Bessemer says India SaaS is on track to touch $50 billion by 2030

India’s software-as-a-service (SaaS) market continues to go from strength to strength—it’s projected to reach $50 billion of annual recurring revenue (ARR) by 2030, nearly quadrupling its size today. Cloud builders in the country serve domestic and international customers alike: “India-first” companies, such as Perfios, Lentra, M2P, and Zopper, sell software that reaches the country’s population of 1.4 billion, while “global-first” companies, like Zoho, Freshworks, Gainsight, iCertis, Zenoti, Leena, and Entropik primarily sell to customers around the world.

Many global-first India SaaS businesses, like Zoho, Freshworks, and iCertis started selling globally on day one, while others, like Entropik and Leena, started by selling to the India market first, eventually expanding into global markets Today, tens of companies generating $50 million or more in revenue fall into both categories. Having been investors in India’s entrepreneurial ecosystem for 15 years, we know that there’s no better time to invest in the region. We believe Indian SaaS centaurs and unicorns will bring in between $20 and $25 billion in revenues by 2030.

In our previous report, we shared our perspective on the fundamental drivers of cloud innovation in India—including the rise of digital rails, mobile ubiquity, and the digitalization across all industries—as well as our predictions for the India SaaS market. For 2023, we present an update on the state of India’s cloud ecosystem, highlighting the current valuation environment, the importance of efficiency, the artificial intelligence (AI) landscape, and our predictions for the next year.

India’s SaaS market in 2023
In 2022, investors deployed almost $6 billion into Indian SaaS companies, up nearly 3.5x from 2020 and a staggering 8x from 2018. However, new venture funding has sharply declined this year-to-date: amid geopolitical conflicts and interest rate hikes aimed to curb inflation, tech sector growth has slowed in the public markets, prompting investors to be more judicious about which software businesses to back.

At the same time, the ecosystem continues to mature. As we explored in last year’s State of the Cloud 2022, centaurs—private SaaS businesses that have crossed the $100 million ARR mark—represent a new milestone of success in the cloud world. This year, the number of Indian centaurs has grown to 11, now including Postman and GupShup, signaling resilience and growth in the Indian SaaS ecosystem, even in the current market environment.

While India’s SaaS ecosystem is still in its early innings, we’re already seeing promising signs of growth and durability. In particular, we’ve seen significant growth in the number of early-stage companies that surpass $10 million in revenue. Six years ago, we identified approximately 30 businesses with revenue over $10 million, and today that figure is over 85 companies, an almost threefold increase.

Cloud multiples and interest rates

It is well known that cloud multiples have compressed from their all-time highs in the last ~18 months. The average EV/NTM revenue multiple for The BVP Nasdaq Emerging Cloud Index declined from its high of ~25X to ~6X as of the first half of this year. Interest rates are a major driver of SaaS multiple compression—they rose from almost zero to almost 6.5% in the same time period. And it’s not just cloud stocks that were affected: the broader S&P 500 and Nasdaq also declined by 8.3% and 14.2%, respectively, in the same time period. So, what do rising interest rates actually mean for growing SaaS businesses in India?

When it’s cheaper to borrow, company valuations tend to be higher––interest rates and asset valuations have an inverse relationship. And when the cost of borrowing is higher, company valuations tend to be lower. That’s because company valuations depend on an estimate of what future cash flows would be worth today––and interest rates are a key part of the mathematical model that is used (Discounted Cash Flow model). Without going into too much detail, it is important to understand that the value of future cash flows of a business is calculated by discounting those cash flows to cost of capital and the cost of capital goes up when interest rates go up. Hence valuation multiples tend to be lower than they would be in a less challenging macroeconomic environment.

So what should Indian SaaS founders do? At the end of the day, what’s most important for founders to focus on is building a sustainable business––one that grows in any market environment. The cloud model remains strong for this reason. Founders and entrepreneurs should focus on metrics and KPIs they can control, e.g. revenue and customer satisfaction, while building sustainable businesses, and not trouble themselves with externalities that they can’t really control.

Building an efficient business won’t just pay off in the future––more efficient companies are valued more highly in high interest rate environments. This is apparent in The BVP Nasdaq Emerging Cloud Index: there is a strong correlation between revenue multiples and capital efficiency at leading cloud companies.

The India advantage
In today’s high-interest rate environment, India’s SaaS businesses have a leg up. Capital markets around the world are placing a valuation premium on efficient businesses, and India’s SaaS market is poised to benefit—as we highlighted in last year’s report, Indian software companies tend to have higher efficiency metrics than their global counterparts. Across revenue ranges and levels of business scale, we observed that Indian SaaS companies have higher efficiency scores (defined as FCF% + Growth for mature companies, and as Net New ARR/ Net Burn for early stage companies) than their U.S. counterparts.

There are two key drivers behind India’s efficiency advantage: (1) SaaS businesses in India already value efficiency on a cultural level; they can upstart and scale with less capital than startups in other countries; (2) India’s SaaS companies tend to build additional products faster and earlier in their lifecycle.

Indian companies like Zoho and Freshworks have used a multi-product strategy to their advantage—every subsequent product is a way to add more revenue from the same customer. Zoho in particular has shown that it is possible to cross $1 billion in ARR without needing outside capital. Similarly, companies like Perfios, Lentra, and Zopper have shown that by going to market with a fully baked product (As opposed to a minimum viable product) and by continuously iterating based on customer feedback to add more product features, creates the ability to capture more spend buckets from the same customer.

In the next section, we share five predictions for India’s distinctive SaaS market, beginning with one that’s rooted in efficiency.

Five predictions for India’s SaaS market
Prediction 1: Indian companies’ efficiency advantage will aid them on their path to global leadership
By having an efficient operational foundation, in today’s macroeconomic environment, Indian SaaS businesses will have an easier time expanding into international markets than software companies with higher overhead costs that are based in other countries. In addition, as investors across the world try to find efficient businesses with higher growth and cash flows, we believe Indian companies could provide them with compelling investment opportunities leading to increased availability of growth capital for Indian SaaS companies. This availability of capital could be a key factor in the path to global leadership for many Indian SaaS companies.

Prediction 2: New cloud infrastructure will emerge to power traditional financial services
Investing in fintech infrastructure in India today is a once-in-a-lifetime opportunity due to a unique confluence of events: wider cloud adoption; new players are offering more flexible and customer-friendly products; banks are unable to launch new products on the go; legacy software is hampering flexibility; and COVID-19 has accelerated the process of digital lending.

Pressure from new players, the accelerated adoption of digital lending, and widespread cloud usage have required banks and non-bank lenders to start embracing cloud-based SaaS platforms across different use cases: underwriting, fraud, collection, KYC, wealth management, loan origination systems (LOS), loan management systems (LMS), customer engagement, among others.

Bessemer Venture Partners