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Thesis
Software
blog
22
January
,
2022
10 mins

The Future of SaaS, an Indian Perspective

EXPERT
HOST

Both the availability of data, number of connected devices, reduced storage costs, and avenues for its consumption by organisations — data-driven decision making, input to AI systems — are growing exponentially. That creates a massive opportunity for DaaS businesses. Within DaaS, we feel there are three characteristics that can lead to differentiation and excitement.The migration of enterprise software from an on-premise model to one hosted on a central cloud — a trend that started ~20 years ago with Salesforce as a torchbearer — has continued unabated, with much headroom left still. Consequently, SaaS has been on a roll in recent years. The market capitalization of 58 companies on the Bessemer Emerging Cloud Index crossed $2 trillion. Median valuation multiples for SaaS companies went from ~10X of ARR in 2016 to ~30X in 2021. And exciting new SaaS companies continue to come up with increasing frequency.

Amidst this global boom in SaaS, Indian SaaS companies have begun finding their place in the spotlight. In particular, we believe 2021 will be looked on as a landmark year for India SaaS – several Indian SaaS companies such as Zenoti, Chargebee, MindTickle, BrowserStack turned ‘unicorns’ in the private markets, and Chennai-based Freshworks completed a successful IPO on Nasdaq.

SaaS is, and will continue to be, an important investment theme for us. As we were exiting 2021 and stepping into 2022, we thought it was an opportune time to step back and think about India SaaS today, as well as what the future holds for Indian SaaS companies. Once we had some ideas, we also wanted to discuss them with other people in the ecosystem to sharpen our own thinking. So, we decided that the best way to do that would be to leverage the rich experience within the Stellaris Founder Network.*

Themes that define the future

Potential for AI-first software businesses

This is a theme we have been bullish on for a long time, with our excitement levels only increasing with time. A confluence of simultaneous factors — an exponential increase in the availability of data, increased storage and bandwidth at reduced costs, increasing algorithmic sophistication — has created the perfect set of conditions for AI to create business value for narrowly defined problems, as opposed to an omnipresent general-purpose AI. Such solutions help aid human judgement and lead to effectiveness gains, as opposed to the efficiency focus of traditional software.

The magnitude of impact, therefore, can be far higher than what we have seen with traditional software. In addition to software, building AI-first solutions needs capabilities around data and models. Given these are non-deterministic by design, they also need ongoing support after implementation. A services component for AI applications is often a feature and not a bug. For these reasons, we believe AI will lead to the next large category in software, akin to the cloud. We also believe that India, with a large pool of skilled manpower to aid with data and model management, as well as post-implementation support, is well placed to capitalize on this trend.

While the group concurred with this view, they added a word of caution. Both Rahul and Krishna emphasized the importance of AI-software companies selling solutions and not AI. While it is natural to be excited about the technology one is building, customers ultimately care only about the outcomes you can drive for them.

Data-as-a-service (DaaS) businesses

Both the availability of data, number of connected devices, reduced storage costs, and avenues for its consumption by organisations — data-driven decision making, input to AI systems — are growing exponentially. That creates a massive opportunity for DaaS businesses. Within DaaS, we feel there are three characteristics that can lead to differentiation and excitement.

  • Providing non-trivial insights based on third-party or public data
  • Aggregate data from several hard-to-access sources
  • Providing proprietary data

On the flip side, aggregating easily accessible 3rd party data is an insufficient base to build a meaningful business.

Shashi, given his experience with Lattice Engines and D&B, had valuable inputs around this theme. Unlike SaaS, where the end state of the market often ends up being oligopolistic, data businesses are highly fragmented as entry barriers are lower. He felt it was important for DaaS companies to think proactively about what can help them transition to a more SaaS-like business. One good way of doing this is transitioning from being just a data provider to a workflow provider, something Zoominfo has done very well. It’s also a playbook that was successfully executed by Slintel, one of our portfolio companies that was recently acquired by 6sense.

Developer-focused software

There are several tailwinds driving this:

  1. Software is continuing to eat the world. With a corresponding increase in the number of developers, it’s expected that there will be 100 million software engineers globally by 2030
  2. Constantly shortening software development lifecycles
  3. ‘Left shift’ of operations, networking, and security into product development
  4. Increasing buying power with developers. We have seen more and more developer-focused companies emerge in the last 18 months, and only expect this to accelerate

There are some specific themes we are excited about: data and ML Ops tools, low-code and API-led development tools, and autonomous/scriptless and continuous testing. This is also a theme of interest for Ashu, who felt that over time, companies will insource the actual software/model development, and what they will spend on are tools to enable developers and data scientists. Specific themes he found exciting were data governance, tools for citizen data scientists and sophisticated infra for data scientists, commercializing open source projects, and model explainability.

Platform BPO

India has created immense value by outsourcing repetitive tasks that do not necessarily need to be executed on-site, and has benefitted from a large English-speaking, skilled talent pool with much lower costs. Two trends are changing that. One, machines can do 70-80% of what humans do in BPO. Two, the growth of flexible, on-demand work preferences has led to the creation of a no-fixed-resources model. As such, we are very bullish on the emergence of platform companies that are services-oriented in their revenue profile but highly product-oriented in their delivery.

Software for the bottom of the pyramid

What is popularly referred to as the Product Led Growth (PLG) GTM motion. Three key trends are acting as catalysts for PLG-led businesses.

  1. Easier to discover end users through content marketing, Google Adwords, community marketing, Appstore ecosystems, etc.
  2. Convergence between the buyer and the user: increased empowerment for end-users to buy/use their own software within an enterprise, increased software adoption among solopreneurs and small business owners
  3. Maturing product-led growth playbooks, where customers convert through smart nudges and no manual interventions. It’s worth noting that PLG motions often transition to more traditional enterprise sales motions as companies scale e.g. Dropbox. That does not diminish the excitement around PLG as a GTM playbook in our mind, which comes from the fact that, if done right, such businesses can simultaneously be highly scalable and capital efficient for a significant period of time.

An additional theme of excitement — mentioned by Ashu — is cybersecurity. An interesting way to look at cybersecurity is with a comparison to spending on physical security/defense. As the digital world increases in importance compared to the physical world, so will cybersecurity spending.

While we discussed these reasons for bullishness about the prospects for Indian SaaS companies, there was also a word of caution. Being based in India provides a global SaaS business with some advantages, but that is true irrespective of where the company was founded. With software being a global business, and remote work being the new norm, there is no need for companies to have teams in the same geography as where they were founded.

We have already witnessed early signs of this, with mature US SaaS companies having Indian founders establish significant India operations earlier in their journeys. What that means is it’s even more imperative for Indian companies to focus on the future, and to innovate and execute to even higher standards than what we have seen so far.

All things considered, we continue to be extremely excited about the potential for Indian SaaS companies for the foreseeable future, and have every reason to believe 2022 will be an even better year for these businesses than 2021. Here’s looking forward to many more Indian companies becoming market leaders and doing decacorn IPOs, and not just Freshworks!

This article was originally published in the YourStory Expert Opinion section

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