Will SaaS Startups Finally Unlock India Opportunity Amid 2023’s Uncertainty? 

In many ways, enterprisetech or SaaS was the last bastion to fall in 2022’s brutal winter for the global and Indian tech industry. Cutbacks and layoffs at Salesforce, Shopify and Amazon and other huge enterprise-focussed companies have resulted in shockwaves that are expected to ripple across 2023.

In India subscription management unicorn Chargebee, Nasdaq-listed Freshworks featured among the enterprisetech companies that laid off employees, a list that also includes Hirect, Hubilo and Dukaan.

The feeling among investors is that ticket sizes and valuations have historically never been as high as B2C startups when it comes to SaaS or enterprisetech, even at the peak of funding in 2021. So when things slowed down dramatically for B2C leading to massive job cuts in 2022 in India, SaaS did not feel the pinch as much, well not as much as say edtech.

But amid talks of more layoffs in 2023, already seen in the case of Salesforce, it’s beginning to look like the year ahead will not be a smooth ride for the SaaS sector.

One thing is clear though the push towards automation to replace some functions across businesses means SaaS startups have a high growth ceiling even amid cutbacks. And the rise and advancement of ML engines and language models has created a new dynamic even within the SaaS community.

As venture capital Tomasz Tunguz hinted in his predictions for 2023, the entry of ChatGPT into the mainstream is likely to result in an explosion of applications and features built around the large language model. And SaaS will not be untouched.

According to early stage SaaS VC Ideaspring Capital’s Naganand Doraswamy, “ChatGPT is making a lot of noise! It will impact the search industry quite a bit. It will also change content marketing including SEO. We already know of companies using ChatGPT to generate content on their platforms.”

But coming back to the basics such as funding, hiring and business growth, what does 2023 hold for SaaS investors and founders? While on balance there is optimism, it can definitely be characterised as guarded or cautious.

But there is one clear opportunity for Indian SaaS startups that has so far remained untapped and perhaps 2023 will finally deliver on this promise. As most western markets show a muted outlook, perhaps this is finally the year that India becomes a major focus for SaaS startups.

Mixed Funding Outlook: Will Dry Powder Boost SaaS? 

Despite 2022 ending with layoffs in the sector, enterprisetech startups saw an uptick in overall funding in the year.

Mega deals, which were otherwise rare in 2022, were seen in the SaaS sector with Uniphore’s $400 Mn and Chargebee’s $250 Mn round, plus the year also saw new enterprisetech unicorns like Fractal, DarwinBox, Uniphore, Leadsquared.

With $4Bn raised in the year and 303 deals, 2022 was far better than 2021 in both regards. this total investment—was raised in the year’s first six months. The funding amount and deal count surged 25% and 32% respectively year-on-year.

The funding outlook for 2023 remains muted for the first half of the year as the hangover of a slow 2022 lingers on. SaaS funding is likely to see a surge after June 2023 and towards the end of the year when dry powder is forced out of investors into companies that survived the worst of the slowdown.

But while that is the thinking at the moment given the traditional investment cycles for new funds, there could be more surprises in store. In short, no one is sure when things will bounce back.

Private equity fund TVS Capital Funds’ chairman and managing director Gopal Srinivasan believes there’s no timeline. “It’s always hard to say when recovery will happen after such a reset. The correction is not over yet and our advice to founders is to be ready for a tough road ahead in 2023.”

The Hangover Of Sober Valuations 

Investors we spoke to believe that not only have valuations corrected, but the revenue expectations to reach the next round are also changing. Many investors that had set 12-15 month ARR timelines for their portfolio companies are having to rethink this given that the projections of the past seem too ambitious in the current market.

But according to a survey conducted by Inc42 with 50+ active investors in Indian startups, 26% of investors are bullish about enterprisetech (joint top with fintech) for FY24.

Having said that, investors also agree that the last two years of high fund flow and sky-high valuations were an aberration, even for non-SaaS startups, and that the lowering of valuations now and in 2023 is the new normal.

“B2B in general raised less capital and hence valuations were more moderate compared to B2C. However, even B2B valuations were getting too high. Even in public markets the PEs ratios were unsustainable. It is now around 10-15x which is sustainable,” says Doraswamy.

While valuations remain sober, there will inevitably be as many unicorns in 2023 as there were in 2022, if not higher. The funding recovery towards the end of the year will likely result in a flurry of unicorns from the soonicorn club of the Indian startup ecosystem. Soonicorn startups from SaaS, fintech and B2B ecommerce are most likely to see the biggest valuation bumps according to investors.

The reasoning is that 2022’s slowdown was severe on those startups that relied on consumer spending, but B2B sectors continued to see gains. Enterprisetech, B2B fintech and ecommerce are going to remain in fashion since they reduce cost of operations for most businesses today.

SaaS & The Consolidation Wave 

But the global macroeconomic slowdown not only resulted in a decline in SaaS ticket size from large businesses and trimming of subscription costs, but also forced SaaS companies themselves to check their costs.

