What it takes to build a successful SaaS startup out of India


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(This article was co-authored with Prasanna Krishnamoorthy.)

What makes Indian SaaS succeed on the world stage? What does it take to build a successful SaaS startup in Asia? How can young SaaS startups leverage the experience of their more established peers to improve their odds of success? How can SaaS startups derive insights from available data to chart their road ahead to profitability and growth?

These are questions that keep coming up with the rise and rise of Indian SaaS. A survey of SaaS startups by advisory firm Signal Hill and industry think-tank iSPIRT (Indian Software Product Round-Table) provides some answers. It was conducted between September and November last year and analyzed inputs from 76 companies, 35 of them with an ARR (annual recurring revenue) of over US$1 million. Freshworks, Capillary, ChargeBee, Exotel, Orangescape, and CleverTap are some of the Indian SaaS startups that took part in the study.

In the first part of this series, we looked at the SaaS story blooming in India, through the lens of a case study on the unfair advantages that an Indian SaaS startup typically has over its counterparts around the world.

See: The unfair advantage Indian SaaS startups have over rivals around the world

Today, we broaden that out with insights derived from the Signal Hill-iSPIRT survey to see how startups in India and other Asian hubs sharing similar characteristics can make the most of those advantages.

Path to profitability

India became the world’s top destination for outsourcing of IT services from the nineties on the back of tech talent at significantly lower costs. Today’s Indian SaaS startups enjoy the same low-cost environment for building cloud-based software products for global clients.

This is reflected in the survey which looked at the costs and path to profitability:

  • Two-thirds of the startups that crossed US$1 million in ARR (annual recurring revenue) recovered their CAC (cost of acquisition of customers) in less than a year.
  • Their larger peers, with over US$2.5 million ARR, had lower CAC, as their sales models stabilized and they had to spend less on chasing growth.
  • The CAC is also lower for the early-stage startups with ARR below US$1 million because they rely only on digital marketing and inside sales.

It’s apparent from this that it’s when the startup crosses a threshold to reach larger enterprise clients does its CAC go up. That’s because beyond that threshold it involves some feet-on-street sales and longer lead times. Then the CAC comes down again when the startup scales up and has steady clients.

“Typically, to get one big enterprise client, it takes a sales cycle of three to four months,” says Rohit Chennamaneni, CEO and co-founder of Darwinbox, which recently raised series A funding for its HR management suite on the cloud. “Initially, our implementation times are also longer once the sale to a large enterprise is done, because you are learning how to implement it better.”

Two-year-old Darwinbox is approaching the US$1 million ARR milestone, with around 40 big enterprise clients.

This underlines the need to crack the sales model early, because the India advantage starts kicking in fast after that. The revenue per employee shoots up after the US$1 million ARR level as each product attracts a fast-growing list of clients. In comparison, the cost of developing and selling the product grows modestly.

There is no formula to get to a million dollar revenue quickly, because sometimes it is front-ended, and sometimes back-ended.

But revenue generating ability varies widely across the SaaS spectrum, points out Chennamaneni. For example, a company like Slack could take longer to get to the US$1 million ARR, because they give the software as freemium initially and start charging as the organization grows. On the other hand, a company like Darwinbox focusing on mid-size to large enterprises for its HR suite, the time to cross the US$1 million threshold depends on getting four or five large clients.

“So there is no formula to get to a million dollar revenue quickly, because sometimes it is front-ended, and sometimes back-ended,” says Chennamaneni.

Shifting gears for the scale-up phase

Krish Subramanian, co-founder and CEO of Chargebee, whose four-year-old SaaS product takes the headache out of subscription billing and recurring payments, shares his experience of shifting gears for the scale-up phase of sales.

“In the initial days, you tend to go after low hanging fruits and proven channels,” says Subramanian. “During the scale-up phase, you will experiment with several channels through which you promote your product.”

Chargebee tried everything – adwords, Reddit ads, retargeting, display banner ads, events, networking dinners, event sponsorships, and so on.

A big factor is having the right person who maniacally optimizes and drives these numbers to ensure it’s done right.

“It takes time to understand if all these channels result in higher quality visitors, and in turn to qualified leads, and then to better qualified opportunities, and eventually conversion into paying customers. You would experiment with messaging, collaterals, creatives, etc., before you eliminate certain channels and double down on the ones that work for you. This is an iterative process that could take several quarters,” says the Chargebee CEO. “And then there is a big factor of having the right person who maniacally optimizes and drives these numbers to ensure it’s done right.”

