Indian SaaS startups set liberal growth targets, even as global majors look at cost cuts

Broadly speaking, “If the customer set has an Amazon, Accenture or whoever is conducting layoffs, there is a burden of proof on the SaaS product to demonstrate higher Return on Investment (RoI) upfront,” explained Puri, adding that the focus on RoI — dollars earned or saved per dollar spent on using a SaaS product — is higher than it was two years ago.

These demands of greater value for a dollar spent in a cost-conscious economic environment could work in favour of Indian SaaS startups, who ‘provide enterprise-grade tools and technology at a lower cost than their global counterparts’, according to Sparsh Gupta, Co-Founder, Wingify — a bootstrapped DevOps SaaS startup.

The power of Indian SaaS companies to offer attractive pricing in a tough market comes from their ability to be capital efficient, with eight out of 10 startups recording a burn multiple of less than 1.5x, which is well below the global average of 2x-3x, according to an EY-Upekkha report, which also notes that pricing changes have become a priority for most Indian SaaS CXOs.

What’s also driving growth is the opening up of newer geographies that are helping Indian SaaS startups reduce their reliance on the North American market.

For instance, Wingify is increasing its footprint in Asia Pacific and Latin America after witnessing a strong 70 percent growth in Indonesia, Thailand and other South-East Asian markets over the last two years as the pandemic accelerated digital adoption in the region.

“While the US, Canada, Europe, Australia, Germany, and the Netherlands are some of the top markets for us, APAC is the one that is expanding the fastest,” said Gupta.

Currently clocking $30 million in Annual Recurring Revenue (ARR) and profitable, the bootstrapped Wingify is a leader in the mid-market visual website optimizer (VWO) and experimentation category and works with more than 4,000 clients including global giants like Ubisoft, eBay, Target and Virgin holidays.

Over the last year, the company has doubled its headcount to 400 employees. “The fact that the Indian SaaS ecosystem will witness ‘growth’ during a period like this is itself a testimony to its resilience," said Gupta who has seen several down cycles since co-founding Wingify in 2009.

In fact, four out of 10 CXOs at Indian B2B SaaS startups are expecting over 100 percent ultra-growth in Annual Recurring Revenue (ARR), whereas a majority — eight out of 10 — are baking in a 50 percent plus hyper-growth in 2023. That’s as per the EY-Upekkha survey, which spoke with at least 140 growth-stage SaaS companies ($1 million to $100 million ARR) over Q3 and Q4 2022.

This growth, however, could come on a low base for several companies. As of 2022, of the 1,600 Indian SaaS companies that have received funding over the past five years, only 14 of them have exceeded the $100 million ARR mark, as per a Bain report. Zoho and FreshWorks — the trailblazers of the India SaaS story — have an ARR of $1 billion and $500 million respectively.

Data shows about 15 companies are in the $50-100 million ARR stage, while at least 80 of them are in the $10-$50 million range. “There is no one size fits all. Growing at 100 percent for a $1 million ARR company is very different to a company doubling it from $50 million to $100 million. The stage matters,” explained Puri.

On whether these growth targets are realistic in the current economic environment, Puri said, “I don't think 50-100 percent ARR growth target is totally unreasonable. I would say most of our companies would aim at close to 100 percent ARR or more, at least.” Bessemer’s India SaaS portfolio includes Innoviti, Aununta, Entropik, Leena AI, Lentra and Perfios.

Case in point: Mystifly — a vertical SaaS and marketplace provider for the air travel industry — which is targeting $100 million in ARR by 2027 at a yearly growth rate of over 100 percent. Last month, the company raised $8 million in pre-Series B funding led by Cornerstone Venture Partners. At the time, the company said it recorded an ARR growth of 120 percent in FY23.

To be sure, the global airline industry suffered during the pandemic as lockdowns led to months-long grounding or restricted flight operations. While the company didn’t reveal its current ARR, it pointed to the pandemic-led adoption — a 2x jump in revenue from $6 million in 2019 to $15 million in 2020.

“The pandemic made us more resilient," said Rajeev Kumar, founder and CEO, Mystifly. “We've rebuilt the digital plumbing lines for airlines and intermediaries, enabling them to adapt to today's e-commerce world," he added. The company operates in more than 70 countries with 3,000 clients, including American Express Leisure Travel, JPMorgan Chase, MakeMyTrip, Paytm, Agoda, EaseMyTrip and others.

