$100m ARR Club - Part III

Software-as-a-Service

This is the final post in our three part series looking at startups in emerging markets that have scaled to $100m in revenue. Following our first post on Marketplaces and second on FinTech’s, this one looks at Software-as-a-Service (SaaS) startups that have scaled to $100m across India, Southeast Asia, and Latin America.

While SaaS may be ubiquitous in developed markets, helping businesses manage everything from inventory to HR and cashflows, it is still nascent in emerging economies. There are two key challenges for SaaS adoption in these markets. The first is the willingness and ability of businesses, especially SMEs, to pay for software. Many have become accustomed to using it for free and push back against subscription fees. The second is the digital literacy of the end user, which can lead to low engagement and churn unless the right education and onboarding is put in place.

The key trends witnessed in the top SaaS companies are:

• The capital required to reach $100Mn is the lowest of the three business models compared, at an average of $130m, well below Marketplaces ($272m) and FinTech’s ($423m).

• In the early days of SaaS, the average time to scale to $100m was 15 years.  This has dropped to 6 years more recently.

• Average year over year growth leading up to 100m is 90% for the top quartile. This drops to under 50% post $100m 

• SaaS has high operating margins, with top quartile gross margins of 70 – 80%. The CAC payback period for these companies is 12-24 months.

• India is ahead of the curve, with 6 out of the 7 SaaS companies analysed coming from that market.

India

Indian SaaS companies are being founded in record numbers and proving they have a right to win in the global market. Of the 1,600 Indian SaaS companies that have been funded over the past five years, 14 of them exceed $100m in annual revenue today. While some of the early success stories such as Zoho bootstrapped their way to this mark, there has been an increase in interest and investment from VCs in the space in recent years. Capital efficiency, high margins and the opportunity to earn US dollar revenues on a local currency cost base are some of the reasons for this focus.  

The tailwinds promoting SaaS growth in India: 

• The depth and quality of trained software talent, built through its experience as an outsourcing centre for the world.

• Government tax rebates to operate abroad, which have incentivised Indian startups to build for the world.

• The digitalisation of domestic enterprises and SMEs as they shift from offline to online to meet the demands of their end customers and in the search for greater operating efficiency.

• The conversion of the legacy on-premise software base into a cloud-based SaaS model, and a shift to outsourcing non-core functions and operations to third-party software providers. 

Below are the key learnings from successful SaaS startups in India:

Unfair cost arbitrage

Unlike many other business models, SaaS can be easily shipped worldwide, something companies like Zoho have used to their advantage. Zoho leveraged the low cost, high quality software talent in India to build world-class products. Today 90% of its revenue comes from outside India, and Zoho has managed to scale efficiently despite a relatively low revenue-per-employee metric ($70,000 compared to $430,000 for Atlassian). This reflects the lower salaries and G&A fees in India that give Zoho its unfair cost advantage against developed market competitors.

Net retention is crucial to growth

Maintaining strong customer relationships becomes vital once a SaaS startup achieves product-market fit and establishes a scalable sales strategy. Measuring customer health, providing exceptional service, and fostering positive experiences are essential in improving customer retention. 

Zoho and Freshworks are two good examples of this. Both companies have tens of different products which they built early in their growth trajectory as a business. These businesses set up personalized sales and customer success functions for every customer to drive higher net dollar retention. Achieving this higher net dollar retention leads to sustainable growth at lower cost and higher value creation as customers increase their spending.

The rise of Vertical SaaS

While the early SaaS startups like Zoho, Freshworks & Druva built software products for one function of the enterprise, more recent SaaS startups have scaled faster with vertically integrated business models. Examples include Dehaat, a full stack AgriTech solution, and Innovaccer, a cloud-based healthcare platform. There has been a rapid rise of vertical SaaS in the FinTech space as well, with banks and insurance companies adopting software solutions across their product offerings and internal operations. One example being Sturgeon Capital portfolio company Datacultr, a digital debt collections management platform. Our analysis showed that vertical SaaS businesses in India have grown revenue at 200% year over year in the last three years.

