As Indian digital startups come to grips with a drought in funding and attempt to become capital efficient, one segment that has maintained a seemingly sustainable trajectory is Software as a Service (SaaS).
One of the metrics venture capitalists keep—or are expected to keep—an eagle eye on is ‘burn rate multiple’, a measure of how much a startup is spending to generate revenue growth, and how efficiently capital is being used. A high burn multiple is an indicator of how inefficiently capital is being used for revenue generation.
Over the past six to seven years, a wide swathe of startups—many of them unicorns—have had a cash burn higher than their net revenue (sales minus expenses). The endeavour of course is to acquire customers by subsidising their offerings, with the confidence that the next funding round is nigh. That round, today, is a mirage for most.
It’s here that SaaS startups stand apart with their lower burn rates and more predictable revenue generation (from subscription services and multi-year contracts). A study early this year by Ernst & Young and SaaS accelerator Upekkha suggests that most—eight out of 10—Indian B2B SaaS companies operate on a burn multiple of under 1.5x, “well below the global average of 2x to 3x”. Burn rates of under 2 are considered good by VCs, above 2 is suspect and over 3 is hazardous. The EY-Upekkha report, based on insights from roughly 140 respondents and over 30 in-depth interviews, points out that “startups with low burn multiples in theory should have more runway and be capable of withstanding an economic downturn”. The report also reckons that “one out of three Indian B2B SaaS companies are trailblazers and are targeting more than 50 percent ARR (annual recurring revenue) growth with very low burn”.
This fortnight, Forbes India’s Technology Editor Harichandan Arakali shines a light on the prospects of the SaaS sector even as the developed world grapples with threats of a recession. Arakali’s prognosis for Indian SaaS is bright. That’s because a clutch of SaaS startups, stirred by the headway made by early birds like Zoho, Freshworks and Capillary Technologies are, as he puts it, “perfecting the playbook of building software in India and selling it to America. And the current slowdown in the global economy will only serve to sharpen their focus”.
Of the three SaaS founders on the cover, Shashank Bijapur is at the helm of the youngest of them—the 2017-founded SpotDraft, which focuses on contract management for businesses of all sizes. That has resulted in the startup bagging clients from startups to global marquee brands like Airbnb and Panasonic, to name just two. “Think of us as the Salesforce of contract management,” Bijapur tells Arakali. To find out why, turn to ‘From India, with Love.
In September 2021, Forbes India put Freshworks founder Girish Mathrubootham on the cover, standing tall in front of the Nasdaq building in New York, with the headline ‘From Startup to Scaleup’. The trigger was the spectacular listing of the 10-year-old SaaS company on the Nasdaq—the stock made its trading debut at $43.5 per share, giving it a market cap of over $12 billion.
It’s been a rough way down since then, as Freshworks got caught up in the tech meltdown in the US—the stock was quoting at a little over $16 at the end of July’s first week. The founder, for his part, isn’t losing sleep over this erosion. Instead, he’s focussed on building software for the world’s biggest 5 million companies—not just the top 500—and, in the process ,become a billion-dollar revenue enterprise. For more on that, don’t miss ‘Fresh Generation’.
(This story appears in the 28 July, 2023 issue of Forbes India. To visit our Archives, click here.)