Future of SaaS companies in 2023: DeepTech will continue to be a favourite bet

Year 2023 is likely to be tough for many SaaS companies. However, segments such as generative AI, PaaS offerings, and Low Code/No Code platforms, cloud security-based software may gather more steam in 2023.

Year 2022 started on a positive note for the booming domestic SaaS ecosystem in India and globally. The Indian SaaS startups raised more than $5 billion this year, according to data research and analysis firm Venture Intelligence.

However, SaaS firms started to feel the heat of slow demand growth in the second half of the year.

The Russia-Ukraine war and its impact on supply chains, runaway inflation and the US Federal Reserve’s aggressive interest rate hikes led to fears of a recession in the US. Experts are concerned this may lead to lower spending on software, which would be a dampener for SaaS companies.

Top SaaS firms including Salesforce, Freshworks, and Chargebee announced layoffs while other firms resorted to stringent cost-cutting measures like freezing hiring or reducing marketing spends.

Mega fundraising deals like Uniphore’s $400 million and Chargebee’s $250 million at the start of the year made investors, founders and other SaaS stakeholders upbeat about the sector. In 2022, India also minted unicorns like Fractal , Darwinbox , Uniphore , LeadSquared .

Indian SaaS companies are focusing on delivering cost savings and improved efficiency to enterprise customers as the going gets tough.

Predictions for 2023 :

1. Predictive AI will be the biggest bet:

Predictive as well as embedded AI experience into their platforms and it is going to become table stakes through 2023 which which found use-cases in HRTech, ChatBots including climate change analysis.?

2. DeepTech will continue to be a favourite bet :

With many top SaaS firms betting big on DeepTech and doubling down investments, the segment is poised to grow further. Any products especially in the DeepTech category that are built to improve operational efficiencies, cut down costs and directly improve bottom lines/revenues will do well.

3. Cloud infra, data security and developer tools will grow big :

Cybersecurity is transitioning to a board-level imperative and is now a non-negotiable capability for every organisation, private or governmental.Cybersecurity is a critical national security risk for every country and cyber warfare capabilities will increasingly determine outcomes in military conflicts. The recent breach at AIIMS should serve as a wake-up call.A tiny security or privacy lapse can topple even the biggest brands.

Cloud Infrastructure and developer tools are going to be big themes in 2023. India has more than five million developers and this market is going to go big from India to global companies. India will see a lot of regulation coming around data privacy, security, and cloud infrastructure, which will shape how businesses in these segments will grow.

4. SaaS is getting commodified:

SaaS and software are getting commodified. In this setup, SaaS companies should make sure the product features are of absolutely low- cost but still make money out of it. If SaaS companies cannot acquire customers without massive marketing spending then that means there is no market for that product. They have to be very efficient in acquiring customers.

Companies which are still figuring out product market fit and haven’t raised yet will find it difficult, this is the biggest learning from our business too.

5. The SaaS ecosystem may see consolidation?:

SaaS companies’ net retention ratio (NRR) may grow slowly or may not grow at all in 2023 and if enterprise SaaS is targeting only SMB businesses, which are more prone to shut down or have financial issues in scaling up. Due to this many smaller organisations may not sustain in the market. However, their products still make sense for bigger firms. This will eventually result in industry-wide consolidation of SaaS as small-scale businesses will be absorbed by bigger companies.

Consolidation will be driven from the customer end as well. As more businesses start up directly or shift their entire operations to the cloud, demand will increase for consolidated—i.e, unified—online platforms.

Companies may go all the way to improve efficiencies. The numbers like unit economics, churn and SaaS magic numbers which will determine sales efficiency will take centre stage.Efficient growth is definitely going to be big and a very different breed of companies that will survive through this will emerge stronger.

SaaS companies selling their products to other SaaS companies may see a hit in their businesses. They are very vertical focused and there is no scope for hedging.Earlier companies started and were structured only for growth, now companies should balance between growth and profit.

The incentive for someone to start a business is growing, and pre-seed and seed stage investors are still enthusiastic. Maybe not be as active as in 2021 but will be similar to 2022. However, the late stage will go through massive challenges because of the valuation gap. And the IPO market looks very bleak too.

Controlling burn, retaining customers, and growth with a view to profitability are all becoming key survival factors for 2023. And as I indicated above, managing and meeting key metrics such as NDR (net dollar retention), NNR (net new revenue), payback period (sales efficiency) will be key.

(Excerpts from various news reports and articles)