Even as Indian SaaS companies struggle to perfect the art of selling to the world, raise money, or strike partnerships, a new breed of companies that use artificial intelligence are threatening to upend their plans.
Looking at him from behind, Sridhar Vembu, in the picture, has a halo around him. It’s the lighting in the room. But for several entrepreneurs, he’s a demigod. Not for nothing. Building a profitable software as a service company that makes close to half a billion dollars in revenue, without raising venture capital, is a superhuman feat. Vembu has done that at Zoho, the company he founded more than 20 years ago.
We’re at a beach resort in Mahabalipuram, a little off Chennai — India’s software as a service (Saas) capital. Over 100 founders are in attendance at the fifth edition of SaaSx, an annual conference where entrepreneurs like Vembu share their lessons. Some have come on an overnight bus hired by the organisers, some others have flown in.
I was on the bus, named the ‘Sassy Bus’ (a pun on SaaSx), which started a little after midnight from Bengaluru. Early the next morning, we reached Mahabalipuram. At the pit stop, while we waited our turn to use the bathroom, Pravin Singh, a volunteer at iSpirt, the software products thinktank that is organising SaaSx, has struck up a conversation with entrepreneurs around him.
“What’s your ARR,” he asked, pointing at them one by one.
For the uninitiated, ARR is short for annual run rate. It’s the money you’re on track to make at the end of the year. No one in the group of six-seven founders had a run rate of over $1 million. “That’s why we’re in the bus. The ones who are making over a million will fly in.” We broke into a laugh.
It sadly true, though. Most Indian Saas companies haven’t crossed the $1 million mark after several years in business. And, even as they struggle to perfect the art of selling to the world, raise money, or strike partnerships, there are dark clouds before them: a new breed of companies that use artificial intelligence are threatening to upend their plans.
These new companies, mostly emerging from markets like the US and Europe, are not only automating tasks but also have the potential to sell cheaper – wiping out the cost arbitrage that Indian Saas companies have gained from. The classic Saas business model– which charges customers per licence– is also moving to an outcome-based pricing model.
“By no means has Saas caught up in India from an AI perspective. I’d argue that we haven’t even reached the original promise of Saas in India,” says Ashwini Asokan, the co-founder of Mad Street Den, a Chennai-based AI-first company. Asokan is right. Barring a few like Zoho or Freshworks, Indian Saas companies are yet to make it big in the global market.
India has roughly about 500 Saas companies and a majority of them have an average run rate of less than $5 million. Back in 2016, a study by Google and Accel Partners had projected that Indian Saas businesses can potentially serve 8% of the global demand by 2025, making it a $10 billion industry. By 2020, the study projected, Indian Saas will turn in $2.5 billion. (Accel Partners is an investor in Sourcecode Media, the company that owns FactorDaily.)
But, the market is fragmented. Another report, the India SaaS Survey 2017, by iSpirt and investment bank DCS Advisory, has a telling data point: the median ARR, among 59 survey participants, was just about $750,000.
Computing power, data and newer methods of training machines have revived the field of AI. This time around, it’s more enterprise ready. Gartner predicts that the business value derived from AI will touch $1.2 trillion in 2018. A large chunk of this, about 46%, will come from what are called virtual agents – software robots written for specific tasks.
Virtual agents won’t need customer relationship management software built for humans to and understand customer data. They will interface directly with databases and customers.
Virtual Agents will interface directly with databases and customers.
Many tasks that a pixel pusher would earlier do to make a presentation look good are now relegated to AI.
That cost arbitrage Indian SaaS companies thrived on, is likely to change with AI coming into the picture.
To add to the growing list of worries: a change in the business model of selling software is imminent. AI-first companies can charge customers based on business outcomes whereas traditionally, the Saas business has worked on the ‘per seat’ pay-as-you-go model. Enterprises like outcome-based pricing a lot more than buying recurring licences. “Revenue models that are based on the number of operational users seem to be threatened. Revenue models based on end-users or end-user transactions seem safe for now,” says Sangeeta Banerjee, CEO of Apartment Adda, an accounting and management software company for apartment complexes.
Even successful companies aren’t immune to the threat posed by AI-based companies. Global leaders like Salesforce are doubling down on AI, baking the technology into different solutions the company sells to its 150,000-odd customers.
It’s an early trend but Indian companies such as Zoho and Freshworks have also started investing in AI. Zoho has launched Zia, a conversational bot that can do sentiment analysis or learn new skills. Besides hiring AI ready talent, Freshworks has acquired companies like Chatimity, Frilp and Joe Hukum to build its AI stack. Its CRM solution Freshsales, now ships with built-in AI features.
“They will clearly have a lead,” says Mehta. But the new wave of AI-first companies have the potential to grow faster compared to the first wave of companies, he adds. “Can’t really say whether they will overtake. But either outcome is desirable.”
Others point out it is not judgement day yet. Suresh Sambandam, the founder of workflow management software company Kissflow, has a grounded view of AI. “AI is good and we shouldn’t ignore it. But it’s not like we should leave everything that we are doing and jump ship,” he says. Kissflow uses AI inside its workflow management solution to optimise a newsfeed of sorts for its users. But for him, it’s too early for the industry as a whole to focus on the AI narrative.
For Sambandam, it’s too early for the industry as a whole to focus on the AI narrative.