“It was the best of times, it was the worst of times…”

These immortal opening lines from Charles Dickens’ A Tale of Two Cities are the best way to describe the opportunity for Indian SaaS startups.

On the one hand the global market for software-as-a-service (where companies purchase business applications not as expensive, high-commitment software but as low-cost, low-risk services delivered through the Internet) is already at a whopping $300 billion today. The companies in this space are collectively valued at over a trillion dollars today. In comparison, the total size of the Indian e-commerce market is currently at just $6 billion by some estimates.

But on the other hand, break-out SaaS startups from India have been few and far between. A recent joint study by Google India and Accel Partners projected that Indian SaaS companies are expected to jointly reach a revenue total of $10 billion in 2025, which would barely amount to a few percentage points of the global total. It’s safe to say India missed the SaaS bus.

But here’s the thing about the SaaS bus: it never stops, and it keeps circling back to let smaller, nimbler startups board.

For instance, one could argue that Salesforce really owned the bus, but then its early success spawned the launch of dozens of other SaaS companies. In a largely uncharted milieu, many of these startups could launch without spending a lot of money — all it required was a couple of engineers and a bunch of cheap servers rented from AWS (Amazon Web Services). And before you knew, these startups were seeing promising early traction in niches that were, in a matter of speaking, “blue oceans” — markets with little or no competition.

But then the bus would let on more startups.

The same low entry barriers then allowed hundreds of other SaaS startups to follow suit and launch their own competing apps. So every small niche witnessed a plethora of competing startups fighting for the same piece of the pie.

Unsurprisingly, as competition grew, the cost of building a differentiated product and marketing shot up in tandem. Which in turn negatively impacted the unit economics and efficiency metrics that the SaaS playbook was run on. Cost metrics such as CAC (customer acquisition cost) and payback period went up while revenue metrics such as LTV (lifetime customer value) went down.

The tempering of these metrics resulted in early SaaS companies not being able to raise money for follow-on rounds at historically-tracked valuations and several startups were acquired for far lower valuations than expected earlier. As a result, the pace of new SaaS startup creation has actually fallen in the last two years.

Meanwhile, the bus never stops.

The World is Flat, Again

Now, while all of this may come across as bad news for the SaaS sector in general, it is music to the ears of SaaS entrepreneurs in India.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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