The Tragedy of Indian SAAS Startups.

Indian SaaS startups scene is warming up and people are beginning to take note. Google and Accel published a combined study during the first week of March 2016 that postulates that Indian SaaS startups would earn almost $10B and be worth $50B by 2025, up almost 20X from now. World should look somewhat rosy for a SaaS founder.

Ironically, it does not. There is a tragedy at play in the Indian SaaS scene, and its impact is quite drastic – it turns a #unicorn into a #punycorn.

Allow me to explain.

A business requires capital to grow. As Shekhar Kirani of Accel Partners shared on-stage at the above-mentioned event, it takes an average of $1.350M to build a $1M ARR (a fact also largely borne out in other analysis). If a startup indeed manages to create this $1M+ ARR, US VC firms would generally consider it to be a Series A candidate (of course depending on other conditions).

In India, given that VC firms mostly tend to follow US benchmarks, Indian VCs also look for same milestones ($1M+ ARR to be considered a serious Series A candidate) However, the average seed round raise of an Indian SaaS startup is somewhere around $500K, which means that it only has about 1/3rd the amount of capital required to reach the $1M ARR and become a serious Series A candidate.

Now, it is virtually impossible for Indian founders to be 3X more efficient compared to their US counterparts, given that US founders are not bad themselves, if anything. Which means, that before an Indian SaaS can reach the Series A stage, it has to look at further rounds of funding, many times termed Bridge, Pre-series A or something of that sort.

And that is where the tragedy starts taking shape. While an equivalent US SaaS startup raises $1.5M seed round, deploys it and gets to a $1M ARR in 12 – 15 months, an otherwise equally good Indian SaaS startup deploys its $500K and 18 – 20 months later, is still a good distance short of of the magical $1M ARR.

Given the VC insistence on $1M ARR, while largely ignoring the reality of the capital available,  the startup has no option but to raise Bridge and/or Pre-series A rounds, usually anywhere between $500K to $2M. And given yet another peculiarity of the Indian fund-raising market – that it likes only priced rounds and abhors convertible notes etc., the startup ends up diluting equity in the range of 20-25% for this Bridge/Pre-series A round.

So while a (successful looking) US SaaS startup raised $1.5M seed, dilutes 15-20% equity and gets to Series A readiness in 12 months, an otherwise equally capable Indian SaaS startup raises $1.5-2M ($500K seed+ $1.5M pre-series a), takes around 30-36 months (18-24 months seed+12-18 pre-series a) and dilutes around 40-45% equity (20-25% seed + 20-25% pre-series a) before it can get to Series A readiness.

This kills a lot of momentum because of all the extra time spent, kills a lot of motivation for the founders as they dilute significantly early on, kills the ability to attract the best talent as there is lesser equity available to go into the ESOP pool. So what you get at the end is something lot smaller than what it could have been.

One look at the competition for the poster-children of Indian SaaS scene and you would see that mostly, they are almost 1/5th to 1/10th the size of their next biggest competitor.

A #punycorn is what you are left holding in your hands at the end of the day, not a #unicorn.

And that is when you succeed.

Amarpreet Kalkat (Frrole) @UnPluggd
Amarpreet Kalkat (Frrole) @UnPluggd

[About the author: Amarpreet Kalkat is the founder of Frrole, a Data SaaS startup. He has been around in the Indian startup ecosystem for a while.

A persevering and resilient sort of fellow, with a bit of attitude,  is what most people would call him. He usually prefers to ‘do’, but once in a while, he likes to ‘think’.

This post is the result of some such thoughts. He can be found on Twitter @amarpreetkalkat.]

Sign Up for nextbigwhat newsletter

The smartest newsletter, partly written by AI.

Download, the short news app for busy professionals