Growth and durability prospects appear bright for India’s SaaS market

India’s software-as-a-service industry could be worth $one trillion in value by 2030 and can be in a position to create nearly half a million new jobs, according to a recent report compiled by consulting firm McKinsey & Co and SaaSBoomi, a community of industry leaders. There are nearly a thousand such companies in India, of which 10 are unicorns, or startups worth at least $1 billion

In 2022, investors deployed almost $ six billion into Indian SaaS companies, up nearly 3.5x from 2020 and a staggering 8x from 2018. However, new venture funding has sharply declined this year amid geopolitical conflicts and interest rate hikes aimed at curbing inflation and tech sector growth has slowed in public markets, prompting investors to be more judicious about which software businesses to back.

While India’s SaaS ecosystem is still in its early stages, we’re already seeing promising signs of growth and durability. In particular, we’ve seen significant growth in the number of early-stage companies that surpass $10 million in revenue.

Six years ago, we identified approximately 30 businesses with revenue of over $10 million and today that figure is over 85 companies, an almost threefold increase.

In today’s high-interest rate environment, India’s SaaS businesses have a leg up. Capital markets around the world are placing a valuation premium on efficient businesses and India’s SaaS market is poised to benefit—as we highlighted in last year’s report, Indian software companies tend to have higher efficiency metrics than their global counterparts.

There are two key drivers to India’s efficiency advantage: (1) SaaS businesses in India already value efficiency on a cultural level; they can upstart and scale with less capital than startups in other countries; (2) The SaaS companies tend to build additional products faster and earlier in their lifecycle.

Covid-19 has forced business around the world to make huge investments in digital infrastructure, furthering the influence of companies providing software-as-a-service, or SaaS. Businesses spent an extra $15 billion per week last year on tech as they scrambled to create safe remote working environments, according to a KPMG survey.

SaaS companies provide web-based applications that take care of everything from how secure the software is to how well it performs. Some of the world’s top SaaS companies include Zoom (ZM), SAP Concur and Salesforce (CRM), the American behemoth that owns workplace messaging app Slack.

India’s software-as-a-service industry could be worth $one trillion in value by 2030 and can be in a position to create nearly half a million new jobs, according to a recent report compiled by consulting firm McKinsey & Co and SaaSBoomi, a community of industry leaders. There are nearly a thousand such companies in India, of which 10 are unicorns, or startups worth at least $ one billion, the report said.

While India is a small player in the global SaaS market, investors say the country could eventually dominate the sector because of two things: its vast pool of English-speaking developers and the relatively low cost of hiring them. The low cost of operating in India is a big plus.

According to a report by consulting firm Bain & Company, the salary of entry-level developers in India is 85% less than their counterparts in the United States.

“If you are building a SaaS company in the US, it is better to have a million-dollar client rather than a $10,000 client because you need to pay for sales and marketing in that country,” said Prasanna Krishnamoorthy, managing partner at SaaS accelerator Upekkha.

“When you are serving customers from India, you can have these small and mid-sized companies, as well as large ones,” he added.

Most SaaS companies focus on global clients, similar to the strategy that was followed by IT giants like TCS and Infosys (INFY). Investors see this as a welcome change, since most of India’s oldest unicorns — from Flipkart to Paytm — have focused primarily on the domestic market.

SaaS firms are much better placed to go global than e-commerce companies like India’s Flipkart, for example. They write software once, and then are able to use it multiple times.

Pressure from new players, the accelerated adoption of digital lending, and widespread cloud usage have required banks and non-bank lenders to start embracing cloud-based SaaS platforms across different use cases: underwriting, fraud, collection, KYC, wealth management, loan origination systems (LOS), loan management systems (LMS), customer engagement, among others.

India is spearheading the global shift to digital payments, with people-to-merchant (P2M) payments expected to grow by 3X, creating a $1.2 trillion market by 2026.

However, despite the euphoria, there are some hurdles Indian companies have to overcome before they can deliver on the $1 trillion promise. Indian engineers trained in the IT services industry may find it hard to develop the discipline required to build a product-focused company.

The SaaS market here continues to differentiate itself among global innovation hubs. As entrepreneurs around the world navigate a higher-interest rate environment, capital efficiency stands out to investors, making India’s already efficient software market poised to benefit in aggregate. Favourable regulatory and infrastructure developments continue to lay a strong foundation for product development and high rates of AI adoption will enhance delivery and transform industries.