Lightspeed India VC says Indian SaaS startups bloated up, suggests better hiring practices needed

Venture Capital firm Lightspeed India’s Partner Dev Khare noted in a social media post that Indian Software as a Service (SaaS) companies are bloated and need to work on their Accounting Rate of Return (ARR) per Full Time Equivalent .

Khare explained that he believes Indian SaaS companies are bloated due to their Accounting Rate of Return (ARR) per Full Time Equivalent. In simple terms, the ARR/ FTE used to measure employee efficiency. Despite the fact that the operational costs are lower in India compared to other locations, the ARR/ FTE of Indian companies cancels the edge of operating out of the country. 

In a LinkedIn post he wrote, “Too many India-based SaaS startups bloated up (even pre-pandemic and even now) at $30-50k ARR/ FTE, negating any cost advantage from operating from India.”

The VC hinted that SaaS companies have not been able to utilise employees efficiently– ARR/FTE being the metric here. Indian companies have ARR/ FTE of $30,000 to $50,000, which is far below their peers in the United States, where the ARR/ FTE is more than ten times at the least.

“US at-scale SaaS at $300k average. a $50mm ARR company could be 750-1500 people from India and 300-400 people from the US. Big difference in agility, margins, management bandwidth, degrees of freedom,” Khare said.

The VC also shared a graph complaining about the metric.

“Need to do much better in India. Graph from Meritech Capital report,” he explained.

According to Khare, Indian SaaS companies can improve their ARR/FTE with a combination of solutions. He noted that the solution includes improving hiring practices, getting right mix of freshers and experienced workers, and improving the underlying product. 

He wrote, “IMO, there is a (solvable) combination of:

1) too many entry-level folks in all functions (I hear things like "because they have passion" or "because they are cheaper")

2) product not doing the job on its own

3) holding on to professional services till very late in the scale-out

The DNA of over-hiring, once it sets in, is hard to break though.”

Over hiring in tech companies has been discussed a lot since late last year globally. Big tech firms like Google, Amazon, Meta, Microsoft, etc all carried downsizing rounds in late 2022 and early 2023 to bring down their employee headcount bracing for the macro economic headwinds.