SaaS (Software as a service) has been one of the success stories of India. Indian founders have created dozens of great SaaS businesses. While these domestic SaaS companies sell their software to American and European clients, they are conceived in India.
Since India produces a huge number of engineers every year, the smartest of them are world-class. They build their startups in India even though their clients are foreign. "Made in India, for the world" has been the mantra of software and SaaS companies for a long time.
But this model is creaking. Why?
AI is transforming our world. ChatGPT was the result of the global AI revolution. AI is creating new jobs and destroying existing ones. Joseph Schumpeter, way back in 1942, coined the term "Creative Destruction". AI is turning out to be the largest creative destructor.
Both WEF and IMF foresee AI taking away millions of existing jobs in all countries. WEF opines that AI will disrupt IT services through automation as well as augmentation. The Indian SaaS industry is grappling with this new reality. Investors are asking how these startups plan to leverage AI to reduce costs and increase revenue.
If you are a SaaS founder struggling to raise venture capital, you are not alone. SaaS funding has dried up in the last 12 months. Traditional VCs use the capital efficiency ratio to evaluate the health of SaaS businesses. But now they also want to know the AI roadmap of SaaS companies.
Unfortunately, India doesn't have a headstart in SaaS. The USA and China are miles ahead. We lack top-notch AI talent. It's a relatively new subject here. Most engineering schools don't offer advanced courses on AI. The country is facing a shortage of AI talent.
The Indian SaaS success story is built on the availability of world-class engineering talent at a lower cost when compared to the developed world. AI is shaking these very foundations. It's a double whammy for Indian startups. By automating a lot of low-end work, AI is eroding India's cost advantage. On the other hand, the country lacks the top talent to employ AI to augment product development.
The picture is so straightforward that everyone, even the VCs who are usually laggards in technology, understand this. But there is no quick fix to this problem. Retraining the existing talent in AI on short notice is challenging.
Indians inherently have a competitive streak that helps them overcome challenges. I do not doubt that the best young engineers in the country will soon become adept at using AI, but it will take a few years. The smartest engineers see this as an opportunity to upskill themselves.
But in the meantime, SaaS startups will fight for the top AI talent. Investors will pester them to integrate AI. The founders with unclear AI roadmap will find it difficult to raise money and stay afloat in this difficult funding environment.
We might see a lot of startups shutting down.
