VCs advise SaaS startups to incorporate in India


Bengaluru: An increasing number of software-as-a-service or SaaS startups are choosing India as their operational base driven by the ease of doing business in the country and access to a larger domestic capital, investors and industry experts said. This trend is reversing the earlier preference for overseas incorporation.

Rise in digitization and hybrid-work models have bolstered growth in the SaaS ecosystem in India and globally. More than 200 SaaS startups were founded in India in the last three years and they collectively received an equity funding of $373 million, as per market intelligence data company Tracxn.

“We’ve seen an uptick of new SaaS startups being incorporated in India…founders need to think of exit strategies when they make their decision of where to incorporate,” said Pranay Desai, managing director of VC firm Matrix Partners India. The rise in Saas startups in the country can be attributed to two reasons – access to capital and an India IPO which is an “interesting” exit option, he said.

“India IPO is an attractive option for companies at a reasonable scale and a path to profitability. The bar for a US IPO has gone up in the last decade from $100 million revenue to $300 million revenue scale,” Desai said. “High quality companies which are below this scale and looking for exit options, see the India IPO as a viable option.” Other investors have also alluded to Saas companies with a $50 million annual recurring revenue or ARR to find more takers in India compared to other regions with a higher threshold.

While initially startup founders preferred setting up companies in overseas jurisdictions due to a host of reasons including ease of conducting business and regulatory regime, better IP protection and higher valuation, it’s not the same anymore, said Nishant Shah, partner at Economic Laws Practice.

“In the recent past, India has significantly improved its positioning in ease of doing business, and adopted various measures that would facilitate operation of such startups in India,” Shah said. “The increase in awareness of capital markets amongst the masses in India has led to the mobilization of savings directly or indirectly of retail investors in listed shares on Indian stock exchanges.”

Domestic institutional investors have narrowed the gap with foreign institutional investors in the Indian stock market over the last few years, reaching a historic low shareholding difference of 13.11%, down from 49.82% in 2015, Shah said.

The Indian SaaS market is expected to reach a valuation of $50 billion by 2030, driven by the widespread adoption of cloud-based solutions across various industries, as per a report by Bessemer Venture Partners.

Over the last few years, startups across sectors have considered ‘reverse flipping’ or shifting their base to India to list their shares on the stock exchanges. They usually do this through two routes– share swaps and inbound mergers – as seen in the case of Peppery.com.

This trend, previously more common among late-stage companies, is now being considered by early and mid-stage SaaS startups to capitalize on investor interest.

Last month, Mint reported that new-age home interior solutions provider Livspace plans to shift its domicile back to India to go public in 2025. The company joins a long list of startups including PhonePe, Razorpay, PineLabs, and Groww which now want to flip back to India.

Indian stock markets are currently booming with increased participation in the secondary market. This provides a more favorable opportunity for founders to monetize the better value of their startups, Shah said. To be sure, India overtook Hong Kong to become the world’s fourth-largest stock market last month.

However, the shift to Indian incorporation has not been as pronounced among SaaS startups as in consumer internet and regulated sectors.

“In most SaaS companies, a large customer base is usually in the US and other foreign countries. Hence, they prefer having the holding companies abroad to stay closer to their customers and to avoid any operational issues relating to collections,” said Sanjay Khan Nagra, partner at Khaitan & Co. “While an Indian IPO is a good option for SaaS companies as well, many SaaS companies eventually get acquired.”

Furthermore, foreign VCs are exercising caution in the SaaS vertical and are now evaluating the model’s viability in the face of potential disruptions from AI technologies across the world.



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