Turning India into a SaaS power

In this episode of the McKinsey on Start-ups podcast, McKinsey executive editor Daniel Eisenberg speaks with Manav Garg, founder and CEO of Eka Software Solutions and founding partner of the Indian industry organization SaaSBOOMi, as well as McKinsey partner Sid Tandon, about the challenges and oppportunities for the growth of software-as-a-service (SaaS) in India over the coming decade. An edited transcript of their conversation follows.

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Daniel Eisenberg: Hello and welcome to McKinsey on Start-ups, I’m Daniel Eisenberg.

Over the last decade, the rise of SaaS has dramatically transformed both the software industry and the myriad enterprises it serves. As the pace of digital transformation and growth of cloud computing has accelerated, SaaS has rapidly become the software-delivery model of choice and preferred alternative to legacy, on-premise products. This paradigm shift to an on-demand, subscription-based model opens a wealth of opportunities for new entrants and start-ups to make their mark in the sector, and India is one market particularly well positioned to help lead this charge. After a period of relative underinvestment, its SaaS industry is just coming into its own as global demand for its offerings is reaching new heights.

SaaSBOOMi, a community of Indian SaaS company founders, recently sought to quantify the country’s opportunities in SaaS; analyze value-creation characteristics among top-performing organizations in other markets; and identify specific measures for how the industry could reach its full potential. McKinsey served as its knowledge partner in this effort, providing independent third-party research and analysis. The final report, Shaping India’s SaaS Landscape, details the key findings.

We are pleased to have two guests involved with the report joining us today to discuss the overall challenges and opportunities facing the burgeoning SaaS sector in India. Manav Garg is the founding partner of SaaSBOOMi and the founder and CEO of Eka Software Solutions, a cloud-based enterprise solutions provider. Sid Tandon is a partner in McKinsey’s Silicon Valley office, where he serves executives and boards of technology, media and telecom (TMT) companies on strategic and value creation efforts.

Manav, Sid, thanks so much for joining us today.

Sid, let’s start with a broad perspective. Tell us about the key global SaaS trends we’re seeing these days and the sector’s growth potential.

Sid Tandon: We’ve done a lot of analysis on SaaS in the last few years. And what we are seeing is that SaaS is currently about a $200 billion to $300 billion market, depending on which forecast you look at. It is expected to double in size by 2025 and continue growing from there to about $800 billion in revenue by the end of the decade. That presents an extraordinary growth trajectory.

The second thing that is interesting is the value creation potential that SaaS is offering. The current SaaS market, give or take, is worth about $3 trillion in value in the market. That is expected to grow to about $10 trillion by the end of the decade, which represents an unbelievable value creation opportunity for anyone participating in this space.

Moreover, this space is broad and fairly secular. SaaS is also extremely democratic, in the sense that it is global and it is broad-based in terms of the industries, verticals, and horizontals it touches. And it is a fundamental shift in the way digitization and technology is happening in this decade.

Daniel Eisenberg: A little over a third of all software today is SaaS. And I think the projections are that it will account for about 80 percent by the end of the decade.

Sid Tandon: That’s exactly right, Daniel. There are two main tailwinds to SaaS growth. One is around the digitization of enterprises and SMBs (small and medium businesses) and so on. And then the second tailwind is the conversion of the legacy software base, which is massive, into a SaaS model. Between the two of them, that’s basically driving the growth trajectory at about a 20 percent clip between now and the end of the decade.

Daniel Eisenberg: Manav, let’s drill down now into the state of play in India. How big is the SaaS potential and opportunity there?

Manav Garg: For some context, we have about 1,000-plus SaaS companies in India today. We have more than 15 unicorns as of now, and new ones are cropping up every single month. In total, all those SaaS companies are bringing in about $2.6 billion in revenue today, a figure that is expected to grow to about $50 billion to $70 billion by 2030. You’re looking at 25X growth in the next nine to ten years.

There are a few fundamental reasons driving such rapid growth. Number one, India now has a unique play in the global market, especially during the pandemic, when you can do the entire initial go-to-market (GTM) sitting in India.