Some optimize for growth, others for profitability and better unit economics, depending on the stage of business or funding availability. But they all see a sharp spike in cost as they move upmarket to scale up. Subramanian details the customer acquisition process for an upmarket enterprise client.

  • The product manager is likely to be the one searching with intent (inbound) or you come across them at an event that you sponsored.
  • You need to build familiarity with the other decision-makers, and this sometimes requires travel and at least one or two meetings.
  • You have to invest in pre-sales and consultative selling over several weeks or months.
  • And hopefully they don’t go cold in between due to change of internal priorities.
  • All-in-all you are looking at a three- to six-month sales cycle.

“These are way variables that get optimized one after another, after which the acquisition channels and RoI (return on investment) would stabilize,” says Subramanian. Then comes the next piece of the puzzle.

Need for speedy innovation

The difference between the early days of Indian IT services and today’s SaaS startups is a greater need to push for innovative products. “To retain our leading position, we need to innovate much faster and continue to widen the gap from competitors. While most CEOs spend most of their time in sales and marketing, a disproportionate amount of my time is spent in the product team,” Suresh Sambandam, founder and CEO of workflow automation software maker Kissflow, says.

Kissflow is close to hitting the US$10 million ARR milestone.

While most CEOs spend most of their time in sales and marketing, a disproportionate amount of my time is spent in the product team.

With Indian SaaS startups mainly relying on digital marketing and inside sales, the top driver of cost is R&D and product development, which accounted for 56 percent of the total costs for the 76 startups surveyed late last year. Their US counterparts have sales and marketing as the biggest cost.

Despite the imperative for innovation, however, cost is still the biggest differentiator. Indian SaaS startups in the survey limited their gross margins to 60-70 percent, which is lower than the 75-80 percent prevalent in the US market. Lower margins on top of the lower costs mean the Indian companies can price their products very competitively in world markets.

Going forward, the sustainability of the Indian model will be tested because building a business with lower margins is harder. But for now, it is contributing to lower pricing and faster access to global markets.

Balancing cost and quality

A cost advantage alone won’t do – it has to be coupled with reliable quality. Both have contributed to the growing success of Indian SaaS.

One measure of this is the revenue retention rate. More than half the startups in the survey reported higher revenues from clients that have been retained. In other words, they’re doing all right with upselling their products, validating their value to clients. This has more than offset the churn from clients leaving, which is comparable to the churn seen in US counterparts, with a median churn rate of 10-15 percent per year.

The retention of revenue from small businesses has been better than that from large enterprises – even though the big firms sign longer term contracts.

The retention of revenue from small businesses has been marginally better than that from large enterprises – even though the big firms sign longer term contracts which help with revenue retention. This could suggest the strong value-for-money appeal that Indian SaaS products have for small and medium businesses.

The most popular contract length is a year, with two-thirds of the large enterprise clients opting for it. The second most popular one is a month, while multi-year contracts come third. What’s encouraging for the startups serving large enterprises is that more than half of those contracts are multi-year. This improves revenue retention.

The most popular pricing metric is by the number of users or employees, with pricing based on usage coming second. Other pricing metrics include number of transactions and database size. Companies based in the US have a similar pattern.

Bootstrapping through the early phase

PNGrowth 2

Tech industry think-tank iSPIRT held a closed door retreat for SaaS founders. 200 entrepreneurs took part in it. Photo credit:
Ahimanikya Satapathy.

Even young startups based in India’s low-cost ecosystem can start earning revenue at an early stage, and bootstrap their way until they’re primed for funding. This comes out clearly in the survey:

  • 38 percent of the surveyed startups were bootstrapped.
  • Another 38 percent had less than US$5 million in funding.

It suggests a healthy model where startups are focusing first on stabilizing their product and sales model before going after funding to scale up fast.

The ARR (annual recurring revenue) of the bootstrapped startups in the sample is higher than that of the startups with seed funding of less than US$1 million – so bootstrapping may be a good option for those who manage to get early traction.

Beyond US$1 million, the funding brings a rise in ARR. But the level of funding had little effect on ARR growth rates which had a median of a little over 100 percent across the board for funded startups. Bootstrapped startups had a median ARR growth rate of 25-50 percent.

More than half of the funded startups raised funding at double digit multiples of their revenue. And nearly two-thirds of the funded startups had a vertical focus in their SaaS products and clients. This is in line with the funding trend of SaaS startups worldwide post-2013.

In the third part of this series tomorrow, we go deeper into new trends in India’s SaaS wave.

And if you missed the first part yesterday, it deconstructed the unfair advantage Indian SaaS startups have over their counterparts around the world.

This post What it takes to build a successful SaaS startup out of India appeared first on Tech in Asia.

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