Even Sridhar Vembu’s Zoho, which hit $1 Bn in revenue in 2021, admitted that growth has slowed down quite a bit in 2022 compared to 2021. But it is precisely companies like Zoho which will be in the advantageous position in 2023, according to investors.

“Profitability is king. Zoho may have seen a slow down but it has the cash. And even though Mr Vembu is not the kind of CEO to acquire companies, there are other SaaS giants that will grab startups at a discount this year,” said an early stage deeptech and SaaS investor without wishing to be named.

While some companies that have raised funding at high valuations in the past few years will grow into their valuations, others might fall by the wayside, especially if the bigger companies such as Zoho continue to use their on-book profits to innovate on R&D and pull ahead in terms of features and pricing.

Enterprisetech, which trailed ecommerce among the sectors with the highest number of M&A deals in 2022, is likely to feature among the top sectors for acquisitions in 2023 as well. Most deals in SaaS were by companies looking to enhance the horizontal and revenue bandwidth of their operations (see Whatfix’s acquisition of Leap.is or CRED acquiring lending SaaS startup CreditVidya).

One out of every five startups acquired in 2022 was from either the ecommerce or the enterprisetech sector.

“Netcore’s $100 Mn acquisition of Unbxd and Shiprocket’s acquisition of Wigzo are examples of mergers and acquisitions that allowed expansion into and greater control over more parts of the value chain,” according to Madhu Shalini Iyer, partner at Rocketship.VC.

She added that more and more M&As are likely as companies continue to eye geographic expansion and talent acquisition, and even international companies are being acquired by Indian entities which have a presence in the US.

AI, ML To Drive Innovation 

Like in other sectors, we are likely to see a new breed of SaaS startups with a deep vertical focus. As more and more VCs look at smaller ticket sizes and value deals, the competition for early-stage money will increase among investors and this is likely to drive innovation and lift niche segments that have so far remained out of the limelight.

According to Doraswamy, “From an early stage investor perspective, few SAAS areas we are looking at are cloud security, generative AI, cloud ops to name a few. There is a lot of activity in cloud migration as it has just begun. Healthtech SaaS is another area that will see a lot of activity.”

Adtech and martech startups are likely to find greater traction as companies look for better return on ad spends and marketing investments through data-led services. Arpit Jain, CEO of app analytics and growth company GreedyGame, believes that the launch of 5G and the expected entry of AR and mixed reality devices in 2024 will propel a new era of startups in the SaaS space.

“The adtech industry, which is already in its golden age, will receive a boost as rural internet connectivity continues to grow and add to the marketing intelligence,” he added.

2023 is also the year when AI and ML will become absolutely essential from a customer experience and conversion standpoint, because this will result in higher cost efficiency.

“More and more startups are realising that AI can change the customer experience on both the user side as well as the buyer side,” Whatfix’s Khadim Batti told Inc42 in 2022 when the company acquired Leap.is to enhance its mobile app onboarding capabilities.

Among SaaS startups that are looking to tap into the automation wave, customer support platforms such as Haptik, Yellow, Gupshup and others will continue to gain traction, especially as WhatsApp-based customer service goes deeper into the market after bursting out in the past two years.

Some of these such as Reliance-owned Haptik and Gupshup are already well-funded and therefore have the deep pockets to acquire more companies to expand their revenue streams in 2023.

How Cutbacks Will Change Hiring

Of course, while new areas of development, acquisitions and expansion are obviously going to be on the cards for SaaS companies, one cannot discount the fact that 2023 will also involve a lot of tightening up.

Companies will continue to look to expand without hiring heavily or spending too much on talent. Customer acquisition will remain a key area of concern and B2B marketing will be a hotly contested area for the talent wars, according to the founders we spoke to.

As usual, positions that deal with AI, ML and newer tech frontiers will be in high demand, not only among Indian startups but also international giants with operations in India.

Ideaspring’s Doraswamy believes that founders or finance leaders that can crack budgeting will be held in good stead when it comes to sustainable business growth. “Budgeting is always a hard exercise. There is no magic bullet. In early stages, you need to spend enough to ensure you have growth and revenue to attract the next round of funding. In later stages, you need to manage your cash flow.”

A Focus On India 

A lot will also depend on global macroeconomic conditions because many SaaS companies in India sell primarily to US, UK and western Europe. So far these startups have not been able to generate as much revenue from India.

In the US, the situation has only become worse with Amazon laying off 18K employees globally. This sends a huge signal in the market and sales cycles that are already delayed are further being deferred.

SaaS startups need to focus on markets that have avoided the worst of the global slowdown.

And that includes India. The key will be listening to Indian SMBs and traditional businesses to understand how their digital transformation needs have changed in the past two years.

For instance, Zoho’s Sridhar Vembu said that R&D is the key to organic marketing and that’s how Zoho was able to grow its India revenue by a CAGR of 65% over the past five years. Besides this, the company has separated its marketing funnels for SMBs and corporates.

Even though 2023 is going to be difficult for SaaS startups, the focus shift to India from overseas might actually be a blessing in disguise for the Indian economy as a whole.