SUMMARY
In 2023, enterprise tech startups witnessed a 68% year-on-year decline in the funding amount, dropping to $1.3 Bn from $4 Bn
In 2023, the sector accounted for nearly one-third or 26.8% of the total M&As that happened in the Indian startup ecosystem, and consolidation is expected to increase further
Enterprise tech startups are unlikely to get respite in 2024 as well and will have to focus on prioritising revenue expansion and increasing customer retention
The Indian enterprise tech sector has established itself as a core focus area for investors on the back of the significant growth it has experienced over the last few years. The startups in the sector raised a whopping $7.7 Bn across more than 540 deals in 2021 and 2022.
Various factors, including the country’s ever-expanding digital and startup ecosystem and increased tech adoption, have contributed to making India a favourable market for enterprise tech startups. However, owing to its sensitivity to global macroeconomic changes, the Indian enterprise tech sector saw a notable slowdown in 2023.
According to Inc42’s Indian Tech Startup Funding Report 2023, enterprise tech startups witnessed a 68% decline in funding to $1.3 Bn in 2023 from $4 Bn in 2022. The number of deals plummeted over 46% to 157 during the year from 292 in 2022.
According to Prasanna Krishnamoorthy, the managing partner of SaaS accelerator and early-stage SaaS fund Upekkha, the funding in the enterprise tech sector in 2023 fell below the pre-pandemic level as investors adopted a cautious approach.
Download The ReportAccording to Inc42 data, late-stage enterprise tech startups were the most impacted. The funding raised by these startups plunged 71% year-on-year (YoY) to $602 Mn, while the number of deals declined 50% YoY to 11.
The sector witnessed only two mega deals during the year — Builder.ai’s $250 Mn Series D round and Zetwerk’s $120 Mn Series F round.
Enterprise Tech Startups Accounted For Nearly One-Third Of Total M&As In 2023
With investors displaying increased restraint in choosing investment avenues, the funding landscape is anticipated to remain challenging, prompting a rise in consolidation activity.
The cofounder and CEO of Indian SaaS unicorn Gupshup, Beerud Sheth, said that consolidation appears imminent due to the current fragmentation in the enterprise tech market. Many SaaS players are now exploring global opportunities, recognising mergers and acquisitions (M&As) as a swift means to amass market share, talent, and technological capabilities.
Consequently, in 2023, the sector accounted for nearly one-third or 26.8% of the total M&As that happened in the Indian startup ecosystem.
Talking about investor exits, Seth said that while the momentum in enterprise tech IPOs is expected to continue going ahead, M&As, too would increase. Key areas of focus for acquisitions are likely to include AI/ML, security, cloud software, and vertical SaaS solutions.
As XScale Global’s chief business officer Anshul Saxena and Gupshup’s Sheth highlight, vertical SaaS has taken a level up in the enterprise tech domain. Within core sectors such as HRtech, cybersecurity, compliance, data tech, marketing, and fintech, the developers are coming up with very niche solutions, making vertical SaaS grow very well.
Download The ReportLarger horizontals acquiring vertical SaaS providers to augment portfolios and tap specific industries was one of the trends observed last year with a bunch of Indian SaaS startups acquiring companies globally.
Will Funding Activity Pick Up This Year?
In 2024, Indian SaaS startups are expected to face several critical challenges, and one significant obstacle is navigating tougher funding conditions.
In addition, the fragmented state of many sub-segments has resulted in intense competition and pricing pressures. Macroeconomic uncertainty may also contribute to higher customer churn as businesses prioritise optimising costs. All these factors collectively will make scaling sales a struggle for startups looking at expansion.
Despite these challenges, industry leaders believe that investors remain interested in supporting innovative and resilient companies that address critical needs and deliver sustainable value.
Investors typically seek SaaS companies with strong growth potential, efficient sales and marketing operations, profitability, and a robust focus on customer satisfaction and retention. The ongoing integration and adoption of cutting-edge technologies such as AI, ML, blockchain, and others in SaaS solutions are expected to keep the sector attractive.
“We are hopeful that market activity will pick up in the new year, and we are already witnessing momentum building. Moreover, India’s SaaS ecosystem is still in its early stages, and we are observing promising signs of growth and durability. Specifically, there has been significant growth in the number of early-stage companies surpassing $10 Mn in revenue,” Sheth said.
Enterprise Tech: Key Focus Areas In 2024
Enterprise tech startups must diligently ensure product-market fit by addressing real pain points aligned with the needs of the buyers. It is crucial to invest in sales and marketing automation to maximise go-to-market efficiency.
Additionally, companies should intensify efforts in customer success, focussing on key result areas to retain clients. Simultaneously, they should optimise costs, build economies of scale, and achieve capital efficiency to reduce cash burn.
“We have many companies that raised capital and are now becoming very cautious from a unit economic perspective. They are striving to achieve unit economic positivity while sustaining growth. We also observe an increasing number of companies venturing into AI,” noted Upekkha’s Krishnamoorthy.
Looking ahead, enterprise tech startups need to concentrate on several key areas such as:
Prioritising Revenue Expansion: Prudent fiscal management shields Indian SaaS against downturns, keeping them innovation-ready. Given delayed sales cycles and macroeconomic uncertainty, startups are prioritising revenue expansion by optimising the customer journey.
Increasing Customer Retention: Companies aim to enhance customer retention and mitigate churn risks through initiatives that boost satisfaction levels across the customer lifecycle. By prioritising customer success, embracing data-driven decision-making, and investing in security and privacy, Indian enterprise software makers could strengthen retention engines.
Adopting New Technologies/Areas: Embracing new technologies like GenAI for smoother operations remains a challenge. Effectively facilitating the efficient assimilation of GenAI is a top priority, but it is still in its nascent stage.
Tapping Into Global Markets: While the US market experienced a slight downturn in enterprise software buying in 2023, it remains the largest market globally. Japan, though a significant market, poses challenges due to language barriers. Even middle-stage startups should look at exploring emerging markets like Southeast Asia, Africa, and Latin America, each requiring a meticulous market-by-market entry approach.
Cultivating Business-Building Competencies: Beyond product development, startups must focus on scaling go-to-market strategies, organisational design, talent recruitment, and profitability. Understanding new defensibility criteria is crucial for safeguarding intellectual property.
Moreover, Krishnamoorthy anticipates that budgets will remain muted in 2024, and enterprise software buying will not reach the levels seen in 2021 or 2020. This poses critical challenges for founders and startups, emphasising the importance of addressing substantial problems that are crucial for companies to solve.
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