“Magic 8 Ball” — Eight predictions for India SaaS for 2023
Last year, we had written on how India has an unprecedented trillion-dollar opportunity to emerge as the “SaaS Operating System of the World” and followed it up with a deep dive to contextualize this opportunity against the global market and macro conditions that we are currently operating in.
As we enter 2023, it is perhaps time to look forward. This post captures eight predictions about how the year will pan out for India SaaS. While no point is guaranteed to pan out exactly as predicted, I am fortunate enough to have a vantage point as both an operator and investor that gives me a ringside view and allows me to have an informed opinion.
Here are my “magic 8 ball” predictions:
1. Founders will accept reality and reset
The Indian SaaS ecosystem has been on a steady rise in recent years. The unprecedented availability of “cheap” capital driven by macro-economic underpinnings led to a “perfect storm” funding scenario in the last eighteen months. In 2022, more than 100 early-stage SaaS companies were funded in India. The valuation multiple of these rounds was as high as 100X ARR in many cases with the average multiple being 15X — the consensus today is that the “right” valuation multiple to apply is 7X. This automatically implies that companies who raised at these valuations will have to at least double their size to merely grow into the valuation of their last rounds. Unlike the past, this growth cannot be achieved with high burn rates as the markets are penalizing companies who are deeply unprofitable — instead companies need to deliver a healthy bottomline EBITDA. It is a double-edged Damocles sword that hangs over the heads of these founders.
Against this backdrop, Indian founders are best placed to reset because of the “India SaaS operating system” advantage. Indian SaaS companies are uniquely positioned to leverage these strengths to rebuild their business models on strong fundamentals. It will give them an opportunity to foundationally overhaul their value proposition by rewiring their operational metrics. Compared to their global competitors who operate in high-cost geographies, Indian SaaS companies can reset their operational metrics to fit market realities faster and more seamlessly.
2. Operational metrics will come into focus — Indian SaaS companies at growth stage will emerge as winners
While Indian SaaS companies enjoy an arbitrage advantage against their global competitors, the fact of the matter is that the availability of cheap capital has led many startups to pursue growth in an indiscriminate and undisciplined manner over the past few years. The classic sins of overhiring and overspending on marketing has led to a situation where companies are growing rapidly but at poor unit economics. While most growth-stage Indian SaaS startups grew rapidly meeting the “Rule of 40” benchmark, they did so by focusing on growth and sacrificing profitability — growing at 100% year on year even if the bottom-line bled to the extent of 60%. The pandemic provided further ballast to the SaaS acceleration narrative — when the euphoria around nosebleed funding and unicorn valuations died down, it left most companies blind-sided.
Fortunately, this equation is reversible. As Indian SaaS companies reset to the new normal, they will firmly focus on operational metrics that balance growth and profitability. In the new “tough” economic environment, we are likely to see the following metrics take center stage:
Revenue/ Employee
Free Cash Flow
Sales Efficiency
NRR
While the Rule of 40 will continue to be valid, the route to achieving that milestone metric is likely to be Mantra 20% growth and 20% EBITDA or 30% growth and 10% EBITDA — an almost equal balance of the two key metrics.
The most pronounced change towards achieving superior operating metrics is likely to be in the go-to-market motions adopted by these companies, specifically PLG (product-led growth).
3. More Indian SaaS companies will finally capitalize on their PLG advantages to achieve early scale
The world over, SaaS companies are increasingly adopting go-to-market strategies centered around PLG. As many as 25 out of 100 in BVP Cloud 100 companies are PLG-focused. India has a unique advantage in the SaaS ecosystem when it comes to PLG — our ability to build for the world remotely combined with our natural demographic advantages enables us to build products more efficiently than others, understand customer behaviour faster and iterate more rapidly than competitors. It is therefore somewhat surprising to note that most Indian SaaS companies in the past were sales-led with the primary GTM motion. Over the last two years, we have seen Indian SaaS companies pay far more attention to PLG than previously — our research indicates that one in five startups are actually PLG-led and primarily rely on sales teams to close customers.
