June, 2023
Some thoughts on software, SME customers and India SaaS exports.
Some categories of software, where the customer is an SME, now have contenders who not only have multi hundred million ARR businesses but also weren’t the first movers in those categories. These contenders usually win because their products rank really high on the “value for money” metric. Value for money doesn’t mean delivering a lower priced product by keeping quality fixed versus competitors. It empirically has been delivering a higher quality product but by keeping pricing somewhat in line with competitors. Either way, R&D and S&M output per dollar needs to be maximized. For well established categories with no technical barriers to entry (e.g. CRM), strong contenders such as Freshworks and Zoho are emerging in India. Not surprising since R&D output per dollar was already high in India historically. However, S&M output per dollar is also increasing since products under $50,000 ACV are being sold remotely from India with relative ease.
Lastly, the market size cannot be underestimated as it unlocks the possibility for multi billion dollar market cap companies in these categories. The sheer number of SMEs in the world is staggering, with 32.2M in the US alone. Even if you heavily discount the software serviceable component of the market to 10% or 3.2M, a company with ACVs of $5,000 barely has to penetrate 0.00625% of the US to build a $100M ARR business. At the same time, there are tons of SMEs outside the US too, albeit with a declining degree of willingness to pay. Finally, software markets are completely open without any trade restrictions. Given these market forces, I believe this trend is here to stay - gradually certain categories of software will come to have large Indian contenders.
It is essential for Indian SaaS businesses to be global fairly early on, and also have increasing ACVs, increasing R&D and S&M output dollar / high efficiency, high win rates against global competitors, active product expansion, high logo and dollar retention. Freshworks is an interesting case study. Today roughly at $140M quarterly revenue, growing at 20% YoY, with 80% gross margins, 107% NDR and $40M quarterly free cash flow.
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