South East Asia & LATAM

While India has shown tremendous growth in the sector, SaaS is still a nascent business model in other countries. One of the exceptions to this is Mexican logistics SaaS Nowports, the “Flexport for Latin America”. Founded in 2018, Nowports offers LATAM-specific shipping services by water, air, and land, combined with a centralized platform where clients can stay updated on their shipments in real-time. The company grew revenue 605% during the pandemic in 2020, and has now scaled to 1,000 employees and $100m in revenue. The other examples we looked at were Unico and Olist, digital identity management SaaS players who are also on the path to becoming $100m revenue businesses.  

Sturgeon’s Markets

Unlike in India, where 69% of businesses (excluding the unorganized sector) claim to have digital companies, in Sturgeon’s markets, Bangladesh, Pakistan, and Central Asia, only 20% - 30% have any kind of digital presence. Given the size of the informal sector in each of these countries, the real number of businesses relying on paper or at best excel to manage their operations is even higher. Eight out of our 24 investments till date have been in SaaS business models and it is a core part of our investment strategy

One of our first investments in Uzbekistan was Billz, an ERP solution for offline retailers to digitalise every aspect of their business. More than 80% of SMEs in the country still rely on paper or excel, and switching to Billz can help them save up to 30% in costs while growing revenues up to 40%. Today the company has close to 1,200 customers and more than 2,000 stores processing close to half a billion dollars in transaction value annually. While Billz has been successful in monetising through subscription fees, they have also added additional revenue streams through partnerships with financial institutions for lending to Billz’ customers and their end consumers. Leveraging the data and distribution from a SaaS product in this way is similar to Trukkr, a portfolio company we discussed in the previous FinTech piece. Billz is now expanding across Central Asia and looking at opportunities in the Middle East where rates of digitalisation among SMEs are similarly low.

Another stand-out performer in our portfolio is PeopleForce, a Ukrainian HR Management Solution targeting SME IT companies. PeopleForce is an all-in-one solution that covers every aspect of an employee’s journey with a company, from recruitment to onboarding, leave management and 360 feedback. While there are many HR software solutions available in developed markets, they are not appropriate for emerging markets due to the high price point and lack of localisation. This is true also for Billz in the ERP space for Central Asia and other emerging markets. PeopleForce has capitalised on this across Eastern Europe and the former Soviet Union, and today has more than 700 customers and 70,000 employees using its platform.

There are still only a few startups from our region that have followed in the path of Zoho and succeeded in global markets, with the most successful till date being Pakistani startup Cloudways. Founded in 2012, Cloudways bootstrapped its way to $50m in annual revenue with a global client base of more than 90K+ agencies, SMBs, and individuals relying on its managed cloud hosting platform. Built out of Pakistan, the company today has more than 280 employees across 20 countries. In September 2022, US-based DigitalOcean acquired Cloudways for $350m to consolidate their offering to SMEs in launching and scaling their online products and services.

Conclusion

The predominance of paper and excel across every aspect of business processes for both SMEs and enterprises in emerging markets is a tantalising opportunity for B2B software companies to tackle. This shift from offline to online is a secular trend, and the products have already been proven in developed and more developed emerging markets across the world. Capital efficiency, high margins and the opportunity to earn US dollar revenues on a local currency cost base make SaaS companies an attractive investment opportunity.

The nuance is building a product that the local customer is willing to pay for. In other markets, especially South East Asia, the majority of B2B software companies have shifted to a transaction or commission-based model to get around this. In Sturgeon’s markets we have seen that companies are willing to pay when they see tangible value in the product. Alternatively, startups can follow in the path of Zoho and target a global customer base. The challenge here is building the sales and marketing engine in a globally competitive environment, something not many SaaS companies can do from their base in emerging countries.

The opportunity in Central and South Asia is to localise products and build integrations at a price point that businesses can afford. International competitors cannot and will not do this. Capturing the opportunity requires an approach that emphasises educating the customer in how to shift from offline to online, an upfront cost that we have seen paid back through high retention rates among both SMEs and enterprise customers.

Once SaaS companies have built distribution, they sit on a depth and breadth of data that no one else in the market has. The opportunity to leverage these for financial products and services can significantly increase the average revenue per user with little to no additional acquisition cost. This can either be done from one’s own balance sheet, as we have seen with Trukkr, or through partnerships with financial institutions, as Billz has done.

This brings to an end our three part series on the $100m ARR club in emerging markets. We hope that you have enjoyed reading this, and should you have any questions please do not hesitate to get in touch.