In 2023, Indian SaaS companies will rediscover the virtues of PLG and go all in. The challenge around being product-led is not merely a tactical shift but a deep strategic shift that touches every facet of company culture — starting from setting a high bar on product quality to developing a regimented and systematic plan to open up pathways for sales opportunities from within the product. The fact that 4 out of the top 5 SaaS companies from India (Freshworks, Zoho, Postman, and Browserstack) are PLG-led will convince other Indian SaaS companies that PLG is the path to scale. The proven playbooks shared by these top companies will pave the way for other companies to follow suit. Ultimately it is not simply about choosing PLG sales motions over sales-led ones but combining channels in an optimal manner to achieve rapid scale beyond the $10m ARR milestone.
4. India will see more startups offerings developer tools and allied solutions around infrastructure and security — they will grow at a faster pace both in quality and scale
While the principles of product-led-growth can be applied to all SaaS sectors, there are some that are particularly well suited to this sales motion. At the top of this list is the market for developer tools and overarching domains such as security and infrastructure. Indian startups such as Postman and Browserstack have demonstrated how to win in the developer tools market, achieving scale without sacrificing profitability. While India has not traditionally been a good market for SaaS offerings, the fact that the number of developers in India has grown from under 3 million to 5 million in the space of a few years gives Indian SaaS startups operating in this space a ready domestic market to experiment within to stress-test ideas and offerings in an inexpensive manner. This large base of 5 million potential customers also implies that Indian dev tools SaaS companies can achieve meaningful scale even if they operate only locally rather than compete globally right at the get-go. Startups that successfully achieve scale domestically will have battle-hardened playbooks that can be taken globally. It behooves these startups that the dev tools market is one of the fastest growing categories globally with 1 in 3 companies in the BVP Cloud 100 list operating in this space. This is a fact that Indian SaaS companies have already woken up to with 30% of the 105 early-stage companies funded last year specifically targeting technical personas.
5. Some vertical SaaS gems will emerge
While horizontal vendors such as dev tools companies are likely to be the flavor du jour in 2023, we are nevertheless likely to see a few gems shine in the vertical SaaS domain, focusing on specific industries such as healthcare, hospitality, automotive and logistics.
Horizontal SaaS startups have traditionally found patronage in other SaaS and technology companies that are typically early adopters of new solutions. However, the downturn in funding and the after effects as evidenced by mass layoffs, hiring freezes and budget pull backs will make it difficult for new SaaS players to find prospects willing to kick the tires. Unlike horizontal SaaS companies, vertical SaaS vendors rarely target the tech sector and are instead focused on old-world industries and companies who are relatively untouched by the negative sentiments that the market currently seems to have for technology companies. While these industries might seem “boring”, they are much safer bets at the moment and more predisposed to have the budget and inclination to try and buy vertical SaaS solutions. It is also worth noting that vertical SaaS companies are more likely to find success in sales-led GTM motions given the nature and domicile of the customer base. So unlike their counterparts in the horizontal SaaS sectors who need to perforce master PLG motions to win in 2023 and beyond, vertical SaaS companies will need to go against the grain and master sales-led motions and other “traditional” channels such as VARs to win.
6. Talent will finally be available
Irrespective of which sector SaaS companies operate in and what GTM motion they adopt, one aspect that will bring relief to all Indian SaaS companies across the board is the fact that talent will finally be available and affordable to them in 2023. In the last two years, the emergence of a seamless global market for talent brought about by the remote work imperatives of the pandemic coupled with the availability of easy money drove talent costs to unsustainably high levels. The explosion of seed rounds from $1–2 million to $5–10 million was in part precipitated by the need to provision high budgets for acquiring and retaining talent. In a matter of a few months, the scenario for hiring has completely changed going from one end of the spectrum to another. While the majority of startups have slowed down or frozen hiring, many others have resorted to layoffs to trim their costs further. Even technology behemoths such as Google, Microsoft, Facebook and Amazon have not been immune to the pressures of investor and shareholder expectations and have laid off tens of thousands of people in the space of a few months. This means that a large pool of high-quality talent will make it easier for companies to find the right people to build their products and grow their businesses. Leveling up on talent is the simplest yet most challenging way for startups to jump to the next orbital shift. This is particularly important for the SaaS ecosystem, as it relies on a strong talent pool to drive innovation and growth.
7. India SaaS will continue to attract strong high-quality funding
The number one question on the minds of most startup founders is likely to center around the availability of capital. While I would like to believe that there will be no dearth in the supply of funding in 2023 for Indian SaaS companies, this bullish prognosis comes with a caveat.
