The Economic Times daily newspaper is available online now.

    SaaS space heats up with big deals at Chargebee, Innovaccer as valuations soar

    Synopsis

    Investors continue to back Indian cross-border enterprises building products that attract global clients

    SaaSETtech
    Illustration: Rahul Awasthi
    Several bulge-bracket Software-as-a-Service (SaaS) deals are expected to be closed over the next few months as risk investors continue to back Indian cross-border enterprises building products that attract global clients.

    With dual bases in India and the US, Chargebee is in talks to raise new funds at a valuation of around $3-3.5 billion, likely doubling from earlier this year, two people familiar with the matter told ET. Existing investor Tiger Global as well as Sequoia Capital is expected to back Chargebee, which helps companies in billing, subscription and revenue management.

    Elevate Your Tech Prowess with High-Value Skill Courses

    Offering CollegeCourseWebsite
    MITMIT Technology Leadership and InnovationVisit
    IIT DelhiIITD Certificate Programme in Data Science & Machine LearningVisit
    IIM LucknowIIML Executive Programme in FinTech, Banking & Applied Risk ManagementVisit
    A similar increase in valuation is expected at Innovaccer, a San Francisco-based healthcare SaaS firm, which has also been in talks to raise funds at valuations of $3-4 billion, sources told ET.

    SoftBank Finalising Investment in Sense
    Also, SoftBank Vision Fund is finalising an investment in Sense, an artificial intelligence-driven talent engagement and communication platform valued around $500 million, multiple people aware of the talks said.

    "We are in constant talks with our investors about the future of the company, but there is no funding announcement to be made at this time," a Chargebee spokesperson told ET in a mailed response.

    Emails sent to SoftBank India, Sequoia Capital and Tiger Global did not elicit a response. Sense’s cofounder and CEO Anil Dharni did not respond to a mail seeking comments on the SoftBank-led funding, while Abhinav Shashank, cofounder & CEO, Innovaccer, said he wouldn’t comment.

    Freshworks IPO
    Deals at such valuations indicate investor attention on SaaS companies and their allure was further burnished by the Nasdaq public offering of Freshworks. While the Girish Mathrubootham-led company has lost more than $5 billion of market value in a month on muted earnings guidance, investors say SaaS companies are commanding valuations of 25-40 times of annual recurring revenue (ARR). SaaS firms are typically valued as a function of ARRs.

    Indian SaaS revenuesETtech
    Graphic: Rahul Awasthi

    "A 30-35 times ARR is the median average for SaaS companies now," said an industry investor who didn’t want to be named. "SaaS multiples have also seen a similar uptick in public markets. In 2017, multiples were around 6-8 times but if you look at the last two years, they jumped to 9-15 times. This is because fundamentally the models are very impressive."

    Freshworks, the first Indian SaaS unicorn, has been joined by several others. Postman, Browserstack, Innovaccer, Zenoti, Druva, Icertis, Mindtickle and HighRadius have all hit the $1-billion valuation mark over the past two years.

    To be sure, the decline in market cap of Freshworks could be attributed to US investor focus on neglected ‘value’ stocks.

    SaaSETtech

    "The US markets rotate between prizing value stocks and growth stocks. Value stocks had not been doing well for a while even as growth stocks flourished," said a venture capitalist. "If the market senses that growth guidance isn’t promising, the stocks go through ruthless correction, sometimes as much as 30-40%. But we don’t worry too much as long-term SaaS investors."

    Scale and Investors
    Accent on digital play and emergence of a new class of investors have helped boost valuations lately.

    "If you scale from a revenue of $10 million to $50-60 million, the risks keep reducing for investors to come in. Scale is what has helped Indian SaaS firms get attractive valuations in the past few years," said an investor cited above.

    New York-based Insight Partners, which according to Silicon Valley tech news site The Information is raising a $16-billion fund, has been picking bets here. The fund has backed Checkout.com, Wiz, Monday.com, Shopify and Alibaba. It started investing in Indian cross-border SaaS startups a few years ago.

    SaaSETtech

    New York-based Tiger Global, famous for its big wager on ecommerce marketplace Flipkart and other consumer-facing startups, began chasing SaaS platforms in 2018-19. This coincided with the departure of Lee Fixel, who was an early proponent of India’s consumer internet story, from Tiger Global.

    Also SoftBank Vision Fund, Sequoia Capital and Steadview Capital became active in the sector. Early-stage venture firm Accel, the first investor in Freshworks, has been among the firsts to spot the SaaS and cross-border opportunity.

    "We’ve seen the market shift from companies largely serving domestic businesses to best-in-class product-led companies that have global demand. We think India is well positioned to be the next leader in global SaaS," Deven Parekh, managing director at Insight Partners, told ET. "Their ecosystem is already leading in sectors like developer tools, infrastructure, and analytics and has strong structural advantages like high-quality talent and customer success capabilities. Our investments in BrowserStack, Chargebee, Postman, and other Indian SaaS companies have all seen tremendous growth, and we’re excited to continue investing in this area."

    Profitable Growth
    Funds are drawn due to fatter margins and high revenue growth. "Great enterprise SaaS startups have real revenue, high growth and gross margins," said Samir Bodas, cofounder & CEO, Icertis. "And if metrics like Rule of 40 and customer acquisition cost (CAC) show that profitability is achievable and revenue growth is efficient, enterprise SaaS startups can get profitable by slowing their growth rate."

    As India now has a critical mass of great enterprise SaaS startups, India-focused venture investors can deploy a lot of capital quickly, Bodas added.

    Earlier this year, the Bellevue, Washington-and-Pune-based Icertis said it posted a 60% increase in revenue from January to June 2021. SoftBank Vision Fund recently bought secondary shares from the software company’s existing investor Eight Roads at around $5 billion valuations, although Bodas did not confirm the development to ET.

    "The unit economics are very healthy as these companies have 80% gross margins. For most of them, burn is actually sales and marketing, which means if they cut down on that, they can turn profitable," an investor cited above said.

    Another senior founding partner at a SaaS and B2B-focused investment fund said recent founders of SaaS firms understand how to scale and grow at 50-200% year-on-year. "Many of them will be growing fast, generating significant EBITDA and will generate a lot of cash," he said. "Many of them don’t require capital and investors have to pay up to get in."

    San Francisco-and Bengaluru-based Sense is said to be clocking ARRs of around $20 million, a benchmark investors such as SoftBank believe signals the model’s scalability.

    Industry executives told ET that India always had the building blocks such as good talent, low costs and expertise in customer service, but the Indian SaaS story is becoming a truly global one.

    "Entrepreneurs are no longer focused solely on the cost advantage but on the power of product to emerge as category leaders. For investors, outcomes are proven with more than 10 SaaS unicorns, including the US-listed Freshworks," said another investor, referring to top SaaS startups.
    ( Originally published on Dec 06, 2021 )
    The Economic Times

    Stories you might be interested in