Rise of Indian SaaS Industry
The birth of a Trillion Dollar Business?
The year is 1999, India’s total GDP back then was less than RBI’s Forex Reserves today. It had been a few years since economic liberalization of 1991 and internet companies were all the rage in international stock markets.
Domestically too, in India, a little known Indian software business by the name of Infosys has started to grab headlines. It was to become the first Indian company to list itself on Nasdaq. Returns to Infosys shareholders since its IPO in 1993 were phenomenal as well, making Infosys a multibagger stock.
Yet, few imagined, that by the time year 1999 comes to a close and dawn of a new century begins, Infosys share price will increase more than 900%.
The reason for this 900% return in a single year was the Y2K Bug.
Y2K was a single event that laid the foundation of Indian software services industry, gave birth to the Indian middle class and changed the future course of our nation. India in 2021, would have been very different, had it not been for the Y2K bug and the subsequent boom of Indian IT Service industry.
Almost two decades later, a collection of multiple such events is transforming the IT industry of today and establishing the foundation for Trillion Dollar dreams of the future.
Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.
The Rise of Indian SaaS Industry
Infosys, TCS, Wipro - everyone knows these names, they are the founding fathers of the IT Service industry and have done incredibly well for themselves in the last two decades.
Zoho, Freshworks, Chargebee - these are the names that you probably haven’t heard of, yet these are the founding fathers for the Indian IT SaaS industry.
What is exciting about the latter SaaS names is that the business model is very different compared to their predecessors in the IT Service industry. While a business like TCS does margins of 30% on a good year, SaaS businesses like Zoho, Freshworks and Chargebee routinely operate at above 70% profit margins. SaaS businesses also tend to have sticky customers compared to IT Service where you have to hunt for new deals every couple of quarters and continue to build your order/service books.
On a unit economics basis alone, a SaaS based IT product business is far superior than the traditional IT Service business. It’s this giant leap in business fundamentals along with a bunch of supporting events, that is driving up the economic boom in this part of the industry.
The Lollapalooza Effect
Several factors today combined have created a lollapalooza effect in the SaaS Industry. Here are a few numbers to give you an idea of the incredible speed of growth in this industry.
A decade ago in 2010, Indian SaaS industry was almost non existent - it was made up of a few names mostly the likes of Zoho and Freshworks who were trying to set up a global cloud based SaaS business from India, against all odds.
If you want to read a detailed deep dive into the business of Freshworks, you can read so here.
By 2015, we had about ~5000 SaaS based businesses operating out of India. Today, we have more than 8000 SaaS based companies incorporated out of India and more than 40 of these have raised considerable capital (Series C funding and above).
India is one of the fastest growing SaaS markets in the world and is expected to increase to ~USD 20 Billion in ARR by 2022, representing a 9% global SaaS market share. This represents a 32% growth CAGR over the last 5 years.
Below are the multiple standalone events that are aiding this growth:
Availability of low cost digital talent: India is blessed with troves of digital talent - this talent is not just limited to coders and engineers but other necessary skills like UI/UX Designers, Product Managers, Sales, Marketing and Management - all the combinations required to set up a well run and successful SaaS business
Robust capital ecosystem via Venture Capital and incubation funds: Success of first generation entrepreneurs of Zoho and Freshworks attracted others to set up and experiment with a SaaS start ups in India. The first choice of a BITS Pilani or IIT Grad today is not to fly off to Silicon Valley, but try out the less charted path of building a global business out of India (GreyOrange, Postman and so many others are examples of this fundamental change)
Democratized world class infrastructure thanks to developments in cloud computing: Amazon Web Services changed everything for everyone in the world. Today a cloud based SaaS business in India has the same infrastructure available to it as someone setting up a similar business in US. Your geography no longer impacts the quality of infrastructure you can access, thanks to AWS and other giant cloud infrastructure set ups available from Microsoft, Google, Oracle and so many more
Winning characteristics of Indian SaaS companies Large market and demand for Indian software products: The world today looks upto Indian made software products. Indian software today is equivalent to German engineering with cars, Japanese quality with hardware. Scaling and selling this software is just a matter of a few clicks and marginal incremental costs. A company completely set up in India can advertise and target customers in South Korea.
For example, Kissflow, a digital workforce management platform, based out of Chennai, has customers in 160+ countries around the world.
Supportive Regulatory Ecosystem: Government of India along with Industry bodies like SaaSBoomi and Nasscom have over the years made it easier for someone new to set up a software business in India. An army of VC partners, incubators and coworking spaces further strengthen this ecosystem.