“Churn in the enterprise customer base is less than five percent on account of high stickiness,” said Kumar, adding that the CAC-to-LTV ratio is ~1:50 on account of a subscription and transactional revenue model across all geographies.

CAC-to-LTV measures the cost incurred in acquiring the customer to the recurring revenue secured from a customer over a lifetime. Ideally, for a scaling SaaS company, a ratio somewhere between 1:3 to 1:5 is considered ‘good’, whereas anything lower could mean an absence of product-market fit. Less than zero signifies losses.

Like Mystifly, eight out of 10 companies reported either an improvement or no changes in key metrics, such as net dollar retention rate (NDRR), customer lifetime value (CLTV) and payback period, as per the EY-Upekkha, which called this ‘a counter-intuitive trend — Indian SaaS was undented — and even improved — on key metrics in 2022’.

“That's why people like it (SaaS). No one else can guarantee a future cash flow stream by selling something this year,” said Puri. “One dollar spent today will give you a dollar of recurring revenue for the next three to four years. That model fundamentally hasn't changed.”

The positive metrics and growth forecasts will surely drive the India SaaS story forward in 2023 after what’s been a stellar five-year period. The combined total annual recurring revenue has surged four times to $12-13 billion in 2022 from 2017, whereas funding has jumped five times to $5 billion over the same period. In the next five years, Indian SaaS companies will collectively reach ~$35 billion in ARR and capture about eight percent of the global SaaS market, as per a Bain report.

In fact, the sector is home to 16 unicorns, with 12 created since the onset of the pandemic. So far this year (Q1 2023), venture capital investors have pumped $400 million in enterprise tech startups across nearly 50 deals, with one out of five dollars invested in Indian startups going towards enterprise tech. Overall startup funding between January 1 and March 31 stood at slightly over $2 billion, as per data from Venture Intelligence.

There is significant dry powder too, with Iron Pillar becoming the latest VC to set up a SaaS-dedicated fund worth ~$130 million. Amid the ongoing funding winter, as the capital ask shifts from growth-at-all-costs to profitable growth, it puts the capital-efficient SaaS companies in a pole position for funding. However, many startups are suspect and need to cut out ‘bad habits’ cultivated over the last two years, say investors.

Unlike in the past, growth cannot be achieved with high burn rates as the markets are penalizing companies that are deeply unprofitable, writes Manav Garg in a blog for Together Fund, which he co-founded with Freshworks’ Girish Mathrubootham to invest in SaaS startups. Garg is also the founder and CEO of Eka Software—a SaaS platform for digital commodity management.

While most growth-stage Indian SaaS startups grew rapidly meeting the “Rule of 40” benchmark, they did so by focusing on growth and sacrificing profitability — growing at 100 percent year-on-year even if the bottom line bled to the extent of 60 percent, explained Garg in a blog post titled, “Magic 8 Ball” — Eight predictions for India SaaS for 2023”.

For any SaaS startup, the Rule of 40 is the guiding principle to maintain 20 percent growth and 20 percent EBITDA or 30 percent growth and 10 percent EBITDA — a balance of the two key metrics for profitable growth.

Over the last two years, a lot of companies ended up using the cheap capital to grow, build more products and add new sales, as they rushed to capitalise on the pandemic-driven tech adoption. “Today, founders are going to be a little bit more thoughtful of initiatives,” concurs Anant Vidur Puri, Partner, Bessemer Venture Partners.

The Nasdaq-listed Freshworks has laid off more than 100 employees across two rounds of downsizing, as it looks to improve operational efficiencies. Its share price is down nearly 70 percent since the blockbuster listing in 2021. The SaaS poster boy of India is still in losses, despite registering $500 million in ARR last year. It expects to break even sometime later this year.

Even the global SaaS leader Salesforce has let go of 7,000 employees and so have several Indian SaaS unicorns — Innovaccer, ChargeBee and Icertis. “More importantly, a lot of this hiring happened in an extremely frothy job market, leaving them with no choice but to part ways with their workforce today,” said Sparsh Gupta of Wingify, which posted Rs 60 crore profits in FY22, and even claims to have been kept its bottom line green since its first filing in FY11.

Overall, dependence on the US market for many, and the collapse of the Silicon Valley Bank show how Indian SaaS startups are at the forefront of global economic risks, with many being global players from Day-1. In what is the nascent ecosystem’s first big downturn, India's SaaS startups will need to quickly reset to the new normal, where no matter the inherent capital efficiency of the business, what’ll matter is profitability — here and now.