It is necessary that we preface this prediction with a note of appreciation around the progress of the Indian SaaS ecosystem in the last five years. As a recent study by Bain & Co noted, of the 1,600 Indian SaaS companies that have received funding in the past five years, 14 of them have achieved over $100 million in ARR, a growth milestone that is happening as quickly for Indian companies as it is for their US counterparts. Indian SaaS companies are winning in the global market and emerging as the best in their respective categories, even as software buyer sentiment has softened in the second half of 2022. Indian SaaS continues to gather momentum despite prevailing market headwinds and has become a global leader behind only the US in scale and maturity. Despite a market slowdown, proven revenue growth combined with attractive margins has made SaaS a comparative safe haven for investors. It is therefore no surprise that India continues to attract interest from top-quality investors from all around the globe.
In 2023, companies that are able to break out of the $1–10 million ARR range will be particularly attractive, as long as they can strike the perfect balance between growth and profitability. The early stages, from seed to series A, will see the most activity, and many second-time founders will seek to take advantage of India’s burgeoning SaaS landscape to build globally scalable companies.
However, before we can fully celebrate this positive trend, companies must reset their valuation expectations and prove their worth through better operational and governance metrics. Investors are likely to back only companies that are built on sound fundamentals with a clear path to profitable growth and strong governance — such companies will be disproportionately rewarded relative to their more profligate peers. We are already seeing profitable SaaS companies who have achieved decent scale raise Series A rounds of $20–25 million in 2023 while they struggled to raise funding in 2022 when investors flocked to flashier competitors. 2023 will see a reset to the mean, not just in terms of valuation but also in terms of sane expectations.
8. 2023 will be the year of AI — AI is here to stay
My final prediction is that 2023 will be the year of AI. There is no doubt that AI is already the most hyped technology of the year. Some naysayers might be tempted to draw parallels with the hype around Web3 last year. However unlike Web3, AI will live up to the hype.
Why so?
I believe that AI will fundamentally change SaaS and all enterprise software in the next few years. It will emerge as a platform shift with as monumental an impact on software as mobile and cloud computing did for previous generations. Platform shifts are guaranteed to facilitate a massive wave of new innovation and disruptors that seemingly come out of nowhere and become mainstream brands.
AI is disruptive in enterprise software because thus far, tech innovation has been only about making people more efficient in how they already work. AI can fundamentally change the nature of the underlying work itself, creating incredible new opportunities.
The vast majority of B2B SaaS apps are an intermediary between some business information and some insight that needs to be derived for a business action — GUIs on top of a database. But what if these insights are delivered to you directly without any visual intermediary. That is what AI can potentially deliver. A zero-UI channel of insights delivered to you contextually in the app that you live in. Imagine a salesperson who spends the majority of his day in a CRM system today. Let’s say this person needs to pitch to a potential client — today, he would need to jump through multiple apps and screens to create and deliver a targeted sales deck to such a prospect. But what if AI could automatically generate a hyper-personalized deck to the salesman when he is just about to enter a meeting. This is just one instance among a thousand other use cases — every job to be done can be significantly improved or accelerated by the use of AI. This new wave of enterprise software startups leveraging machine learning that we’re seeing nearly on a daily basis is remarkable, offering big step ups in productivity, efficiency, and usability. AI use cases that we thought were near impossible or wildly impractical just 5 years ago have become possible and almost trivial “overnight”. Many of the breakthrough use-cases could barely have been contemplated a year ago.
Of course, amidst all the brouhaha around AI, our founders should not forget that AI is merely an enabler — the real focus should continue to be on building real products that help people’s lives and focus on long-term sustainable business models that generate revenue from real customers, and eventually generate cash flow. AI offers an unprecedented opportunity for nimble SaaS startups to leapfrog incumbents and capitalize on the generational shift that is inevitable.
I would like to end by restating the proven fact that the Indian SaaS ecosystem is a force to be reckoned with. With a strong foundation and a culture of innovation and entrepreneurship, Indian SaaS is poised for continued growth and success in 2023 despite the fears around capital and economic sentiments. Investors and companies alike should take note of this dynamic ecosystem and consider the opportunities it presents. It’s a world of endless possibilities.
While this post has magic in its title, the real magic is being performed by our ambitious and driven founders as they convert dreams into reality one step at a time, one year at a time.
– Manav Garg
