SaaS, New Favourite For VC Firms. Why?

After the pandemic, businesses across all sectors faced a downfall, and most of them are still recovering from the same. However, SaaS platforms tackled the situation without much difficulty. As businesses have been forced to adapt to the digital transformation in order to save a portion of their revenue and pave the way to a profitable business, SaaS stocks have continued to rise.

SaaS startups can take as many subscribers as they want while maintaining the same fixed costs, potentially generating enormous revenue. According to reports, in 2022, software-as-a-service (SaaS) companies in India are expected to raise up to $6.5 billion, a 55 per cent increase from 2021.

The revenue of software-as-a-service (SaaS) businesses is recurring because it does not demand any significant capital to cater to a larger consumer base. The costs involved in the infrastructure and operations are more or less the same. For instance, to increase the revenue, over-the-top (OTT) platforms either need to hike the subscription price or need to acquire more subscribers to the platform.

"More consistent and predictable revenue streams make SaaS companies an exciting proposition for us. India has been a home ground for solid software products and services for over two decades now. We are very keen to back talent that is increasingly becoming accomplished to build in India for the world," said Rajiv Srivatsa, Partner at Antler India.

It's also simple to upsell to existing customers once they're hooked. This is not the same as most of the businesses other than SaaS, businesses need to deploy money on the infrastructure as well to cope up with increasing demand for the product. 

SaaS companies also take advantage of current consumer attitudes. Rather than investing large sums of money in a single purchase, consumers prefer flexible, lower-cost products that can be accessed immediately but also easily cancelled. The SaaS business model already has a market.

Dravya Dholakia, Founder and Director at Dholakia Ventures

, explained, "There is a huge demand for cloud-based software and services across sectors in the market.
 It offers a recurring revenue model carrying a minimal capex structure and thereby holds an asset-light business model. Furthermore, SaaS platforms can grow their customer base very quickly, which means they tend to have high gross margins. Therefore, it can be very profitable. The rise of the internet and network speed, creating a huge demand and potential market, is another factor which complements the domain's ability to attract high token money as funding. The SaaS market is still relatively new, so there is a lot of room for growth.”

The problem with SaaS businesses is that the faster they want to grow, the faster they can lose money. On the other hand, investors and board members frequently put pressure on a company to stop burning cash when it may be time to increase spending.

Moreover, SaaS business models necessitate flawless service, strong co-founder relationships, user-friendly interfaces, and robust cybersecurity – none of which are inexpensive. While the opportunities in this competitive market are undeniably vast, so are the challenges that entrepreneurs will face in operating in this sector today.