Alok Goyal knows a few things about the software industry. He spent close to a decade at German multinational SAP. And since 2012 he has been investing in the enterprise software space, which since the advent of cloud infrastructure has given way to the software-as-a-service (SaaS) industry.

A lot has changed in this period, according to him. One major change is the growing realization that companies born in India can indeed become large players in the global market. Earlier, investors used to demand a discount on valuations to factor in the risk of investing in India.

“I have heard VCs say they would pay 10-15x (of annual recurring revenue, or ARR) for companies in the US, meaning they would pay only 5-7x for companies from India. I don’t think anyone says that today,” said Goyal, partner at early-stage investment firm Stellaris Venture Partners, discussing valuation multiples for SaaS deals in the Indian market. 

Indian SaaS startups are now demanding valuations similar to their US peers. Growth-stage investments in the space are now being struck at more than 30-40x ARR multiples. At seed and series A funding rounds, the multiples are even higher.

Why? The combined market capitalization of US cloud-based businesses, comprising mostly software companies, has increased from $1 trillion in February 2020 to $2.2 trillion in February this year, according to the ‘State of the Cloud 2021’ report by Bessemer Venture Partners. As a result of this valuation run-up in the US, many investors are turning to India—home to perhaps the largest set of new SaaS startups.

“They are not getting good deals in the US so they are ready to look at India,” said an investment banker who tracks SaaS deals. “If companies are able to build up revenues of $10-15 million ARR in the US, they are asking for $500-600 million (in valuation).”