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Decoding the 2023 SaaS story

At the start of 2022, we did a crystal ball-gazing exercise about what the future could hold for Indian SaaS companies. Not much has changed in our long-term view on SaaS. However, 2022 has been an odd year with significant implications for SaaS companies in the short term. 

Let us first address the elephant in the room – valuations (or lack thereof) for SaaS in 2022. It is important to segregate value from valuation. While valuations are hard to predict, the value of software to the global economy is only an increasing function, and the opportunity for high quality software companies continues to be secular. 

With that out of the way, here are some key aspects we expect to play out in 2023. 

Artificial Intelligence goes mainstream

Since 2020, we have believed AI to be the next defining wave in the world of enterprise software, and 2023 is the year it will truly take off. The capabilities of AI are finally accessible to the public at large, through multiple generative AI models, the most well-known being, of course, ChatGPT. The implications of this are enormous for AI at large, and not just generative AI. We will move from an era where AI products are treated with skepticism by the end buyer, introducing significant friction in enterprise adoption, to a world where end users will embrace AI and its capabilities, much like how UX evolved in enterprise software. Apart from driving adoption, it will push companies to up their game and build products that add real value, creating a long-lasting virtuous cycle. 

IT spends will get optimized

The global economy is facing headwinds, and belts are being tightened. Businesses, of all sizes, will take a hard look at their software and infrastructure spends. However, optimization does not necessarily mean reduction – software is too deeply ingrained in businesses to take out at the drop of a hat, and spends are expected to grow 5.1% in 2023. Enterprises will look to double down on products that add value while eliminating fat in their tech stacks. This has several implications for founders. One, it makes sense to stress test whether you truly are a must have for your customers. Two, sales cycles will be longer and negotiations more protracted. Three, significant engineering effort will go behind optimizing infrastructure spends, especially for mature companies. Amongst this turmoil, founders should not think of pricing as a strategic advantage, and focus on finding ways to deliver superior value to their customers.

OpenSource takes off

As a corollary of the previous point, expect companies to find OpenSource alternatives increasingly more attractive when purchasing software. While economics will be a driver in decision making, the best companies will compete on value rather than price. That could mean enhanced security, better community engagement for not just individuals but also organizations, and smartly targeting the right market segments.

Flatter world for talent

A global business on the demand side, software is becoming so on the supply side as well. Managing teams working in remote/hybrid fashions is now well understood, and companies such as Turing help match the best talent to the best opportunities globally. US native SaaS companies are increasingly opening development centres in India; companies across the world, including Indian SaaS startups, have also tapped into the Eastern Europe market for talent. As a founder, it will make sense to think global for your talent pool much earlier than you used to.

Buyouts galore

With capital being cheap and valuation multiples being high, recent years were great times for corporate M&A – Adobe acquired Figma, Microsoft acquired Nuance, Oracle acquired Cerner. The same reasons also made the environment less attractive for traditional software buyouts – SaaS M&A transactions in the US declined 17% for the first 3 quarters of 2022 as compared to 2021. In addition to mega transactions, buyout activity in the mid-market segment will also increase despite the high cost of debt, for two specific reasons. One, with headwinds in the broader funding environment, more companies are available at attractive revenue multiples. Two, PE firms often look to make tuck-in acquisitions to integrate with larger portfolio companies. 

 We remain bullish about backing world-class software companies from India, and continue to be particularly excited about the following themes – AI SaaS, developer tooling, vertical software, and DaaS.



Views expressed above are the author’s own.


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