Private equity investments in India’s fast-growing software-as-a-service (SaaS) industry are expected to more than double this year to $4.5 billion, according to Bain and Co.

Indian SaaS companies raised about $1.7 billion last year and $1.3 billion in 2019, the global management consulting firm said in a report.

This year’s investments into Saas companies would comprise nearly 8% of total venture capital investments in Indian startups, Bain said in its ‘Indian SaaS Report 2021’ issued on Monday.

Investor interest in India’s SaaS industry spans both early-stage and late-stage deals as public market investors and sovereign funds also tap on to the growing opportunity.

This year, the average value of seed rounds has surged 85% from 2019. There has also been an increase in the size of late-stage investments in Indian SaaS firms, with the top 15 deals contributing 75% of the overall capital attracted by the industry, according to the report.

“We have been observing that investors across the spectrum are now willing to actively invest in Indian SaaS companies including traditional PE (private equity) funds and sovereign funds, as these companies are starting to grow, with the outlook being fairly positive. The average deal value for the SaaS sector has also increased, with total deals roughly being unchanged. We expect revenues of SaaS firms to grow from $7 billion to $8 billion, at present, to roughly $25 billion over the next few years," said Prabhav Kashyap, associate partner, Bain.

The increased investor interest could be attributed to increase in exit opportunities for investors as seen from the recent successful public listing of Freshworks Inc. in the US. Acquisition and consolidation opportunities have also risen in the SaaS space, according to Bain.

Indian SaaS firms are also showing better annual revenue run rates (ARR) with some even outperforming their US counterparts, giving investors increased confidence on the potential of these startups.

In 2021, more than 35 Indian SaaS companies had more than $20 million ARR, a sevenfold jump over five years, with between seven and nine of these companies reaching the $100 million ARR milestone, compared with one to two companies five years ago, according to Bain.

There are currently almost 9,000 SaaS startups, which have either been founded by entrepreneurs of Indian origin, or have a large base of their workforce in India. This is almost double of five years ago when the figure stood at around 5,000.

Within the overall Indian SaaS landscape, horizontal business software including enterprise collaboration, events tech, conversational artificial intelligence (AI), and human resources (HR) tech continue to be the key driver of investments as businesses look for solutions in a post-pandemic world.

Other verticals in Indian SaaS include horizontal infrastructure software providers for cybersecurity and development tools, and vertical-focussed software providers for e-commerce, logistics and healthcare.

“Horizontal business software providers continue to be the leading segment for investors, contributing to almost 60% of the overall deal value being poured into Indian SaaS startups. This is because horizontal software providers work across a wide-array of geographies as well as segments. However, we expect investment interest in vertical SaaS and horizontal infrastructure tools to increase and see them command 55% of overall deal value in next 2-3 years. Further vertical SaaS is noted to have higher stickiness from customers," Kashyap said.

In September, Girish Mathrubootham-led Freshworks successfully listed on the Nasdaq Global Select Market exchange; becoming the first India-born SaaS firm to trade on a US exchange. Messaging unicorn Gupshup is also preparing for a US listing next year.