Do AI or DieTo AI or not: Indian SaaS startups' conundrum

SaaSBoomi Annual—the flagship event of India’s oldest software-as-a-service (SaaS) community—kicked off yesterday, with 1,500 startup founders, investors, operators, and ecosystem builders like banks in attendance. Unsurprisingly, with artificial intelligence (AI) dominating the public discourse over the past 18 months, it was once again, the topic on everyone’s lips.

While in the next 12-18 months, AI uptake by enterprises could be a little underwhelming, said Noshir Kaka, senior partner at consulting firm McKinsey, in the medium-to-long term, the potential of AI will be both truly exciting and terrifying. This is because while AI will likely destroy several existing SaaS businesses, it will also open up many new opportunities and use cases, unlocking tremendous value for the customers/end users.

Kaka’s conviction was based on a joint study conducted by McKinsey in partnership with SaaSBoomi, which had some eye-opening findings concerning AI and India’s SaaS ecosystem. The study estimated that enterprise spending on generative AI, or GenAI, is likely to hit $150-200 billion by 2027. Of this, $100-120 billion would be driven by reimagined workflows and about $60-70 billion by net new offerings.

AI-based software penetration is likely to hit 10% in the next 4-5 years, which would be 3X faster than SaaS—at a similar level of maturity—in the software industry.

With such massive disruption looming large on the horizon, it shouldn’t come as a surprise that the SaaS industry is already ramping up its AI spending. According to a Nasscom survey from January, roughly 70% of SaaS CXOs acknowledged that GenAI is a critical investment, with around 25% of them allocating a separate budget for the technology.

While so far, most of the AI use cases that have emerged in SaaS largely relate to productivity, McKinsey’s Kaka pointed out that going beyond “delivering superior productivity to users” could unlock twice the value. Across three categories (foundational, horizontal and vertical tools), the McKinsey-SaaSBoomi study pointed to the emergence of over 60 AI-first domains such as synthetic data generation (foundational), AI-assisted drug discovery (vertical), and marketing personalisation (horizontal).

While those in heavily commoditised spaces such as conversational AI systems are facing increasing heat and need to work on building new capabilities powered by AI on a war footing, said Prasanna Krishnamoorthy, others are waiting for the dust to settle before deciding on such major product/tech stack decisions. Krishnamoorthy is managing partner at Upekkha, a SaaS-focused fund and accelerator.

There are an estimated 500 AI-first SaaS startups in India, according to Manav Garg, founder and CEO of Eka Software, a commodity and supply chain management platform. “The first challenge of a SaaS startup today is figuring out where to start and which market/domain to play in, and second, how do you provide differentiated offerings given that it is relatively easier to build software now,” says Garg, who is also founding partner at Together Fund, an early-stage SaaS-focused VC firm.

Interestingly, AI’s disruption appears to be something of a great leveller. SaaSBoomi functions on the ‘pay-it-forward’ principle, with larger SaaS startups advising or helping the more nascent ones. This edition, though, marks the first time when all SaaS players, big or small, find themselves in the same boat, says Krish Subramanian, co-founder and CEO of subscription management platform Chargebee.

All startups, irrespective of their stage, need to act fast or regret missing the bus, said Subramanian. This will be especially difficult for growth and late-stage startups, he added, since they have to re-imagine their entire tech stacks, go-to-market, pricing, and other aspects of their businesses. SaaS startups whose businesses are in danger of being commoditised face a higher level of danger of becoming obsolete. "This is the reality of technology. We all signed up for this. This is a privileged position where the industry is advancing at a rapid pace. It's survival of the fittest," said Subramanian.

Vinod Muthukrishnan agrees. “If you do a startup today or you’re a startup at scale, you don’t have to add AI to your products. You have to re-envision your stack because of AI. Applications, tech choices and skills needed will change,” he said, adding that AI is as much of a seminal shift as both cloud and mobile combined. Muthukrishnan is the chief customer officer at Uniphore, a conversational automation technology company, and is a member of SaaSBoomi’s governing council.

The larger message for all late-stage founders couldn’t be any clearer—do AI or die. In his keynote address, Girish Mathrubootham, founder and CEO of Freshworks and one of the founding members of SaaSBoomi, said the idea behind this year’s theme was to bring awareness about the importance of moving from SaaS to SaaS.ai.

“We are at a phenomenal moment in history. Something very, very important is happening around us. We are super happy about this community of founders that we’ve built and the work that we’re doing, but all of this can become irrelevant if we do not adapt to what is happening in the world,” said Mathrubootham, whose company was the first Indian startup to be listed on the NASDAQ.

Mathrubootham explained that while founders are not surprised by new technology that emerges every now and then—such as cloud telephony, social media, and modern messaging—as these provided them with opportunities to disrupt, innovate, and grow faster, AI will be different. “Sometimes, you have monster waves which create massive disruption. They destroy entire industries and also create huge, new winners,” said Mathrubootham. Learning to ride the AI wave is critical, he warned.