Number two, we have a large talent pool of domain experts and engineers who can create software from anywhere in the country, including small towns. Of course, Bangalore and Chennai are the hubs of SaaS. But now we are seeing companies coming from tier two, tier three, and smaller cities in India. And number three, India has a huge developer pool. In fact, it has the second largest developer pool, about three million plus right now, who themselves are a big market for infrastructure tools, which represent about 40 percent of the overall market of SaaS. And as Sid said, SaaS is a secular trend. You can create the company in a horizontal market—like HR, finance or sales, or you can go vertical, with something like healthcare. You can just choose an innumerable number of fields to go after and create a very valuable company.

Daniel Eisenberg: Obviously, India, with its vast experience in global IT services, has a great amount of domain and vertical expertise, and I assume that would also be a strength moving forward for SaaS.

Manav Garg: Yes, absolutely. And that plays into the trend. When you said that one third of the market is SaaS and the remaining 64-65 percent is still on premise, that is where we have a lot of embedded talent in the services firms that are supporting the legacy software at the back end here in India. All the domain knowledge can be converted into workflows, which then get automated into SaaS companies.

Daniel Eisenberg: I would assume cost efficiency is always an asset as well, and certainly in the SaaS universe as well?

Manav Garg: I would not put cost efficiency for development as a top factor, though it will create impact in terms of R&D. But I think the customer acquisition cost makes a lot of difference. Typically, for instance, a valley-based or a U.S.-based SaaS company spends about 40 to 50 percent of their revenue on sales and marketing or go-to-market. We believe that by taking a hybrid approach, where companies do 70 or even 100 percent of their go-to-market from India, you could probably look at cutting that cost of acquisition in half, to just 25 or 30 percent of revenue. I think that is where the maximum difference or efficiency is going to come.

Daniel Eisenberg: How much will that help with the competitive landscape globally? I read in the report that fully 40 percent of the top 600 public SaaS companies have been founded outside the United States. So there already is quite a global profile for the industry, but India has, up to now, only taken a relatively smaller part of it. That leaves a lot of room for growth, I would think.

Manav Garg: Yes. We are expecting Indian SaaS to grow to about seven percent of the global market. Sid talked about $10 trillion in overall market cap for the entire industry by 2030, so we are expecting India’s SaaS sector to have a market cap of between $700 billion to $1 trillion market cap by then.

Daniel Eisenberg: Sid, what are the implications of these market conditions for SaaS companies in India?

Sid Tandon: I just want to build on Manav’s earlier point about the importance of the B2B domain expertise in India. We can’t stress that enough. In all the conversations we’ve had, the level of understanding that exists in the Indian services industry about enterprises’ individual processes and workflows is just phenomenal, and I think that is a huge advantage.

The go-to-market cost advantage is another fundamental point. After all, the biggest constraining factor for a SaaS company is how rapidly you can drive growth, and a lot of that essentially gets down to how many resources, in terms of dollars and people, you need to deploy to drive growth. We are seeing enterprise models where 70 to 80 percent of the sales and marketing workforce is working out of India. Given the broader availability of talent and lower acquisition cost for that talent compared to the North American market, you can drive a lot higher growth with the same investment, which is all that counts in SaaS in terms of value creation at this stage. And so, we think that India has a massive structural advantage in the post-pandemic era, because of this whole pivot to hybrid and digital go-to-market.

In terms of the implications, as part of the report we had conversations with close to 40-plus investors and about 50 or so start-ups in India, including running a quantitative survey. One interesting finding from that research is that most of the Indian SaaS companies are still a little under-indexed on growth, in the sense that the level of investment that they are making relative to what they should be making is low. If you rewind the clock back 12 months, a lot of it was driven by the lack of capital in the country. There wasn’t that much venture capital flowing into B2B SaaS compared to the rest of the world. But that has totally changed this year. There’s just an unbelievable amount of capital now available to those companies to grow rapidly. So that is fundamentally changed.

