Are SaaS companies in India finally taking off?
This month, API development platform Postman raised $150m from a group of investors including Insight Partners, CRV and Nexus Venture Partners at a valuation of c.$2bn, as per news reports. Postman joins a growing club of Indian SaaS startups, such as Freshworks, Druva, and Zoho to join the “unicorn” club in terms of billion dollar plus valuations. It seems that enterprise software firms – more importantly investments in such firms – is finally taking off India which may provide the much-needed boost to the Indian technology industry.
Why has it taken so long?
India is largest software services exporter in the world. The Indian IT services industry is c.$200bn in revenue – with bellwethers such as TCS being valued at c.$100bn. Yet, we are far behind the rest of the world (US, EU and China) in terms of software companies.
Part of this is because it requires a completely different DNA (from founders as well as investors) to build software companies than services companies. The Indian IT industry, despite changing delivery models in the last few years, is still largely a labour arbitrage play. More importantly, the IT services model is a cash generating model from the get-go, and hence does not need huge investments and R&D cycles.
On the contrary, software companies require significant upfront investment to reach a certain scale. However, at scale software companies can potentially be twice or thrice as profitable as services businesses. This is even more true for SaaS business with its recurring revenue model.
Venture capital investments in India, till a few years back, were largely concentrated on the internet / e-Commerce industry and managed to create behemoths such Flipkart, Ola , Quikr in every category. This play was largely to capitalize on India’s trillion-dollar domestic retail industry.
This boom in investments in the internet space was not replicated in the enterprise software space because the domestic market is quite small in India – c.$7bn in revenue vs. the Chinese market which is over $400bn in revenues.
Low cost issues
The single factor that benefitted the IT industry the most is probably what hurts the Enterprise software industry the most – low cost. India is an extremely price sensitive market and one which has never paid market rates for software products. In 2018, test conducted by Microsoft showed that over 90% of new PCs in India loaded with a high of pirated software!
Software pricing in India is at least 60-75% lower than that of the US. Large enterprise software companies such as Microsoft, Salesforce and AWS have significantly discounted prices for India. This means an Indian software company will find it that much more difficult to scale in its domestic market – and therefore has to look outside. No scale equals no investments.
For the Indian SaaS companies to compete with global players, Indian enterprises, including the government, need to start paying market rates for software. Only then will India be able to create large global software players.