There has been a lot of general buzz and excitement about the B2B SaaS space in India because of the huge opportunity the space presents in the Indian as well as the global market. Lead Angels are bullish about this space, and have undertaken this report to educate and give perspective to our members and other stakeholders. Our goal is to give you a brief understanding of the space, its potential and a few metrics which can help you make a better investment decision in this space.

Historical Backdrop/Transition of the industry

The first generation SaaS players like Zoho, Kayako and Wingify were quite different from their contemporaries based on two main factors:

  1. Early players were bootstrapped and had a relatively slow growth.
  2. They mainly focused on large enterprises, rather than SMBs (Small and Medium Businesses).

“The lack of a large funding treasure chest to fall back on meant that these companies grew slowly, investing money towards growth only from internal accruals, and more often than not, capped out at around the $10 million ARR (Annual Recurring Revenue) mark. This was usually on account of two things—either their markets were small or further growth required category or product expansion targeting a different type of purchaser.”

  • 'Swallow or Summer: Indian SaaS startups’ $100m ARR dream', The Ken

The new generation of SaaS start-ups are building on their predecessors, using similar principles and metrics that companies like Zoho and Capillary Technologies used in a more uncertain landscape. More importantly, the markets are bigger and are growing well, which is why (amongst other factors), funding in the space has increased as well.

Market Opportunity

India is one of the fastest growing SaaS markets in the world, estimated to grow at CAGR (Compounded Annual Growth Rate) ~36% (2018-22). This is because of factors such as:

  • Adoption by Start-ups due to cost savings.
  • The proposition of increasing sales and workforce efficiency
  • Tailored solutions in accordance with the requirements.
  • Lack of advanced or desired features in legacy software products.
  • Better product market fit, e.g. leveraging the prevalence of mobile devices to launch SaaS products on mobile for traditional SMBs, as done by KhataBook.

Indian SaaS market size. All Figures in USD Bn. (Source: NASSCOM: Cloud – Next Wave Of Growth)

**Indian SaaS market size. All Figures in USD Bn. (Source: NASSCOM: Cloud – Next Wave Of Growth)**

Yet, in the current scenario, India is still a nascent market for selling SaaS products. This is because of challenges such as:

  • Limited understanding or education about the benefits of Software services
  • No “Do-It-Yourself”(DIY) culture, that is, there is a heavy requirement for extensive servicing and implementation for Indian customers making the cost of a single sale higher as compared to their foreign counterparts.
  • Majority of traditional SMBs still averse to spend capital on technology.
  • Requirement of major offline sales channels and slow sales, thus raising the CAC (Customer Acquisition Cost).
  • Long payment cycles because of delayed payments.

“India is the best place to build a SaaS product but not the ideal market to sell”

  • Arvind Parthiban, co-founder, Zarget (Acquired by Freshworks) & Sr. Director of Marketing, Freshworks

But the fact is the SaaS startups cannot scale by focussing only on the Indian market. The biggest revenue churner for them is the export  or overseas market.

  • SaaS was estimated to be worth USD 73 Bn in 2018 (5.2% of the total Global Software and services industry) and expected to grow to USD 129 Bn by 2022 (7.4% of the total Global Software and services industry)

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  • ~70% of the total SaaS revenues earned by Indian startups are contributed by other geographies, USA being the highest contributor.
  • Key reasons encouraging the transition from on-premise to SaaS are greater agility enabling rapid innovation, reduced vendor lock-in, reduced time to market, reduced IT dependencies and continual access to latest software.

Source: NASSCOM: Cloud – Next Wave Of Growth

Source: NASSCOM: Cloud – Next Wave Of Growth

A significant portion of this revenue from abroad is generated through SMBs who have been embracing SaaS services to grow their businesses.

  • As per a report released by Google & KPMG in July 2018, ‘the global SMB SaaS segment is expected to grow at a CAGR of 36% over the 2017-22 period.

Chennai is the hotbed for SaaS in India–the city not only generates close to $1 Bn in SaaS revenues alone, it has over 10,000 employees working in SaaS. In contrast, the rest of India makes a fraction of this as a whole.