Another interesting finding was that the mindset of the SaaS founders and investors was to build a sustainable, profitable business. Of course, that’s not a bad thing. It’s just that with the rate at which SaaS is evolving you need to have your pedal to the metal on growth. Given the increased availability of capital to invest in that growth, we expect that mindset to shift more aggressively towards growth.

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Daniel Eisenberg: Sid, you and I have talked before about keys to growth for SaaS. Can you talk briefly about the “Rule of 40” and how that will be critical to SaaS companies in India?

Sid Tandon: Yes, absolutely. For the folks hearing that for the first time, the “Rule of 40” is a popular metric that states that the sum of a SaaS company’s revenue growth rate and its free cash flow rate should equal 40 percent or higher. Now, you can get there in many ways, right? For most of the companies in India—given the state of maturity in the SaaS industry—that is going to start with 50 to 70 percent revenue growth year on year. At the same time, most companies will probably be losing 10 to 20 percent on free cash flow, which is fine, because of the way SaaS works in terms of the long-term cash flow to the business. We think that the focus for the time being is going to be primarily on driving the investment.

The thinking is, Let’s drive 60 percent, 70 percent, 80 percent growth, when we are $10 million, $20 million, $30 million ARR (Annual Recurring Revenue). And as the ARRs get up to, like, $100 million-plus, that growth will basically rebound back to 40 or 50 percent. At the same time, given the point that Manav made earlier about the built-in efficiency of the model of operating out of India, you could potentially see Indian SaaS companies becoming more profitable sooner.

Manav, I don’t know if you want to talk about the Freshworks IPO and some of the first view into financials for mature Indian SaaS companies that have reached about $300 million plus in revenue.

Manav Garg: Freshworks is a typical example of what can be done from India. They have proven that A) you can scale from India, and B) you can create unparalleled value from there as well. Freshworks has reached $300 million revenue in about ten years. It is probably one of the fastest to go to $100 million in the span of about five or six years. That’s all on the back of the model of selling and having their go-to-market primarily from India. And of course, now they’re a global company and they have multiple offices and a global go-to-market. But still they followed the hybrid go-to-market model.

One of the pioneers of this entire model was Zoho. And while Zoho is not public, so the revenues and value are not known, they really started this whole model of building this SMB-based go-to-market model for India.

But I also want to mention an aspect that Sid and McKinsey also talk about, the enterprise market. What we are also beginning to see now is that the enterprise, which is global 1,000 to global 5,000 companies, are equally available as potential customers for Indian SaaS companies, who can provide that value so many companies are still looking for from digitizing their mission, their workflows. There is of course a trust curve that you must go through to win and keep that business. But I do think we’re looking at a far, far bigger and broad-based opportunity than ever before.

Sid Tandon: Yes, and Daniel, going back to the implications, we talked a little bit earlier about the importance of the growth mindset. When we look at SaaS companies broadly, I think it’s important to understand what drives value. And those are the three main things that Indian SaaS companies will need to focus on in the coming years as this industry grows and develops.

In addition to the pivot to growth, there’s a massive go-to-market point that Manav has been talking about. It’s like, how do you stand up your revenue engine in terms of driving your new logo [or customer] acquisition, driving your net retention, driving new, innovative models—like the one that Freshworks pioneered around product-led growth?

Then there’s the whole point on a product engine, right? And this involves the talent base for product managers, for product designers, in addition to developers. But the product UX/UI, the product management piece is particularly important. We think that’s at the front end of this.

And then the third piece I’d say is the new business-building engine. If you look at the example that Manav was talking about for Zoho, or even if you look at Freshworks and multiple other companies, they start with one product, right? But as they build that one product, within a few years they will start building the second product or the second business, they will start entering a new country. And this is a constant creation of the next axle in the next S-curve, which is critical for the long-term sustaining growth of the SaaS business.

Daniel Eisenberg: And Manav, how much of a challenge is the shifting of focus to a real growth mindset for Indian SaaS founders?

