The US is the largest SaaS market in the world with a total of 426 unicorns. Ranking second and third respectively are China and India, which house a combined 244 unicorns, according to a recent report published by the Indian financial services firm Motilal Oswal.
And the rising number of India-founded SaaS firms — Freshworks and Zoho to name a few — tapping the global market, signifies the potential of Asian software companies to serve both domestic and global demand.
“For small-and-medium businesses (SMB), Asia is a great place to build for the world,” Nishant Rao, former managing director of LinkedIn India, said during a panel discussion at the Asia PE-VC Summit 2022 on Sept. 28.
Since small businesses do not have too many custom business requirements, the same product works everywhere, Rao explained at the panel session titled ‘Build local, think global: The opportunity for cross-border SaaS play’. “You can exploit the cost advantages of the Indian or Asian market and bring it to the [global] table.” he added.
Going global is the only way to scale
To grow to a scale where they can become a public company, over 90% of SaaS firms will have to serve the global market as customers in emerging Asian markets do not pay the same price as the customers in the West nor do they adapt software products at the same pace, said Cyrus Driver, managing director of Swiss private markets firm Partners Group at the same panel.
“Within Asia, China is the only market where SaaS businesses can reach scale [by remaining local] because the domestic market there is so large. In Southeast Asia or India, I haven’t seen one that has reached close to $100 million in ARR [Annual Recurring Revenue] or in genuine subscription revenue by [serving] the local markets,” Driver explained.
There are several factors that foster global expansion, including competitive products, the ability to attract and harness global talent, and the ability to serve global customers, said Driver.
The Partners Group, he said, invests $50-150 million in SaaS firms in Series D and later stages, by which time most of the investees would already have turned global and proven their ability to win notable customers around the world. “The businesses [that we invest in] are typically SaaS businesses with $20-25 million in ARR,” he explained.
Product strategy is also important as some firms might adopt an aggressive expansion strategy, and in the process overlook product quality. “One of the mistakes we have seen in several of the India B2C companies, as well as some B2B companies, is that they’ve almost gone abroad too quickly. So when they start taking requirements from 15 markets at the same time, those businesses end up with a weak product as a whole,” said Rao.
“In the area of enterprise SaaS, we would like to see companies that have solidified their product over 5-7 years, even if they’re not making massive revenues. Because what happens in Asia, in general, is that the customers tend not to pay much, but they will ask for hundreds of different features, making it a more complex environment to operate in. As a result, the products are quite well-built,” Rao explained.
Rao, who previously served as the global chief operating officer for Freshworks — a customer relationship management software firm that raised $1 billion in a US IPO last September, at a valuation of around $10 billion — used the company as an example to illustrate the importance of testing the products in a new market before committing resources.
“We [at Freshworks] tested our products through Google AdWords to see what the uptake was in different regions, even though we would not put boots on the ground at all. Just to get a sense of what the unique selling points are resonating in the market,” he said.
“Multiples will come down”
Despite the potential that Asian SaaS firms hold, investors believe that the multiples of the SaaS firms will continue to come down given the current macroeconomic headwinds.
However, Kabir Narang, founding general partner at the Singapore- and US-based venture capital firm B Capital Group said that opportunities are still there for Asian players, adding that Asia has the potential to account for 5-7% of the global SaaS market’s share in the next few years.
There are other issues that the Asian SaaS market has to overcome — lack of talent, being a major one. Though talent is becoming more mature in Southeast Asia thanks to the booming tech industry in India and China, the market still requires a large pool of talent to foster growth, said Driver.
Narang remains sanguine about the SaaS market. “At the most structural level, only 20% of the global $9-trillion economy is truly digitised,” he said. “There’s a big opportunity for Asian products for the world. It’s useful to have a global or regional mindset as you set up a business, and we’ve seen that work very well for us. Eight of our 150 companies are crossborder SaaS companies, one of our largest positions in the crossborder SaaS market” he added.