VCs targeting the SaaS companies

Software as a service (SaaS) companies become cornerstone technologies for businesses and consumers all over the world. SaaS is a cloud-based software delivery model in which the cloud provider develops and maintains cloud application software, provides automatic software updates, and makes software available to its customers via the internet on a pay-as-you-go basis.

The SaaS industry has seen unprecedented growth in recent decades, driven by an increasing preference for automation over traditional manual processes and legacy softwares. This growth is supported by private and public investors, and continues to increase exponentially in key markets. Let’s take a closer look at the widespread success of the SaaS industry and its predicted trajectory in the near future.

Experts feel that SaaS companies’ low cash-burn and strong business fundamentals are the major drivers of this trend. The SaaS industry is projected to experience its largest annual growth between 2021 and 2022, reaching a value of approximately $172 billion by the end of the year.

A report says, the monthly Recurring Revenue or MRR is a leading indicator of revenue growth. Hence, it's a well-received way to appraise SaaS businesses. Investors are more likely to consider the MRR rather than the Annual Recurring Revenue. Simply because ARR doesn’t furnish much proof of churn.

There are several reasons why SaaS companies enjoy higher valuations, including: Recurring revenue they earn by charging monthly subscription/recurring fee. More predictable earnings based on their defined pricing tiers. Higher customer lifetime value from long-term contracts.

With this, the SaaS companies see increased VC interest amid market downturn. There are more than 30 SaaS companies that went public, representing around $225 billion of market capital. One of the reasons there is so much investor interest in software is because the use cases for it continue to grow rapidly, spanning a wider range of industries than previously imagined.

The overall SaaS industry is looking much healthier in the current market scenario. While consumer business has seen their valuations slashed by 50 percent, SaaS companies are at a comparatively better place and have not seen valuations cuts. With this the Indian SaaS market is projected to be valued at $50 billion by 2030.

S Mohini Ratna, Editor, VARINDIA