Manav Garg: If you ask a SaaS founder or any founder in tech today, “What are the top three issues?”, they will say, “Talent, talent, and talent.”

While we are looking at growth and massive potential on one side, we are also facing the unprecedented challenge on talent acquisition, talent retention, and talent management. These three are the aspects that Indian companies (or any company the world over) will have to deal with.

India has done that before for IT services, where they created a huge amount of supply a few decades ago. If you go back to the late ‘80s, when Infosys and other companies were founded in India, we had no supply of tech engineers.

I think it’s a similar time, and a similar thing that we are looking to do for the SaaS industry. We have a huge, government-run education infrastructure, and the government has been supportive already. There’s also a substantial number of private industry players who are willing to invest with the SaaS companies and help create education programs focused on SaaS engineering or SaaS go-to-market and inside sales, and of course a product management element.

So, yes, if I look ahead to the next three years, I think talent would be the most important thing to manage and address. This comes at a time when the work environment is changing dramatically because of the pandemic. Today, I went to the office for the first time in a long time. We have 600 people total, and it’s a very different culture now. People’s work behavior has changed, their expectations have changed. I don’t think we are going to see 100 percent attendance in the office in the near term or even the mid-term.

At the same time, as Sid was mentioning, a lot of MNCs [Multinational Corporations] are also doing a lot of hiring now in India. This global go-to-market model based out of India is not only appealing to the start-ups, it’s true for MNCs as well. If you’re a Salesforce, a Workday, Atlassian, they all can copy the same playbook and create huge go-to-market machineries in India. I remember Oracle did it about 20 years back, when they started inside sales from India, even for selling traditional enterprise software. And now we’re in the era of everything happening online, so I think we’re going to see an onslaught from all kinds of businesses.

Daniel Eisenberg: Sid, in terms of the product talent gap, that’s quite different from traditional engineering or developer talent. Is growing that pipeline a big shift for Indian companies?

Sid Tandon: Yes. I think product management is one of those underappreciated talents, or capabilities. When we look at what makes companies really successful, it always boils down to having superior product management.

Product management is not something that is taught in school. It is not something that you can learn in a relatively straightforward way, like computer science and engineering and how to code. It is something that you must train to do over a period of time. It just takes time because you’re building a relatively complex skill set that involves working with engineering, that involves working with customers, that involves working with sales and marketing and DevOps and delivery. We think that talent pool is going to be absolutely at the heart of this fight that Manav was talking about, because the people that get the best product managers will ultimately have the best products, and ultimately win.

So, there’s going to be a huge push towards building out this capability at scale in the country. But let’s not forget, the Indian IT services industry, to Manav’s point, came from nowhere 20 years ago to what it is today. It is literally the beating heart of the global IT services industry, and the country can take that as the inspiration point for the massive SaaS opportunity in front of it. In fact, we’re already seeing it in the conversations we’re having with our clients and others.

Daniel Eisenberg: Manav, you touched earlier upon the role of stakeholders such as government and education. Can you just talk a little bit more about the role of each stakeholder — particularly investors and venture capital—to fully tap this SaaS potential?

Manav Garg: Yes, sure. In the last one year, we have seen an unprecedented amount of capital flowing into the SaaS start-ups. Just to give you an idea, if the seed valuation was X about 12 months back, it is now 3X, which means start-ups are raising three times more capital at a seed stage. So typically, if they were raising $500,000 on average, now it is anywhere from $1.5 million to $3 million at a seed stage, which is same as value. As a result, they now have the potential to invest in the go-to-market from day one instead of waiting for a year or two to first build the product and then start the go-to-market. That will solve the problem of designing for growth or scale from day one. In other words, if you’re successful, you’re going to be insanely successful.

Similarly, we’re also beginning to see the Indian IPO market opened for mid-to-late-stage companies. This is a significant shift in the Indian investor mindset, or Indian street, because it creates a huge amount of value creation in India. You don’t have to go to a NASDAQ or London or Australia or some other global market to monetize the value of these companies.

