Where is the great Indian SaaS story headed

The SaaS (Software-as-a-Service) ecosystem in India recently had another high, with the top 30 software product companies in India crossing $10 billion in valuation, according to an iSPIx report.

These 30 enterprise software companies in India have employed over 21,000 employees, with the maximum concentration in Delhi-NCR and Bengaluru.

Amongst the 30 are Noida-based RateGain and Gurgaon-based Knowlarity, whose founders and CEO Bhanu Chopra and Ambarish Gupta, respectively, were present at Surge 2016, talking about the nature of SaaS businesses in India.

The two companies are at the opposite ends of the spectrum: RateGain works on a vertical-specific SaaS model operating in domains of hospitality and travel, while Knowlarity is a horizontal-specific model working in the cloud telephony sector, giving solutions across domains.

As the name suggests, a vertical SaaS model is one that is focussed on a particular vertical, like the travel and hospitality sector. On the other hand, horizontal SaaS models are specific solutions that can be plugged into any organisation, irrespective of their domain or industry. For example Knowlarity is in telephony services.

So what is the best and most preferred SaaS model according to the two?

Ambarish said that although his company works in the horizontal realm, it makes more sense to function as a vertical SaaS model, as it increases one's expertise in a particular space allowing better-gauged innovations. But, both acknowledged the benefits of SaaS being completely mobile, with the costs depending on usage.

Earlier Girish Mathrubootham, CEO, Freshdesk, had said that old economy companies are still not buying SaaS. This is causing SaaS companies to look at foreign markets for customers. For Indian SaaS players 80 percent of their customers come from global markets, making them change their headquarters abroad. The iSPIx report proved the same by showing that 33 percent of the top 30 SaaS startups are domiciled abroad- with 16 percent in US, 13.3 percent in Singapore and the rest 3.3 percent in UK.

 The dipping valuations

However, according to Bhanu there has been a dip in valuations in the recent past for SaaS business models, accompanied by slowdown in investments.

On the parameters for valuations for SaaS, Bhanu said, ”The beauty lies in the eye of the beholder (read: investor).” They typically remain the same: the fundamentals of the company, availability of money or liquidity of the market followed by the overall sentiment of the industry. He believed the investor psychology is moving more from ‘not missing out’ to ‘not losing out’.

But the question of the hour remains whether it is possible to build a million-dollar SaaS business in India. Both co-founders agreed that it could be done as there is a huge talent pool, with the market becoming more product-oriented than service-oriented. They felt that with emerging businesses keen to adopt or integrate SaaS solutions, it won’t be too long before the next Salesforce emerges out of India.

Building a real business

But building a million-dollar business entails keeping pricing and revenues in check. Ambarish said that for SaaS companies, the way of doing business might be based on a sticky model. This means one can go for years with a subscribed clientele without much effort to constantly acquire customers (on a daily basis), unlike B2C models. Rather, the focus is on showing value to the existing consumers or clientele.

However, Ambarish’s advice to SaaS startups was to maintain their churn rate; a typical gross margin for a SaaS startup should be around 70 percent.

But looking at the bigger picture, Ambarish believed that it doesn’t matter how much it takes to build a solution and how much is charged.

“If you build a solution for $10, you might get $3 in the US and maybe $1 in India,” he explained.

However, in his experience he has seen customers willing to pay if they see value and benefits in the solutions despite Indian customers being price-sensitive.

But how do you change pricing suddenly?

For most SaaS companies that take annual fees for their solutions (charging additional costs monthly for the premium benefits offered), the biggest question on pricing is whether customers and churn rates are affected when prices are raised.

Every year, SaaS businesses have either additional features to their existing offerings or have newer solutions altogether. Ambarish said that they give an option to customers to stick to the old solutions or integrate newer ones. In his experience, customers who went for the older solutions weren't much in touch with their solutions and obviously start falling under the radar of churn rates.

Bhanu pointed out that for vertical models one has to look at the context where pricing might also depend on the size of the client’s business and the how their business is growing, leading to enterprise demands.

A report released by CB Insights last year revealed VC-backed SaaS companies in the US raised over $2.5 billion in 2014. The top four investments that year were led by 500 startups, Andreessen Horowitz and SV Angel. Andreessen Horowitz’s notable investments in 2014 included Box, Slack and Lookout.

The top five sub-industries for SaaS Investments were BI, Analytics and Performance Management, Customer Relationship Management, Advertising Marketing, Monitoring and Security.

Also, VC-backed SaaS IPOs and mergers and acquisitions both reached four-year highs in 2014, up by 66 percent. Thus, it is interesting to see how the SaaS business grows and is fostered in the country and how many Indian companies choose to make their headquarters abroad.