in the world – we are already seeing the emergence of such clusters in Tier 2/3 towns in India like Surat and Bhopal, in Estonia in the Black sea region and many more pockets.
In such a flat-world scenario, does it even make sense to use the narrow constructs of geography to define what an “Indian SaaS” startup constitutes?
For another, is the goal of reaching 6% of the global market a meaningful one?
Rather than frame the global SaaS market as a zero-sum game fought by countries facing off against each other, can we frame the India SaaS opportunity orthogonally?
Presenting the idea of “India as the SaaS Operating System of the World”.
Under this manifesto, the SaaS opportunity for India is flipped from merely looking at Indian SaaS startups competing for a piece of the global pie to India establishing itself as a global substrata for SaaS operations. We believe that this is a $1 trillion opportunity for India within the next five ( 10 years) years.
India’s “tryst with a digital destiny” can be deconstructed into the following vectors.
India as a base for digital R&D talent: As the world becomes progressively digital-first, many nations face the prospect of the worst labor shortage of the last 100 years. A combination of factors – from top talent migrating to other countries or choosing to work for foreign companies to move to a different line of work – will lead to a talent-poor environment for many countries and companies. On the other hand, India has the world’s largest pool of developers – more than 3 million developers. 55-60% of global IT and operations workflows are already delivered from India. And this base is becoming broader – according to a recent study, India’s tech industry added 450,000 new jobs in FY22 and is likely to just an equal or higher number each year over the next five years. This deep talent pool can be leveraged by companies across the globe to fuel their digital ambitions and imperatives.
India as a base for digital go-to-market initiatives: Based on your business model, from desk-based PLG to sales-led motions, more than 75% of go-to-market initiatives can be run remotely from India for any organization around the world. The pandemic has accelerated the shift to remote selling and domains such as the developer tools market lends themselves very well to product-led growth motions that Indian SaaS companies can excel at as companies such as BrowserStack and Postman have already demonstrated. Our large pool of developers not only gives us a ready domestic market, it also endows us with a deep understanding and an intimate first-hand experience of the problems to be solved. “India has a large business process management workforce which provides a pool for building a scalable inside sales team in India,” analysts at Sanford C. Bernstein wrote in a note to clients earlier this year pointing out that the size of India’s inside-sales pool is ~120,000 with the count of skill-ready professionals pegged at ~380,000 compared to the US at 300,000-400,000. Hiring Indian talent for these activities bestows companies with better profitability as they have the advantage of lower product development costs and sales and marketing costs.
India as a base for digital support functions: Transnational operations and global markets mean that support functions such as finance, HR, and legal ops can be delivered remotely from anywhere in the world. India is unmatched in terms of the depth and breadth of its talent pool for these aspects. A rich legacy of decades of IT services and offshore BPO capabilities has endowed India with an asymmetric competitive advantage. With the rise of the mobile internet, over 750 million people have smartphones in India and can use these devices for work as much as for play. According to a recent study by the McKinsey Global Institute, by 2030, one billion Indians will be online and become the plurality of English speakers in the world, offering an army of talented support professionals for hire.
India as a digital customer success base: A recent industry report revealed that digital customer engagement has made a significant impact — increasing revenue by 70% on average for companies that invested in it. These same companies expect to almost double their investment in customer engagement and success by 2025. Scaled Indian SaaS startups such as Freshworks and Zoho have successfully demonstrated how to leverage India as a low-cost high-value customer success base. India’s labor cost arbitrage allows companies to economically hire young professionals to complement self-serve customer onboarding and success motions. This not only increases trial-to-paid conversion rates, it also facilitates higher engagement and lower customer attrition.
India as a digital market: While India had traditionally not been a large market for software, the situation has drastically (meaningfully) changed over the last two years. There are many facets to this development:
The move towards digitization precipitated by the pandemic and the emergence of digital rails for many large sectors has spurred market development. For instance, on the back of platforms such as Aadhaar and UPI, the fintech market in India has leapfrogged other geographies and is generationally more advanced. Companies are now building banking solutions and financial services on top of these ubiquitous digital rails and universal standards. Similar trends in other industries such as healthcare (the National Digital Health Stack), retail (ONDC), and logistics(FastTag) will lead to rapid penetration of technology into these large legacy markets.
Scaled startups are becoming early adopters of SaaS – Scaled startups understand the significance of speed of technology adoption in achieving scale and operational effectiveness. They want to focus on their core competency and don’t wish to deploy their core tech talent in developing all products in-house. Even Indian SMBs are slowly willing to adopt SaaS as they see merit in adoption and they also have to compete with their digital more tech-enabled counterparts.
India is a services-heavy economy but with massive fragmentation in supply. These services, particularly B2B services, will get productized as mobile internet penetration increases and as financial rails get standardized. Vendors in these businesses can use cloud software to organize the fragmented supply, standardize service delivery, increase transparency, and facilitate payments.
With India’s internet user base set to touch 900 million by 2025, there is a large opportunity for the digital ecosystem to solve for “Bharat” with unique mobile-first digital solutions such as those pioneered by Dukaan tech startups that can then be exported to other parts of the globe. A recent report from Unesco Science Report that in purchasing-power-parity terms, India now spends more on research than France, the UK, and Italy indicating a healthy appetite for technology innovation.
Technology behemoths such as Amazon, Microsoft, Salesforce, and Google have woken up to India – the country is one of the fastest growing markets for public cloud and SaaS companies. Going by Amazon’s internal revenue forecasting, AWS revenue from India is slated to exceed even Japan and Korea in the near future.
In a nutshell, the center of the world economy is returning to Asia. While China is a manufacturing superpower, India is becoming a tech and digital superpower.
Such a feat will be befitting for an economy that once was the most prosperous in the world – in the 18th century, India was the world’s leading economy with a GDP share of 27% of the globe. Beyond the sepia-tinted nostalgia of becoming “Sone ki chidiya” once again, we have a real opportunity to become a land of prosperity and progress once again. This is not just a goal, this is our obligation. This is our tryst with destiny to become a digital superpower.
If you’re an entrepreneur building the next great SaaS business anywhere in the world, it would be worthwhile to consider India as your “SaaS operating system”.