SaaS That Targets India Does Not Scale. Part?1: The Small Online Market

“Not scalable, not predictable and yet repeated. This done knowingly — is fine. Attempting this and not knowing is a slow poison.” — Vivek Khandelwal , Founder of iZooto

Can you name a SaaS startup from India that has scaled to more than $10M Annual Recurring Revenue (ARR) by targeting the domestic market? I can not.

This 4 part series will provide SaaS founders a critique of the Indian market to encourage them to pivot their sales and marketing toward the Global Market.

I was a SaaS founder once, and I know how enticing it can be to discover a problem and build a solution for the people in your network. But do not do this beyond a set of beta customers — as my peers and I have learned — selling SaaS to the domestic market is not scalable.

For the founders reading, please follow along carefully. Without further ado, here are the 4 reasons I believe scaling SaaS in India is next to impossible.

1. The Small Online Market
2. The Low Perceived Value of Software
3. The Culture of B2B Payments
4. The Culture of B2B Services & The Risk of Custom Development

Definitions

To begin, let me clarify a few vocabulary words:

• Scale — I define scale as +10M USD (Rs. 70 Crore) Annual Recurring Revenue (ARR)
• Software as a Service (SaaS) — Any cloud-based software product whose customer and user is a business i.e. Business-to-Business (B2B)
• SaaS that targets the Domestic Market — Any SaaS startup that spends more than 50% of its sales and marketing budget toward acquiring customers in India
• MSMB / SMB — Micro, Small and Medium Business. Examples include Kirana shops, restaurants, manufacturers, recruiting companies, etc.
• Online Market / Global Market — For the purposes of buying Adwords and defining Go-to-Market strategy for SaaS startups: “Online Market” / “Global Market” is synonymous with the “U.S. Market”
• Offline / In-Person — I use these words interchangeably to describe the business model required to serve Indian SMBs

Note 1: This article only concerns SaaS targeting the MSMB market — not the Enterprise market. I am unable to speak knowledgeably about the Enterprise market in India.

Note 2: I define Scale as greater than $10M ARR because that amount of revenue indicates a large number of customers.

Note 3: I exclude Payment Gateways from my definition of SaaS.

The Small Online Market and the Barriers to Scaling Offline Business

Google search volumes serve as a barometer for demand in the market

Do a Google keyword search for any SaaS-style product (e.g. “CRM”, “Website Builder”, “Project Management”, etc.) and you will see how the search volumes in other markets compare to that of India.

(Google Keyword Planner)

The data speaks for itself — if a startup targets the Indian market it is targeting a relatively small online market.

“But, wait!”, I hear a SaaS entrepreneur object, “consider this …”

• “Though India’s Online market is small, India’s Offline market is LARGE!”
• “And, there is enough Online business in India for me to build a scalable startup”

The first point I address here— just because a market is large does not mean it is scalable — and the second point I will address in future articles.

Offline SaaS is Low Margin

To characterize the market, SaaS entrepreneurs will agree that the average Indian SMB does not leverage modern technologies to improve its business operations. And, based on the above Search Volume data , the average Indian SMB does not search Online (Google) to find solutions to improve its business operations.

To understand why businesses do not search Online, it means, either:

• Businesses are unaware they have a business operation inefficiency

OR

• Businesses are aware they have an business operation inefficiency, BUT they look for solutions through their personal network, and not by searching Online

For SaaS founders, the problem with these two scenarios is that they will have to invest significant resources into contacting SMBs in-person, and educating them on the inefficiencies of their business operations. This is a challenge because educating a market is SLOW. Education requires meeting prospect customers multiple times. And requires sophisticated sales representatives who can articulate the customer problems and sell the SaaS solution. That is an expensive endeavor and is a barrier to scale for any SaaS startup.

But I’m not the only one saying this, Vinod Muthukrishnan, Founder of CloudCherry, one of India’s fastest growing SaaS startups, had this to say:

“The issue in India is that the Average Revenue per User (ARPU) is low. For a SaaS company to have 80% gross margins, the cost of all people and General & Administrative (GA) expenses around customer success/support should not exceed 10–12%, assuming cloud costs are 8–10% of ARR.

If the ARPU is low and you need to fly every month to see the prospect client in-person in Mumbai, and spend 3 hours a day educating and chatting with them on multiple things, basically, the math doesn’t add up. Both vectors are stacked against us — ARPU (Low) and Service expectations (high)” — Vinod Muthukrishnan, CoFounder of CloudCherry

As Vinod points out, because of the high costs of in-person education and sales, SaaS startups generate lower gross-revenues. This reduces the capital for sales and marketing to acquire customers, making the startup unscalable.

In the next section, I will show how Online SaaS models are different and more scalable than Offline models.

Online SaaS is High Margin

By leveraging technology, you can see how Online SaaS startups can market-to, acquire, onboard, and service a larger number of customers with fewer resources, than Offline SaaS startups. This makes Online SaaS a more scalable approach.

The Difficult Pivot

The skillset and culture required to operate a Online versus Offline SaaS is worlds apart. This is risky because the longer a SaaS invests resources into building a Sales and Marketing culture to acquire an Offline market, the harder it becomes to pivot to an Online Market. So SaaS startups can literally get “stuck” by selling Offline. I’ve had this experience myself, and so have many of my peers.

In Closing

There’s a reward at the end of this tunnel if you’re willing to pivot to the Global Market. As the great Shekhar Kirani — Partner at Accel — once said:

“I think there is an extraordinary opportunity for entrepreneurs from India to build massive B2B/SaaS companies purely by focusing on large global with a high-quality product. Having a base in India is a massive advantage on unit economics of demand-gen, inside sales, and R&D.” — Shekhar Kirani — Partner at Accel

If you’re still not convinced about the risks of the domestic market, then look out for next article on the “Low Perceived Value of Software in India”.

If you have any comments or feedback on the article I’d love to hear them — Are there other challenges you see to scaling a SaaS? Or, do you have any objections to my points?

Thanks for reading and stay tuned for the next post,

-Adam