‘Innovation will be key differentiator in SaaS’
- Around 80% of the global SaaS market is now saturated, says Lightspeed's Hemant Mohapatra
BENGALURU : Amid a downturn in the software-as-a-service (SaaS) market, marked by declining sales and delayed purchases, innovation-led differentiation has emerged as a key challenge for most SaaS firms, globally, including in India, a top executive at Lightspeed said in an interview.
Hemant Mohapatra, a partner at Lightspeed, focussing on SaaS, enterprise infrastructure, crypto, and space and satellite investments, said with rising competition, the sector has become crowded with “hundreds, if not thousands, of companies going after the same set of customers".
Around 80% of the SaaS market is now saturated, with every category witnessing several alternatives over the past two decades of the internet, he added. “This is why every single sales cycle has gotten elongated, which is also why loyalty from the customers is a lot harder to find."
At the outset of the internet era, many companies prioritized innovation, he said. “When Dropbox came to the market, it was remarkable. It was very innovative. But over time, Dropbox is no different than, say, Box, or Drive, or Office 365. They all do the same thing. How do you differentiate?"
Besides, SaaS companies have been struggling due to extended timelines from customers, impacting growth. In a June 2023 report, management consulting firm Zinnov and venture capital firm Chiratae Ventures had revised revenue projections for Indian SaaS startups from $100 billion to $26 billion.
According to Mohapatra, when interest rates were low, companies sought differentiation through discounts, marketing, branding, and product-led initiatives, rather than innovation, which impacted their profits. “That is what happened with the world of SaaS."
“The capital market has changed its attitude. Now they are saying, there's no free money. I need you to clamp down on your bottom line, and get profitable. So, people are now wondering, how they could differentiate, and innovate, and are going back to the basics."
Mohapatra believes the artificial intelligence (AI) wave is the new oil. “So, the opportunity for many of these companies is to take this new resource and build something that nobody has been able to build because this kind of AI was just not easily available."
It would be a mistake for companies not to use AI in their businesses, he said. “It's almost like being in the 1990s and saying the internet is stupid, let's not build anything on it."
A January 2024 report by SaaS-focussed accelerator Upekkha and late-stage investor WestBridge Capital indicated that the use of Generative AI in the SaaS and information technology (IT) industry will help firms generate nearly $1.3 trillion in revenues by 2033, up significantly from $10 billion in 2024.
Lightspeed is ramping up its AI investments. According to Mohapatra, it has backed over 75 AI startups worldwide in the last 18 months alone, marking one of its busiest years. “We typically do 19-20 deals in a year but last year we did 21."
The scrutiny for seed-stage and early-stage investments, however, has increased, he said. “A lot of seed companies got funded in 2021-22, but all were not of very high quality. So, when they come up for series A, I would say there was a crunch at that level. In fact, I would say that there was a crunch even at the seed level."
“The level of scrutiny people are getting at the seed level is very different from the level of scrutiny people got at seeds, maybe, two years ago. And now, Series A scrutiny feels a lot like Series B scrutiny."
