Funding slowdown for Indian SaaS start-ups bottomed out, gradual recovery in process: Report

Despite an intensifying funding winter, the Indian software as a service (SaaS) sector continues to attract investor interest and its revenues are likely to grow about 2.5 times (x) to clock $26 billion by 2026, a survey by Chiratae Ventures and Zinnov revealed.  

Titled ‘India SaaSonomics: Navigating Growth and Efficiency’, the report said seed-stage funding grew 1.5x while early-stage funding experienced 1.6x surge in value during 2022. In fact, Indian SaaS start-ups secured 3x more funding in 2022 compared to 2019, demonstrating a CAGR of 47 per cent. Overall funding to the sector grew from $871 million in 2019 to $2.7 billion in 2022. As per the report, stable deal volumes in Q1 2023 ($211 million raised across 59 deals) indicate that the funding slowdown for Indian SaaS companies has bottomed out, signalling a gradual recovery to look forward to in the upcoming quarters. The number of seed-stage deals increased 22 per cent in Q1 of 2023 over Q4 2022, though funding value across the stages was lower than the previous quarter. 

The drop in SaaS company valuations in public markets affected private markets, leading to an 80 per cent decrease in funding in Q1 2023 compared with the previous year. This drop was primarily driven by a significant decline in late-stage funding valuation, while early and seed funding valuations remained unaffected. Late-stage deal value dropped 33 per cent to $1 billion in 2022, from $1.5 billion in the previous year. 

As per the report, global public valuation multiples have gradually recovered since October 2022, with today’s median valuation multiple standing at 6.6x. Although slightly lower than the pre-pandemic median, this trend indicates that Indian SaaS valuation multiples have displayed higher resilience than their global counterparts and that the impact of macroeconomic variables are less pronounced on them.   

“Both founders and investors are optimistic about valuation multiples bouncing back to pre-pandemic levels in the next 12-18 months. However, investors are being more prudent with their investment decisions and have directed their focus towards investing in entities that exhibit efficiency and profitability in addition to growth. Despite this vigilant approach, investors anticipate an upsurge in both deal activity and exits over the next 12 months, attesting to a sustained interest in the space, with many seeing an opportunity to make astute investments in promising start-ups,” the report said. 

India currently has over 1,650 funded SaaS start-ups, of which approximately 280 have generated revenues between $1 million and $10 million in 2022. DevOps, Cybersecurity, and Vertical SaaS will lead the next phase of growth and innovation across SaaS categories, the report said.