Types of SaaS Businesses
Broadly, a typical SaaS business can be segregated into one of the following four categories:
SMB focused SaaS
Vertical Specific SaaS
Globally Competitive SaaS
India specific SaaS
Each of these four categories represents unique opportunities and have several established and successful companies within them.
SMB Focused SaaS Companies
These companies are focused on creating software for the small and medium scale enterprises globally. Most of them are horizontal offerings aimed at a particular function, for eg. subscription management, with applications across industries. This group is dominated by the first generation of SaaS companies established in the early days of Indian SaaS industry (pre-2010).
Examples include, Zoho, Freshworks, Chargebee and Kissflow.
Vertical Specific SaaS
These are businesses that are focused at disrupting industries currently underserved by the presence of software, eg. hospitality, logistics, wellness.
Most companies in this group are trying to disrupt individual functions within an industry with the help of software. For example, subscription based analytics software for utility companies, document management in case of legal industry and policy service management in case of insurance industry.
Globally Competitive SaaS Products
Increasingly, global leaders in various categories of SaaS products are emerging from India. Unlike their predecessors in the IT service industry, these companies are not just servicing the giants but they are the giants in the industry.
Most companies in this group are using emerging technologies to build innovative and differentiated products. For example, venacular.ai is a voice AI company that can automate the process of routine customer support tasks across industries.
Other established players in this industry include Postman, BrowserStack and Hasura.
India Specific SaaS
These are the companies showcasing the best of Indian ingenuity - focused at creating SaaS based products for India specific use cases targeted both for B2C as well as B2B customers.
The best example is a company called MyGate - a SaaS business aimed at providing software products to residential and commercial establishments to manage their building security along with other community tasks like collection of maintenance fee etc.
Businesses in this category can be further divided into - Pure play SaaS companies and SaaS enabled B2B platforms.
Interesting SaaS Businesses of India
Before I conclude this article, I thought of introducing some really interesting SaaS businesses both in private as well as public markets.
Infra.Market is disrupting how raw material is sourced and managed in the real estate and construction industry. Infra.Market runs a platform to aggregate customer demand and solve for supply chain inefficiencies via technology.
This single start up alone has managed to completely reform the supply side construction market. Infra.Market is currently working on 140+ construction projects and has 70+ clients.
Ninjacart is disrupting the fresh food produce supply chain industry. Its aim is to use technology and analytics to solve for inefficiencies within the supply chain industry and leverage technology to directly connect farmers to retailers.
Freight Tiger is trying to transform logistics supply chains by enabling businesses to better control and track their shipments. Its using software to better connect shippers and transporters with businesses.
LoveLocal helps local stores create a digitized storefront. Its aim is to empower Indian retail businesses to migrate online and leverage technology to digitize their existing businesses.
Airmeet is India’s answer to Zoom. Airmeet specializes in creating and providing software tools to businesses for building and organizing large scale immersive webinars and virtual conferences.
The company has slowly started gaining global market attention and is securing a great niche for itself within international markets.
Druva is a data protection and cybersecurity company built from the ground up for the cloud computing era. Traditional cybersecurity software vendors were focused on on-premise servers and didn’t keep up pace with the advancements in cloud computing. This provided a window of opportunity for companies like Druva to enter and garner market share.
Druva is one of the major success stories of Indian SaaS industry, esp. when it comes to building products for a global market.
Listed Indian SaaS Companies
Very few pure SaaS businesses are listed in Indian equity market. Few names that exists are in transition to move their business models from sales of software licenses to subscription based revenue models.
Some of these IT Products companies once transitioned to SaaS model, stand to do very well for themselves.
Examples include, Intellect Design Arena and Newgen Technologies.
Conclusion
We have come a long way since 1999 and Y2K. The two decades of prosperity in IT Service industry and the butterfly effect that took place because of it, stands to be overshadowed by the rise of Indian SaaS industry.
The coming decade belongs to Indian IT industry, more specifically, the SaaS based IT product industry. Few of the names, discussed here today, will rise up to become giants of tomorrow.
Until next time.
Peace,
Tar
Hey Tariq, I am a great fan of your writing, but this time to be honest, i felt you could have explained the SaaS concept a bit more, it would have definitely helped. I am also doing a bit of research on a few IT companies which are enabling other industries eg KPIT Tech, TATA Elxsi, etc. Can you guide me with where to find research material. Thanks a ton. PS: Sent a p.m. on Twitter
Very well put together. Can you please share some of the reference material or sth of that sort if someone wants to delve deep into the SaaS?