What SaaS companies are doing right to stay warm in the funding winter

As Indian digital startups come to grips with a drought in funding and attempt to become capital efficient, one segment that has maintained a seemingly sustainable trajectory is Software as a Service (SaaS).  

One of the metrics venture capitalists keep—or are expected to keep—an eagle eye on is ‘burn rate multiple’, a measure of how much a startup is spending to generate revenue growth, and how efficiently capital is being used. A high burn multiple is an indicator of how inefficiently capital is being used for revenue generation.

Over the past six to seven years, a wide swathe of startups—many of them unicorns—have had a cash burn higher than their net revenue (sales minus expenses). The endeavour of course is to acquire customers by subsidising their offerings, with the confidence that the next funding round is nigh. That round, today, is a mirage for most.  

It’s here that SaaS startups stand apart with their lower burn rates and more predictable revenue generation (from subscription services and multi-year contracts). A study early this year by Ernst & Young and SaaS accelerator Upekkha suggests that most—eight out of 10—Indian B2B SaaS companies operate on a burn multiple of under 1.5x, “well below the global average of 2x to 3x”. Burn rates of under 2 are considered good by VCs, above 2 is suspect and over 3 is hazardous. The EY-Upekkha report, based on insights from roughly 140 respondents and over 30 in-depth interviews, points out that “startups with low burn multiples in theory should have more runway and be capable of withstanding an economic downturn”. The report also reckons that “one out of three Indian B2B SaaS companies are trailblazers and are targeting more than 50 percent ARR (annual recurring revenue) growth with very low burn”.  

This fortnight, Forbes India’s Technology Editor Harichandan Arakali shines a light on the prospects of the SaaS sector even as the developed world grapples with threats of a recession. Arakali’s prognosis for Indian SaaS is bright. That’s because a clutch of SaaS startups, stirred by the headway made by early birds like Zoho, Freshworks and Capillary Technologies are, as he puts it, “perfecting the playbook of building software in India and selling it to America. And the current slowdown in the global economy will only serve to sharpen their focus”.