It's Dateline India for new Saas startups

The rise in digitization and hybrid work models have bolstered growth in the SaaS ecosystem in India and globally. More than 200 SaaS startups were founded in India in the last three years and they collectively received an equity funding of $373 million, according to Tracxn data.

“We’ve seen an uptick of new SaaS startups being incorporated in India...founders need to think of exit strategies when they make their decision of where to incorporate," said Pranay Desai, managing director of Matrix Partners India. The rise in SaaS startups in the country can be attributed to two reasons—access to capital and an India initial public offering (IPO) that is an “interesting" exit option, he said.

“India IPO is an attractive option for companies at a reasonable scale and a path to profitability. The bar for a US IPO has gone up in the last decade from $100 million revenue to $300 million revenue scale," Desai said. “High-quality companies that are below this scale and looking for exit options, see the India IPO as a viable option."

As a result, many SaaS startups that are incorporating now are choosing India as their domicile. “Many are choosing to set up in India now. The sentiment in India is better than the US for SaaS companies and it is easier for Indian funds to invest in them if they are incorporated locally," a fund manager with multiple SaaS firms in his portfolio said.

The Reserve Bank of India requires alternative investment fund (AIF) managers making overseas investments to seek regulatory clearances. Cumulatively, the Indian AIF industry cannot invest more than $1.5 billion in overseas firms, making investments in foreign incorporated SaaS startups hard for Indian VCs.

Other reason is artificial intelligence (AI). “There is a feeling that AI could disrupt a lot of what SaaS startups do," the fund manager added.

A second VC fund manager said if any of his SaaS startups were incorporated in India, it would have been an easy decision to go public currently.

The sentiment in the US has certainly changed in the public markets. In 2021, three SaaS startups—MapmyIndia, RateGain, and Freshworks—made their public debut. MapmyIndia and RateGain listed on domestic stock exchanges, whereas Freshworks opted for a US IPO. Since their listing, Freshworks’ shares have dropped by 53.67%, while RateGain and MapmyIndia have seen their share prices increase by 160.26% and 30%, respectively, to date.

Investor reception is much better for SaaS firms with an annual recurring revenue as low as $50-100 million and above, the two VC fund managers said on the condition of anonymity.

While startup founders initially preferred setting up firms in overseas jurisdictions due to a host of reasons including the ease of conducting business and regulatory regime, better IP protection and higher valuation, it’s not the same anymore, said Nishant Shah, partner at Economic Laws Practice. SaaS startups also chose US incorporation to be closer to their clients.

“In the recent past, India has significantly improved its positioning in ease of doing business, and adopted various measures that would facilitate operation of such startups in India," Shah said. “The increase in awareness of capital markets amongst the masses in India has led to the mobilization of savings directly or indirectly of retail investors in listed shares on Indian stock exchanges."

Domestic institutional investors have narrowed the gap with foreign institutional investors in the Indian stock market over the last few years, reaching a historic low shareholding difference of 13.11%, down from 49.82% in 2015, Shah said.

The Indian SaaS market is expected to reach a valuation of $50 billion by 2030, driven by the widespread adoption of cloud-based solutions across various industries, per a report by Bessemer Venture Partners, prompting early and mid-stage SaaS startups to consider moving back to India to capitalize on investor interest.

The process of flipping back to India has been more pronounced in other sectors.

Last month, Mint reported that new-age home interior solutions provider Livspace plans to shift its domicile back to India to go public in 2025. The company joins a long list of startups in fintech including PhonePe, Razorpay, PineLabs, and Groww which now want to flip back to India. In fintech, RBI is also keen that fintechs are incorporated in India.

However, the shift to Indian incorporation in late stage SaaS companies has not been as pronounced. This is likely to change in the next few years, with many late stage SaaS firms choosing to flip back to India.

(Ranjani Raghavan in Mumbai contributed to this story.)