Newly minted desi unicorns out to reshape the SaaS space

Even as India hotly awaits the next mega IPO in its burgeoning software as a service (SaaS) sector, founders and investors watching the industry closely say ‘don’t forget about acquihires and mid-size acquisitions’ which could become commonplace in 2022.

Increasingly, this consolidation could be led by the ten-odd Indian SaaS unicorns, as they recognise the importance of bringing in quality talent and intellectual property, while paying a fair value for it, says Sanjay Nath, cofounder and managing partner at Blume Ventures.

If this happens, it could be a big shift from the past where acquisitions in the SaaS space were largely led by global companies and tech giants — the likes of Ally.io and Slintel which were acquired by Microsoft and US-based 6sense respectively in 2021.

But acquisitions are not the only thing that these SaaS unicorns, and other successes, will drive.

“SaaS unicorns, amongst the universal set, have become role models for others to start up. We can expect and look for ex-employees of such unicorns, who have scaled business units and seen the lifecycle from scale up to exits, to similarly start up and look for funding,” says Nath.

He further explains that the listing of SaaS bellwethers will also establish benchmarks that other founders, investors and bankers can follow, possibly accelerating the trend of more companies going public in the near future.

Girish Mathrubootham, cofounder and CEO of Freshworks, which became the first Indian SaaS company to go public on the Nasdaq in September, agrees, saying that the pipeline of companies expected to cross the $100 million annual recurring revenue (ARR) mark is healthy.

“If we take a two year horizon, you will see the next set of SaaS companies going public. The best way to measure this is to measure how many companies have crossed $100 million, $50 million, $10 million and $5 million in ARR mark,” says Mathrubootham. “Only four (Indian SaaS) companies had more than $100 million ARR just a few years ago.”

But it’s not just the number of exits that are expected to go up. Valuations and funding are expected to continue to rise as well, something that maybe isn’t alarming at this point of time but needs to be watched more closely, experts say.

According to the ‘Indian SaaS Report 2021’ by Bain & Company, investments in the sector grew to $4.5 billion in 2021, an increase of 170% compared to the previous year. This growth was largely driven by an increase in the number of deals valued at over $50 million.

Mathrubootham agrees that valuations of SaaS companies are running a little wild, while Nath says he’s sometimes seeing that in Series B and C funding rounds, revenue numbers of firms are not aligning with desired valuation bands, creating a potential danger of overpricing that can come back to hurt founders and investors.

This abundance of capital in the market is also fueling a war for talent, as SaaS firms fight to attract the best and brightest among a relatively small and limited pool.

“There’s a general sense of belief and aspiration that SaaS could be India’s next big story to the world. The only thing constraining that dream is the availability of the right talent pool,” says Jayant Paleti, cofounder of HR tech platform Darwinbox.

According to him, as demand for SaaS has grown over the last 18 months, companies have just been poaching from each other rather than growing the talent pool. While he says it’s unrealistic to expect companies having raised just a Series A or B round to train talent, larger firms will need to do this.

“2022 will be a great time for candidates as the sheer number of opportunities available are very high. But, it’s going to be a tough time for companies as they’re going to have to go back to the drawing board to figure out their talent strategy,” Paleti adds.

Moreover, India will need to build a strong pool of talent for SaaS if it wants to keep up with new and emerging trends in the sector globally. Vertical SaaS, robotics-as-a-service, and SaaS serving the needs of domestic Indian businesses are among the key growth areas for the next few years.

“Verticalisation wasn’t an interesting concept a few years ago, because laggard industries didn’t have budgets to buy software, but today, the market is becoming a lot more specific,” says Shruti Ghatge, cofounder and CEO of Zomentum, a sales enablement platform for managed service providers.

She adds that India is perfectly placed to capitalise on this opportunity, as customising solutions for customers by building a lot of integrations is a people intensive process. “A US company for instance can’t keep investing so much in resources to keep building integrations, and as a result, I see India SaaS at the cusp of this massive change,” Ghatge adds.