'AI will provide an upside to enterprise software adoption'

Developers realised they had a device to build software on in India. Today, 800 million something people in India use a smartphone daily. They aren’t all from Tier 1 cities, but they are all on their device and they all know how to operate a device. What that means is if you show them a software, they will know how to use it. The intuition is now built in. And then Covid served as an accelerant to the adoption of software.

An interesting data point I came across last year is that India is the largest contributor to open source AI projects on GitHub. So, if you think software is eating the world and AI is eating software, the largest number of software developers, AI developers are going to be in India… there is no way that you can ignore India from a software market perspective. 

Q. Tell us about your latest report on the SaaS sector, The Rise of Cloud AI in India 2024.

We continue to believe that India is well on its path to be a $50 billion revenue SaaS market in the next six years, by 2030, a number we forecast a few years ago. In fact, we think that because of the tailwind of AI, there is an upside to this number. We feel AI is accelerating software adoption.

AI is increasing the amount of value that software can deliver and it's increasing the breadth of what software can do. And so, we are actually more positive. We also saw that in the last 12 to 18 months, in 2023 and early part of 2024, venture funding and software which had really kind of gone down… that's starting to come back. And a large part of that is led by AI.

We're also seeing that there are more $100 million ARR (annual recurring revenue) companies. For us, the gold standard in software is can a company get to $100 million ARR. What that means is that the company has enough product-market fit and customer love to give it a right to really scale. And we call such a company a ‘centaur’.

As against unicorns, which are valuation dependent, ‘centaur’ status, on the other hand, which is the $100 million revenue, is only dependent on customers. And it doesn't go up and down because the Fed (US central bank Federal Reserve) increases or reduces rates. So, we prefer to index on that. India added three new Centaurs in the last 12 months.

Companies such as Amagi, Innovacer, Shiprocket have all entered the Centaur club. There are now, we think, 14 publicly known Centaurs and there may be a couple more who haven't disclosed their numbers.

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Q. Tell us about the predictions …

On the predictions front, this year too, we have five: The first two of them deal with AI, the third deals with cybersecurity, the fourth is with software for wealth tech, and the last is on industrial software.

We did a survey of a large number of SaaS companies between a couple of million dollars of revenue at the lower end all the way up to a hundred plus million dollars. Of them, 86 percent classified themselves as either AI native or AI enabled. And that is the underlying thesis of our first prediction: We feel India SaaS, which is what we used to call this, is going to transition to IndAI SaaS.

AI is the next wave of building software. Enterprises have realised the value that AI can deliver to them. So, we feel that software is going to become AI software. And today, as a SaaS company, if you are not adopting AI either as a feature or becoming a native or figuring out how to use AI to add value to your customers, you risk getting left behind in the coming years because your competition is going to do it and customers are going to want it.

Second, AI has created a tailwind for the services industry. AI has allowed services to become a much better business model in the sense you can now use AI to augment humans. You can deliver more work. You can deliver higher accuracy work. And you can deliver that at higher gross margins.

And you can move away from the conventional price-per-human model that existed in services to a price-per-output or per work done. And that's what we call as AI-enabled services or productised services using AI. And we feel that when this model becomes more and more mainstream, Indian services firms are going to get a major boost. 

And this AI wave is going to lead to further increase in the strength of the Indian services market.

The third prediction, which is actually my personal favourite, is that cybersecurity is going to increase in relevance and is just going to exponentially grow in India in the coming years. As India is becoming more and more digital tech enabled, the risk of cyber attacks is consistently increasing.

When you put AI into the picture, AI has brought down the cost of cyber attacks, just like it has brought down the cost of business for everyone. It has increased the efficacy of their business like it has increased for everyone.

A stunning stat I came across is that India's domestic cybersecurity market, just domestic, not counting anything that somebody is doing for companies outside India, was $6 billion in 2023. And this is growing so fast, we think this will become double digit billion dollars as quickly as in the next two to three years.

Another stat is that today, India is the second largest country in terms of cybersecurity professionals. This talent has tripled in the last three years and in those same three years, the biggest names in cybersecurity, such as Palo Alto Networks, SentinelOne, CrowdStrike… they've all set up massive offices in India to the extent that for a lot of them, India is their largest outpost. Put all this together, and this market is ready to inflect.

Prediction four and five are more of what I call as sunrise predictions. Retail participation in equity and alternative assets is increasing. And a set of cloud software companies are emerging that is orchestrating the backend needed to handle this growth.

We feel these providers are also going to have a heyday or they're going to grow massively because as the front-end demand grows, the backend demand grows.

The last prediction is around industrial software. We've heard about make in India, and there is also a push towards sustainable manufacturing. For example, very recently, a new set of norms was released for shoes manufacturing in India that everything needs to be BIS certified. Tracking compliance for all of this entails a growing need for software.

As manufacturing grows, managing the additional workforce and new machines needs software. Therefore, industrial software is going to be like the grease for the wheels of the industry.

Q. For comparison, where’s the Indian SaaS sector at today?

So, today just the Centaurs and unicorns, which are the really large software company startups in India are already creating $5-6 billion of revenue annually. The total market is at $12-$15 billion. We were less than a billion six years ago, and we are almost at 15 billion today. And we're going to compound from here.

A large part of this revenue today is going towards global cloud majors. So, if you think of it, the Indian Centaurs and unicorns are creating around six-ish billion roughly. So, the remaining 8-10 billion-odd today is coming from global companies and their products and platforms, like Azure, Google Cloud, AWS and so on.

But that is what we think is going to flip in the coming years, because we feel that by 2030, when $50 billion is going to be the total revenue market size, $20-25 billion of that is going to come from Indian companies who are being created as we speak. So that split, which is heavily in favour of global players today, is going to become almost equal by 2030 and then going to increase from there for the Indian companies.