Small towns turn big for SaaS sector amid headwinds in global market

Headwinds in the global market are encouraging both major players and newer entrants to set up distributed workforce models outside of the major cities

The Indian SaaS or software-as-a-service ecosystem is considered the third largest in the world after the US and China and is expected to surpass China by 2026. But a recent report by Bain and Company indicated that the country is already the second largest globally after the United States in terms of its size and maturity. According to Bain’s estimates, the country now contributes to around 18 per cent (8,120) of the total (43,951) SaaS companies in the world. For an industry that got its shape only in the mid-2000s in India, this is considered to be an achievement in itself.

In the SaaS model, organisational software is hosted by a third-party provider and delivered to customers over the internet as a service. The total annual recurring revenue (ARR) of Indian SaaS firms has grown four times to $12-13 billion in 2022 and investments into this sector have increased six-fold to $5 billion over the past five years. After India’s SaaS pioneer Zoho Corporation kicked off the growth story in the mid-2000s, many companies followed the trend, including the likes of Freshworks, which became the first Indian SaaS player to get listed at Nasdaq.

The majority of the revenue of Indian SaaS companies is generated from abroad, especially from markets like the United States. Reports indicate that only 30 per cent of Indian SaaS companies are situated in India, while the remaining are based out of the US.

Including Zoho and Freshworks, most of the SaaS companies originate from the larger cities, mostly Chennai and Bengaluru. Among these, Chennai is considered as the SaaS capital owing to the presence of a long list of players — Chargebee, Kissflow, PipeCandy, Klenty, Unmetric, Facilio, Hippo, Animaker, HappyFox, FourKites and Mad Street Den.

Now, however, with the global markets seeing fresh headwinds, Indian SaaS majors are slowly moving towards smaller cities — in the tier-II, III and IV levels — in search of growth, even as many newer players are basing themselves from small cities, too.

Leading from the front is Zoho through its “transnational localism” strategy. The company started its first such hub office (around 1,000 employees) in Tenkasi way back in 2011 and now has presence in Renigunta (in Tirupati), Tiruppur and Trichy. It is also in the process of opening centres in Tirunelveli and Madurai districts in Tamil Nadu as well as one in Uttar Pradesh. It also has more than 30 “spoke” offices across the country.

In a recent interview with <Business Standard>, Zoho Corporation Co-founder and Chief Executive Officer Sridhar Vembu said the idea of having a distributed workforce model is to distribute the growth and income across tier-II and III communities, instead of relying on a big city. “Many of our product development teams today sit out of these hub-and-spoke offices, including some teams that are involved in deep-tech research and development. The long-term vision of these efforts is to create self-sufficient and economically prosperous rural communities,” Vembu said.

Vembu is not the only one that is focussing on rural India. “There are two trends. One is that companies like Zoho are setting up offices in tier-II and III cities. The other trend is companies that are operating from these regions. Most of these cities have start-ups in services and products. In tier-III and IV cities, there are one or two SaaS start-ups that are actually doing well,” said Avinash Raghava, founding volunteer and chief executive officer of SaaSBOOMi, a community for Indian SaaS companies.

According to Tracxn, cities such as Ahmedabad already have 559 SaaS start-ups, followed by Coimbatore (223), Surat (161), Chandigarh (118) and Rajkot (65). Among the other noted ones from small towns include Bhopal-based Appointy, an appointment scheduling start-up, and Nagaland’s first SaaS firm Tabernacle, which provides integrated cloud-based software and mobile apps for churches and ministries to become future-ready through an all-in-one digital solution.

Take the case of Kovai.co, which is based out of Coimbatore (city is also known as Kovai). The company’s client base includes HP, Columbia (clothing and sportswear brand), Air Transat, Pfizer, Mercedes, BBC, Carrefour, Vodafone and Toyota among others. Geographically, the major contributors to its revenue are the US, followed by Canada and the UK.

“We at Kovai.co have been catering to global clients since the inception of our Coimbatore operations in 2013. It is from Coimbatore that we grew from a single-product company to a multi-product one with an ARR that has crossed $ 10 million ARR,” said Saravana Kumar, chief executive officer and founder, Kovai.co. “This trend holds multiple advantages for SaaS players and talent in small towns. We think we can attract a largely untapped talent pool and train them to suit our requirements. We also have an opportunity to contribute to the economy in tier-II towns. Additionally, operating costs and employee attrition are much lower because competition among players is lesser,” Kumar added.

In New Delhi-based Wingify, too, more than three out of five employees reportedly come from small cities such as Latur, Korba, Tiruvallur and Buldhana. Another Coimbatore-based SaaS firm, RFPIO, which provides solutions in the tender automation space, indicates that being in a small town is not a challenge as product value is of prime importance. The company’s consumers include the likes of Microsoft, Amazon, Google, Facebook and Uber. “We are continuing to hire across the country now and strengthen our base in Coimbatore. There are a lot of educational institutions in Coimbatore and students here are not getting many opportunities. We are creating world-class products out of a city giving opportunity for people to work at their hometowns and hence the cost of the company also declines,” said Ganesh Shankar, CEO of RFPIO.

“In most of the tier-II and III cities, an ecosystem is built. They are probably where Chennai and Bengaluru were 10 years ago. The next breed of entrepreneurs is going to come from these cities,” said Raghava.