Lengthening sales cycles due to involvement of finance teams in purchase decisions and continuing cost shedding by enterprise customers are posing challenges of falling revenue for Indian SaaS startups, which may lead to down-rounds, or funding at lower valuations than the previous round, founders and investors ET spoke to said.
To add to the troubles is the limited runway for several startups, as funding taps dry due to global macroeconomic slumps, which may potentially lead to shutdowns in the next two to three quarters if the overall situation doesn’t improve, at least three people in direct talks with some of these startups said.
To counter the slowdown, SaaS companies, which cornered large rounds at high valuations from investors during the funding peaks of 2021 and 2022, are actively looking at pivots, in terms of product, demographic of customers and looking to sell to global markets such as the US and Southeast Asia.
The SaaS industry is also forced to offer deep discounts to sign up customers for multi-year contracts, putting additional pressures on their margins.
According to a dozen founders and investors that ET spoke to in the space, the industry is going through a “reset”, as the going gets tough with SaaS companies taking a direct hit with customers tightening their purses. Even practices of selling software to other SaaS startups (to show sales growth) has stopped as most companies are stuck in a tough spot and actively taking calls to prune costs through restructuring exercises.
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“The overall mood in the SaaS industry is uncertain and a ‘reset’ (in terms of valuation and growth guidance) is happening. Earlier, SaaS companies were selling to other SaaS companies, with venture capital money being used to buy software and drive business growth – which has stopped (among software firms). All that has changed and from an enterprise point of view, only ‘mission critical products’ are being considered for purchase, but those too under a lot of constraints,” said a serial entrepreneur in the software space.Sales cycle double, CFOs make calls
Now decisions regarding software spends have moved to finance teams, with chief financial officers (CFOs) giving the final sign offs, instead of the concerned business heads, as pressure to rein in cost mounts.
This has led to sales cycles almost doubling for some players from 2021 and 2022, depending on the industry.
“How will deals be struck if customers themselves have no money? At this point in time, it is very hard for SaaS companies to build a solid growth rate. Now there is added due diligence on every deal, asking if the software solution is really required right now or not … it usually takes us one month to close a deal, this was the case until 2021 and early 2022. Now it is taking us at least two months to close a deal,” said a third early-stage founder ET spoke to.
ETtechDelayed responses from potential customers are also leading to higher sales costs and impacting the limited funds that some of these startups have.
“Companies are still buying SaaS, but they are being thoughtful about the purchases now. They want their CFOs to give a take on it, approve it and be part of that purchase process… The CFO has to pre-approve before Spendflo can actually go and start a process,” said Siddharth Sridharan, cofounder of Spendflo, which helps companies with their software buying and management journey.
“Decision makers have increased, so sales are taking longer than usual to convert. SaaS companies may have a big pipeline, but conversion is what matters to investors,” said an early-stage founder who spoke on the condition of anonymity.
At least two SaaS founders ET spoke to said they have faced instances where after months of negotiation, deals have fallen because the vertical head (in the enterprise purchasing the software) got laid off as a part of a restructuring exercise.
“One way you can offset slowing sales cycles is by building a bigger pipe of deals. That is what is happening with us,” said Khadim Batti, founder and chief executive officer at SoftBank-backed Whatfix, which provides digital adoption software to enterprises.
Revenue and growth conundrum
However, as the technology slump dries up funding taps, valuation multiples have corrected across the board.
According to venture capital funds and entrepreneurs that ET spoke to, investors are ready to give a valuation of 15x revenue in new fundraising currently, but most of the companies had raised funding at much higher multiples previously.
“Investors are not allowing the companies to do the down rounds. But if they don’t have enough money in the bank, the investors are asking them to grow to the value the previously raised funds at,” said Suresh Sambandam, founder and CEO, Kissflow, an app development platform.
Further, with sales cycles tumbling and SaaS companies forced to give discounts, revenue growth for several of them is down considerably, raising questions on their future fund raises.
“The multiples have corrected anywhere between 50% and 70%, depending on the industry they operate in. So companies which were getting 30-times multiple, the same companies are getting 10 or 15 times … Some companies may take one or two years to catch up to that valuation. And if they run out of money, they will have to do either structured rounds or down rounds,” said Anand Prasanna, managing partner, Iron Pillar, which has backed the likes of Jiffy.ai and Uniphore.
In order to raise the next round, startups need to show growth, but also efficiency.
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“With the current economic cycle impacting earnings of major technology companies, valuations on both the public and private side of SaaS companies are unlikely to go up soon, at least in 2023,” said Alok Goyal, founding partner, Stellaris Venture Partners.
Early-stage pivots
The global meltdown is by no means easy for early-stage SaaSstartups which had attracted premier valuations from investors over the last few years, when capital was widely available.
“Companies which don’t have a mission critical product will have to answer that question. Because companies have started to see a dip in their growth now,” said one of the founders ET spoke to.
Further, the jury is yet to be out on the strategy around tapping global geographies to offset falling margins and overall slowdowns.
“There is panic and everyone is thinking about survival. Most funded companies in desperation think that if they can go to the US, they will be able to sell more. But the verdict is still out on that,” said the above founder.
Further, investors and entrepreneurs ET spoke to said the strategy will only work if average contract values (ACV) is higher for these companies, considering the costs incurred in setting sales teams in global geographies.
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“For early-stage SaaS, there are a lot of pivots happening. We have seen people pivoting from SME SaaS to mid-stage enterprises, and thereafter to large enterprises, because unit economics may not work. Companies are pivoting not just products but also industry segments,” Prasanna of Iron Pillar said.
Margins and discounts at play
Over the past months, margins for several SaaS businesses have dropped from their 2021 to 2022 peaks, with enterprises wanting to spend less.
For very large deals, companies have been giving a 40-50% discount to also ensure that they don’t lose out to rivals on pricing. This is in spite of Indian SaaS having a price advantage over the US rivals. Usually margins in SaaS weigh in around 60%-70% for the sector.
The discounts are in line to help lock clients on annual contracts.
“What SaaS companies are doing is moving their clients from monthly to annual, or longer (contracts). Customers have expressed uncertainty but also want to continue using the SaaS tools, which is why a 30% discount via a two-year deal is a win-win for both of them,” said Divyansh Saini, co-founder and chief executive, Houseware, a revenue-SaaS platform.
“Right now, it is more about getting customers than worrying about margins and budgets,” said one of the early-stage founders.