India's SaaS market is eying $50 billion by 2030, driven by AI and start-up innovation

SaaS represents a form of cloud computing where companies offer clients access to application software while managing all underlying physical and software resources. This model not only streamlines operations but also reduces costs and increases scaleability for businesses. How is it different from plain-vanilla software? The simplest explanation is that instead of buying a software solution upfront and running it on premises, a business buys a subscription, which allows them to run the software on the cloud, where all the computing takes place. All that the client needs is a front-end, which could be just a browser.

SaaS firms offer services ranging from customer relationship management (CRM), enterprise resource planning (ERP), sales modules and complete business suites to conversational AI messaging and subscription billing, invoicing, and tax management, among others.

Let’s get back to what the future holds for SaaS firms in India. A report in 2023 by SaaSBoomi—a pay-it-forward community for SaaS founders—says that over the next decade, the sector is expected to generate $50-70 billion in revenue and create more than half a trillion dollars in value. This growth is anticipated to foster the rise of more than 100 unicorns and 50 centaurs (start-ups valued at more than $100 million), while also generating more than 500,000 jobs. India has 19 SaaS unicorns, says the report. The ecosystem is also seeing a seismic shift with the entry of AI and Generative AI (Gen AI).

However, the past two years have seen a slowdown in SaaS investments, as venture capitalists (VCs) exercise caution. Experts suggest that VCs are now primarily targeting B2B SaaS start-ups or those leveraging AI-driven solutions. Preeti Nellore Sampat, Partner at Eximius Ventures—a venture capital firm investing in pre-seed and Series A start-ups—says that the way VCs evaluate companies has changed since 2021. Earlier, market share and growth rates were prioritised; now the focus is on fundamentals. This shift, along with global valuation corrections, has led investors to change their investment strategies. “Consequently, there has been increased caution in selecting business models,” she says, adding that since 2023, however, there has been an uptick in investment activity. “Investments in SaaS are again picking up as of Q42023 and Q12024.”

But these are still lower compared to 2022 when the SaaS industry overtook fintech in attracting investments. In 2021, investors deployed almost $6 billion into Indian SaaS firms, up nearly 3.5x from 2020 and 8x from 2018, says a Bessemer report from 2023. New venture funding, however, fell to $0.3 billion for H12023, the report says.

The global venture landscape has recalibrated since its 2021 peak, says the latest Bessemer report, titled ‘The Rise of Cloud AI in India 2024’. While funding levels have moderated from the high of $6 billion in 2021, there are signs of a recovery. In 2024, venture funding is set to exceed the 2023 figures by 25%, with nearly $1 billion flowing into Indian start-ups. AI-focussed companies will capture a chunk of this, with around $175 million being invested in such start-ups in 2023.

But most investments are in the pre-seed or seed stage, say industry watchers. SaaS firm Unicommerce launched an IPO in August. Sridhar Vembu, CEO of Chennai-based SaaS firm Zoho Corporation, tells BT that in the last two years, there was only one IPO globally for a SaaS company. “We’re currently in an AI bubble,” he cautions. “Every SaaS company is jumping into AI,” he says, suggesting investor pressure could be a driving force.

The Money Flow

VCs are known to invest in trends, but Sampat of Eximius Ventures notes that investment models have evolved significantly since 2021. Emerging trends like AI and Gen AI have transformed the SaaS landscape, rendering some previously growing companies redundant while accelerating the growth of others. Consequently, VCs are adopting a more cautious approach.

“VCs are focussing on fast-moving firms that are likely to quickly reach valuations of $100 million to $500 million. SaaS, as a model, will continue to exist and thrive, but there will be more emphasis on AI. Companies building AI-first models are likely to receive more funding,” says Avinash Raghava, Founding Volunteer and CEO at SaaSBoomi. Kushagra Gupta, Partner at global strategy and consulting firm McKinsey & Company, says that while there has been a decline in investments into SaaS firms in 2023, dry powder for SaaS investments in India and globally has seen a 15-20% increase, signalling openness to invest in “well-performing assets”.

Manav Garg, who founded SaaS firm Eka Software Solutions that was acquired by US-based private equity fund STG earlier this year, says within sectoral allocations, the SaaS or global B2B sector has received the most funding over the past two to three years. “Series A and Series B funding in sectors like SaaS or B2B tends to decline compared to consumer brands due to the longer time required to achieve product-market fit. Typically, it takes about a year for a SaaS or B2B company to reach early product-market fit,” explains Garg, also Co-founder and Managing Partner of Together Fund, a venture capital firm, adding that a lot of seed investments are happening in SaaS companies that are leveraging AI. On the other hand, Dev Khare, Partner at Lightspeed India says there was a sort of exuberance in the markets before the interest rate hikes. “But if you normalise for that, 2023 was up from 2022 and 2024 will be up from 2023,” he says. In fact, Lightspeed has put in about $150 million to work in AI since the beginning of last year in India and Southeast Asia, and over $1 billion in 70 companies globally over that time, he says.

The Gen AI Trend

Some experts feel that India could be a source of breakthrough in Gen AI. Stephanie Buckner, COO of US-based computational intelligence firm Altair, says that most companies from other countries have their “AI competency centre sitting in India”. But incorporating Gen AI into large-scale personalisation systems is still expensive, says Ankur Gattani, Chief Growth Officer at WebEngage, a customer data platform and marketing automation suite that manages user engagement and retention. Zoho’s Vembu, however, dismisses Gen AI trend as “ hype”.

Brands are looking to incorporate Gen AI into the simplest of functions to save time and cost and get more value, says Beerud Sheth, Co-founder and CEO of Gupshup, a unicorn and an AI-based messaging platform for businesses to communicate.

How should investors look at the Gen AI trend in the SaaS space? Sampat says that investors should look at what problem is being solved, whether the start-up’s solution solves for the core problem, and which technology is the right fit, and then back firms. “Invest from the problem-solution point of view over whether we should back/build a Gen AI company or not,” she says. Sampat asserts that going back to the fundamentals of product solving is the right approach to investing. But Lightspeed’s Khare believes that cash flow is not an aim for early-stage start-ups in India. “Talking about cash flow, especially in a sector like AI, which is in its first couple of years, is not right,” he says.

The Way Forward

McKinsey’s Gupta says the penetration of Gen AI in SaaS is expected to be three times faster than that of traditional SaaS in the software industry. Gen AI is likely to unlock an additional $200 billion in total addressable market (TAM) by 2027. “Six archetypes of Gen AI plays are emerging in the Indian SaaS industry: virtual agents, scenario modelers, workflow augmentation, co-pilots, conversational interfaces, and AI DevTools,” he says.

Sampat says India has a vast AI talent pool, where 20-25% of the total global talent sits here. “We have become the second largest SaaS economy in the world,” she says, adding that in 2021, the focus was not necessarily on profitability. “Investors are now examining start-ups’ road maps to cash efficiency as an important metric for deciding whether to invest.”

All SaaS stakeholders in India believe investments are on the rise, but they emphasise caution. The mantra for all is simple: Focus on solving real problems and adhere to investment fundamentals. While early-stage metrics are important, having a clear road map is crucial.

@PalakAgarwal64