Freshworks Inc’s successful conclusion of a $1 billion Initial Public Offer (IPO) in the US markets, to command a $12 billion valuation on debut, is a defining moment for Indian software start-ups, just as the domestic listing of Zomato in July marked the mainstreaming of platform ventures. The Software-as-a-Service (SaaS) model has been a key disruptive force in the global software industry in the past decade, with about 30 per cent of global enterprises now adopting it and the market size soaring from $10 billion in 2010 to $150 billion now. Saas providers essentially rent out ready-made product suites hosted on the cloud for companies looking to run internal functions such as customer engagement, human resource management and training. Cloud-based services unleash significant cost and time savings for users by trimming investments in product licences, IT infrastructure and dedicated on-site personnel to maintain traditional software products and applications. The software industry, often chided for missing the bus on the high-margin products business, now has a fresh shot at garnering product market share and creating global brands through Saas offerings. India is already home to about a thousand Saas start-ups with nine of Freshworks’ peers already attaining unicorn status. Freshworks’ listing opens the doors for these firms to explore public market debuts that create wealth for their founders, employees, angel backers and private equity investors.
Apart from global enterprises embracing Saas, three other factors have provided tailwinds to successful SaaS ventures such as Freshworks, Zoho and Postman. The first is improved access to funding for these ventures right from their early stages. With prominent global PEs/VCs such as Accel Partners, Bain, Sequoia, Tiger Global and Google Capital betting on this space, domestic SaaS start-ups have raised over $8 billion in funding from 480 deals since 2016, as per Venture Intelligence. Two, high net worth serial entrepreneurs from the fintech and e-commerce spaces have turned prolific angel investors willing to commit both seed capital and early funding to their fellow start-ups in other verticals. Three, lately young engineers have shown greater willingness to bet their careers and fortunes on start-ups, with ESOPs as incentives, rather than seek secure jobs with mass-recruiting IT giants.
To policymakers, the success of such ventures underlines the fact that start-ups do not really need the government’s tax sops, funding or incubation support to make it big. Instead, sunrise sectors benefit from a stable and friction-free regulatory regime that doesn’t place impediments on the business model, as recent e-commerce regulations do. Despite many tweaks, India’s tax and policy regime for angel investors remains unfriendly and needs to be reworked. As inbound PE/VC flows are partly fuelled by the global cheap money regime which could get disrupted, incentives must be offered to encourage on-shoring of management and local capital-raising by PEs and VCs.