From artificial intelligence to automation, 2023 has been a year of both triumphs and setbacks. The Indian software-as-a-service (SaaS) industry has not only weathered economic downturns but has also stood tall amid the funding winter.

Projections paint a promising picture, with a joint report from SaaSBOOMiand McKinsey & Company setting ambitious targets for India’s SaaS sector—a revenue range of $50-70 billion and an enterprise value of $500 billion by 2030.

A total of 82 Indian startups were funded in the sector in 2023, according to the SaaS fund and accelerator Upekkha.

According to YourStory Research, in 2022, there were a total of 182 deals totalling $1.89 billion. In 2023, the number of deals decreased to 111 with a funding size of $482.09 million.

Comparing the number of deals in 2023 to 2022, YS Research

Over the years, the zero-interest rate phenomenon (ZIRP, an RBI policy to stimulate economic activity) brought a significant influx of cash to startups, making them attractive opportunities for risk-taking investors. However, in 2023, as inflation set in, interest rates soared and the once abundant pool of cash for startups dried up.

However, Boston-based marketing automation firm Klaviyo's September 2023 IPO offered a breath of fresh air. Founded by an Indian-origin entrepreneur, the firm raised $576 million through its public debut on the New York Stock Exchange. The milestone brought hope during a period of diminished tech valuations and boosted investor confidence.

Prime SaaS funding hubs in 2023

Also, generative AI (GenAI) has become the new buzzword in the SaaS landscape too with startups such as Sarvam AI, employee experience platform Atomicwork, and small business-focused Blubirch raising fresh capital.

“In addition to cloud tech becoming the norm, the generative AI wave has added more than $250 billion to the TAM (total addressable market),” says Manav Garg, CEO of Eka Software and Founding Partner at Together Fund, in a conversation with YourStory.

Many late-stage companies are now assessing the adaptability of GenAI for various downstream applications. “If the new technology could potentially be a disruptor to the entire business, it is the right time to pivot now,” he adds.

VCs still see SaaS startups as promising long-term investment opportunities, says Anand Jain, Co-founder and Chief Product Office, CleverTap.

"Despite recent turbulence, if founders prioritise building tangible value over just raising capital, investors will be attracted to the sector. First, because the SaaS business model (especially B2B) is inherently scalable. And second, external variables such as the rate of digital transformation globally and maturity of cloud computing only facilitate a more evolved SaaS ecosystem," he explains.

Despite a 54% YoY drop in VC investments from 2022 to 2023, according to Upekkha, companies employing AI saw a significant uptick in funding. A Goldman Sachs report projected that global AI investments to potentially reach $200 billion by 2025, up from $21 billion in 2021.

Scalability, regular software........

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