Reasons for the Growth of Indian B2B SaaS Industry

Cost & Skill of development

India has been an established IT outsourcing hub, employing almost 4 million people, that offers skilled talent at a fraction of the cost of other countries. Apart from that, the entry level salary for a developer in India is USD 9000 which is significantly lower compared to their US counterparts, which stands at USD 70,000. Therefore, the cost of development and implementation for SaaS products is far cheaper, giving them a cost advantage.

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Cost Effectiveness

Indian SaaS companies have truly embraced Digital marketing and inbound marketing in particular. There was also a shift away from this traditional approach to selling software in the said markets.

Instead they invested more resources into Search Engine Optimisation (SEO) & Search Engine Marketing (SEM), and specifically to improve a metric, known as Payback Period, i.e. how much business each dollar spent in marketing would generate and how much time it would take for this revenue to exceed the initial marketing spend.

Payback Period = CAC/Monthly Recurring Revenue per user

While traditional SaaS metrics such as Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) give you an idea of how big a business can be a short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster.

Rise of SMBs in developed nations

Spaces, such as CRM, support and collaboration are segments that are dominated by well established, larger competitors and therefore, it is difficult for Indian SaaS startups to compete with them. Which is why the Indian SaaS companies’ focus is on the SMB customers globally. The B2B SaaS companies from developed countries have to focus on large enterprises owing to their relatively high development, implementation and selling costs as selling to SMBs does not make economic sense for them. The cost effectiveness advantage of Indian SaaS startups allows them to uniquely service SMB customers profitably. Freshworks was probably the first well-funded Indian SaaS startup that targeted SMB customers globally.

“The SMB segment of the global SaaS market is expected to outgrow the enterprise SaaS market by 2020. The SMB segment is underpenetrated and has substantial revenue potential.” - Suresh Sambandam (CEO, KiSSFLOW)

Potential in the Domestic Market

As stated before, even though the domestic (India + South East Asia + Middle East) market has a bunch of problems in terms of selling for SaaS players, many experts are confident about the potential about the market. The only thing holding it back is the maturity/adaptability and willingness in spending capital on technology for SMBs and enterprises, which is expected to increase with time. The adoption of mobile has enabled SaaS players like KhataBook to tap into the historically techno-averse SMB businessmen in India.

Geographical and Cultural Advantage

India is geographically well-situated to serve all of Asia. As it is a 4-hour flight away from the major markets in the Middle East, Indonesia and China. Culturally, India is similar to the rest of Asia, this allows Indian SaaS companies to sell better in these countries than in developed markets as compared to their foreign counterparts. This means that whatever products works in India, it is likely to work in the aforementioned markets as well.

Access to More Capital

There has been a change in the perception of B2B SaaS companies from before. Most investors didn’t find the B2B SaaS market big enough in the past, but the success of Freshworks, Capillary etc. soon changed their outlook. Investors pumped in around $2.36 billion in funds in pure-play B2B startups; which is up more than a third from the total investments seen in the same period a year earlier. A lot of the marquee VCs are also betting big on the SaaS companies, for instance Sequoia investing in DarwinBox, Tiger Global Management investing in Zenoti.

While B2B start-ups in India raised only Rs $797 million in 2014, secured $3.09 billion in 2018, a rise of around 300%

A Few Key Metrics for B2B SaaS Companies

  • Life Time Value (LTV): Customer Lifetime Value (LTV) is an estimate of the average gross revenue that a customer will generate before they churn (cancel). LTV = ARPU/Churn Rate (ARPU is Average Revenue Per User in MRR)
  • Customer Acquisition Cost (CAC): CAC specifically measures the cost to acquire a single customer.
  • LTV/CAC: The LTV:CAC ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that customer.
  • Churn Rate: (Should be less than 10%, ideally around 5%): Customer churn rate is the rate at which a business is losing customers due to cancellations (proactive churn) or failures to renew (passive churn), and is usually measured on a monthly basis.
  • Payback Period: how much business each dollar spent in marketing would generate and how much time it would take for this revenue to exceed the initial marketing spend.
  • Payment Cycle (especially for SaaS focusing on the domestic market): How long the payment it takes the client to make the payment.