Therefore, the need for late-stage capital can also be handled through the Indian IPO market. I think that’s going to create a meaningful change. You know, founders really like it because they get a lot of social recognition. Family feels important. And, of course, there’s a huge amount of value creation for all the employees and the stakeholders who have invested in the company in many ways. Investors who have never invested in Indian SaaS before are now actually beginning to look at it as an asset class.

Now, on the talent supply issue, as I said previously, that is a problem that we have solved in IT services years ago. There’s a playbook that exists. The playbook is that you go deep into the Indian education system. We have hundreds of thousands of educational institutions in engineering and inside sales and marketing, which can be accessed. Recently the government has announced an entire new education policy in which the universities can create their own curriculum. So, you start creating tailor-made programs to what is needed. For example, if SaaS needs cloud, you can talk to engineering organizations and companies and say, “Can I now tweak my last semester for more of cloud, DevOps, SaaSOps, which are required for a cloud company.”

Daniel Eisenberg: I know we’re almost out of time, so I have just a couple more questions. I am curious about global IT services companies’ existing relationships with global enterprise customers. How much of an asset is that going to be going forward for the Indian SaaS sector? Will Indian SaaS start-ups strike alliances with the Indian global IT services powerhouses to help with the go-to-market?

Sid Tandon: We are seeing some of this already happen, and do believe that kind of collaboration will play out over a period of time. Ultimately it comes from the customer, right? They are asking for deployments of SaaS software, but it must be tailored to the environments, given the legacy infrastructure they have, or the current investors they have. So, there’s going to be a big push towards some sort of a partnership between these innovative SaaS companies coming out of India and the IT services companies, just because that’s what’s needed to serve the customer the right way. Given that 40 percent of the global IT spend goes on the large enterprise, that’s going to be a huge opportunity for SaaS companies to participate.

I also think that eventually you will see a lot of innovative models come out around product-led growth, where a physical go-to-market channel is not required. It is purely digital. You do self-serve and things of that nature. And I think that is a post-pandemic construct that has been truly embraced by Indian companies partly out of need, because we don’t have sales teams, the physical presence in Western Europe and North America. But they are pairing that digital go-to-market motion in the SMB, in the mid-market, with a partnership-led construct in the large enterprise market, to get the maximum growth trajectory and velocity.

Manav Garg: I also want to mention again the importance of this entire infrastructure/DevTools market and bottoms-up adoption, where Postman is a leading example right now, as is Browserstack. So, developers start using a SaaS product first, and that makes their life easier, and then suddenly the company behind that product just starts growing crazily, without having any feet on the street or enterprise sales motion as such.

Sid Tandon: India has, like, three million developers at this point, right? There’s a massive pool of potential customers, for lack of a better word, that already exist in India. You serve them, and learn from them.

Manav Garg: Correct. And I think the second vector is the cloud providers themselves, Microsoft Azure, Google Cloud, Oracle Cloud, and of course, AWS. We are already seeing a huge amount of investment from them in the Indian ecosystem. They are investing heavily in bringing more SaaS applications into their own ecosystems. Because if the application eruption grows on the front end, the infrastructure ultimately grows, and they make more money.

Daniel Eisenberg: Well, I think that’s a good note on which to end. Manav and Sid, I want to thank you both for taking the time to speak about SaaS and its growing place in such a key, dynamic market as India. It’s been such an informative discussion.

Manav Garg: Thank you.

Sid Tandon: Thanks for having us, Daniel.

Daniel Eisenberg: So, that’s it for this pod. Thanks again to our guests, Manav Garg, the founder and CEO of Eka Software Solutions and founding partner of SaaSBOOMi, and Sid Tandon, a McKinsey partner in the firm’s Silicon Valley office.

As always, I also want to thank our amazing McKinsey on Start-ups production team— Molly Karlan, Polly Noah, Sid Ramtri, Myron Shurgan, and Katie Znameroski.

And of course, thank you for listening. We hope you’ll return for future episodes of McKinsey on Start-ups.

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