Indian SaaS Industry: Annual Review – Navigating Funding Challenges and Market Slumps Amid AI Disruption

Navigating Challenges in India’s SaaS Landscape

Overview of the Current Situation

India’s Software-as-a-Service (SaaS) industry is currently facing a challenging landscape. As highlighted by multiple industry executives in recent discussions, the sector is grappling with major headwinds, including slowing demand, cautious investor sentiment, and the transformative impact of artificial intelligence (AI). Karan Sharma, managing director of Avendus Capital, emphasizes that demand for SaaS has notably diminished, particularly due to budget constraints and an increased focus on operational efficiency among enterprises.

Funding Trends: A Stark Contrast

While funding for SaaS startups in India showed a slight uptick in 2024, reaching $1.8 billion from $1.3 billion in 2023, this figure pales when compared to the $4.4 billion raised in 2022. According to the data from Venture Intelligence, the number of deals in 2024 stood at 184, consistent with the previous year; however, this is significantly lower than the 274 deals recorded in 2022. This trend indicates a cautious approach from investors, likely driven by the prevailing economic climate.

The AI Challenge: Opportunities and Threats

As the SaaS market adapts to the influence of AI, industry leaders note it presents both challenges and opportunities. Praval Singh, vice president of marketing and customer experience at Zoho, states that AI-first startups are intensifying the pressure on existing providers to deliver more adaptive, personalized solutions. This necessitates ongoing research and development, as well as upskilling staff to incorporate AI effectively into their offerings.

However, creating proprietary AI models requires significant resources, including large datasets and advanced machine learning capabilities that smaller firms may struggle to access. Singh advocates for a phased approach, suggesting that companies begin with open-source platforms and pay-as-you-go cloud-based AI services while striving for long-term in-house development.

Innovations Through AI Adoption

Siva Rajamani, founder of SaaS startup Everstage, noted a shift in focus toward the application layer of AI among Indian startups. Companies are increasingly leveraging OpenAI and other AI solutions to enhance user offerings, creating a fertile ground for innovation. Rajamani believes this AI transition can disrupt established SaaS leaders, providing fresh opportunities for agile startups willing to capitalize on emerging trends.

Everstage’s recent funding round, which raised $30 million with contributions from Eight Roads Ventures and others, underscores this potential. It highlights the growing recognition of AI-first initiatives as vital to the industry’s future.

Market Dynamics: Early-Stage vs. Late-Stage Investments

Rahul Agarwalla, co-founder of SenseAI Ventures, explains that the overall decline in SaaS funding can be attributed largely to reduced interest in late-stage and growth-stage investments amid market uncertainties. Nevertheless, early-stage funding appears to remain robust, enabling new entrants to explore innovative solutions and capture market share.

SenseAI Ventures recently launched its first fund, focusing on AI startups, with a corpus of Rs 200 crore. This indicates a shift in investment strategies, emphasizing the need for adaptability in today’s market.

Restructuring and Resilience: The Case of Freshworks

A significant example of the current SaaS landscape’s turbulence is Freshworks, often considered a benchmark of Indian SaaS success. In 2024, the company underwent major restructuring, including a shift in leadership as founder Girish Mathrubootham stepped down as CEO. The restructuring also led to layoffs affecting approximately 660 employees globally, representing 13% of its workforce, showcasing how even sector leaders must streamline operations in response to market conditions.

The Changing Landscape of IPOs

Historically, SaaS firms from India targeted the US market for public listings. However, the bar for successful IPOs in the US has raised considerably, requiring significant scale and robust analyst coverage. This landscape shift makes it increasingly challenging for mid-sized firms. Conversely, Indian public markets have shown resilience and a willingness to support tech businesses, paving the way for new opportunities for domestic listings.

Looking Ahead: Growth Drivers on the Horizon

Despite the current challenges, the long-term outlook for India’s SaaS sector remains positive. Industry executives agree that several driving forces, such as cloud migration, workflow automation, and digitization across various industries, will fuel growth. Vipin Raghavan, co-founder and CEO of Haber, underscores that the key to future success lies in leveraging AI as a fundamental element rather than merely a feature, enhancing overall business outcomes.

Strategic Positioning for the Future

To navigate the current challenges and capitalize on emerging opportunities, Indian SaaS companies are encouraged to focus on innovation while remaining responsive to both domestic and global market dynamics. By embracing this strategic positioning, they can effectively chart a course towards sustained growth amidst evolving technological landscapes.