Funding for Indian SaaS startups to rise 62.5% to $6.5 billion this year: report
Indian software-as-a-service (SaaS) startups, which have been at the centre of investor interest, are expected to clock overall revenues of $116 billion by 2026, growing at a compound annual growth rate (CAGR) of 55-70%, according to the latest report from venture capital firm Chiratae and management consultancy Zinnov.
The report, titled ‘India SaaS: Punching through the global pecking order’, Chiratae and Zinnov said that overall funding for Indian SaaS startups is expected to touch $6.5 billion this year from $4 billion in 2021 – a 62.5% increase.
The average size of investments in Indian SaaS grew from roughly $25 million in 2020 to $56 million in 2021, the report added. It said there are presently more than 1,150 active Indian SaaS companies.
“We are very excited in a few segments within SaaS, namely cloud-native services, cloud security, hyper-intelligent automation that integrates AI & ML (artificial intelligence and machine learning), and the Web3 infra layer. And there is a lot of scope for services enabling digital adoption,” said Venkatesh Peddi, managing director of Chiratae Ventures.
Chiratae Ventures (formerly IDG Ventures India) has backed software startups such as conversational automation platform Uniphore, no-code platform Hevo, and customer experience management platform Cloudcherry, among others.
Funding for SaaS picks up
With investors continuing to back Indian SaaS startups for their predictable revenues and growth outcomes amidst the global downturn, the report said as many as eight SaaS startups could become unicorns in 2022.
Of the 14 startups that turned unicorns in the first quarter of 2022, five were SaaS companies – HR software provider DarwinBox, analytics company Fractal, conversational automation startup Uniphore, cloud broadcasting software company Amagi Media Labs, and developer tools platform Hasura.
According to data from research platform Venture Intelligence, SaaS companies raised $2 billion across 93 deals in the first quarter of 2022.
In spite of the funding winter that hit Indian SaaS between 2012 and 2018, almost 15 SaaS companies have achieved unicorn status in the past four years alone, signalling an uptick for the Indian SaaS story, the Chiratae-Zinnov report said. There are 17 Indian SaaS unicorns in total, according to Zinnov’s analysis.
Further, late-stage deals in Indian SaaS continue to boost funding in the sector. In 2021, almost 40% of overall funding invested in Indian SaaS was in growth to late-stage rounds, compared to just 15% between 2018 and 2020.
“In the past few years the belief of larger investors in Indian SaaS has increased tremendously and this will continue to grow further. However the pie remains equal between early-stage and late-stage funding,” said Praveen Bhadada, managing partner, emerging technologies at Zinnov.
“We are definitely seeing caution in terms of investment… however our prediction is that $4.2 billion investment last year will cross about $6 billion this year,” he added.
Close to 1.3 million individuals were working in the Indian SaaS ecosystem last year and this number is expected to more than double to 2.8 million this year, in line with growing revenues.
“While we expect talent to grow in the sector, the fast-growing nature of SaaS is making it difficult to feed the right talent. We hope this will change going forward,” said Peddi.
Bhadada added that post-pandemic, customer acquisition is becoming a challenge. “During the pandemic, for customers, it never really mattered where the company was from, but now in the post-Covid world things are changing. We see the cost of acquiring a customer is going up, which is a challenge for the growth momentum of the SaaS ecosystem,” Bhadada said.
Web3 in focus
As Web3 continues to catch investor interest, with venture capital firms such as Elevation and Accel betting big on the space, the sector has seen increasing SaaS innovation.
The report added that Web3, data analytics, developer tools and security represent the next frontier for SaaS startups.
“From an innovation point of view, Indian Saas in Web3 is still at a very early stage. There is scope for development and we will watch out for companies innovating in the application layer, from decentralised automation to NFTs and the metaverse. Analytics, security and developer tools in Web3 are also exciting,” Peddi said.