Planning global funding? What Indian startup founders need to look out for

In the last couple of years, Indian startups have been a bright spot in a global market experiencing deep uncertainty.

A report by Bessemer Venture Partners* predicts a 25% increase in Annual Recurring Revenue from 2023 to 2024. Moreover, Indian SaaS firms are expected to attract $1 billion in funding this year. While this is far from the $6 billion peak in 2021, it is still an encouraging sign of recovery amidst a global funding winter, and an unmistakable show of faith by global investors in the potential of Indian startups.

Foreign investments can be a game changer in the life cycle of a SaaS firm. It boosts market dynamism and acts as a catalyst for innovation, bringing increased capital for expansion, access to cutting edge technology and opportunities to expand globally. This article aims to guide founders through the process of fundraising from foreign investors, setting up their Indian subsidiary and running it successfully.

With over 67% of FDI since the turn of the millennium coming in the last 10 years, the India story continues to gather momentum. Depending on the nature of the product being manufactured, foreign direct investment can fall into two categories: the Automatic Route and the Government Route.

Sectors that fall under the government route require permission from the Government of India, whereas sectors that fall under the Automatic Route require no such clearance. However, sectoral regulators may require additional approvals for investments in certain industries. The IT & BPM Industry falls in the Automatic category. This makes the SaaS space an attractive investment destination for Foreign Venture Capital Investors, or FVCIs, who provide Indian companies with funding for international business growth.

Managing risk is a crucial aspect of expanding your operations globally. That’s why it is important to conduct thorough market research before expanding into new territories. This involves regulatory differences, the economic and political situation, competition analysis, cost of expansion, and crucially, cultural differences.

• Building international networks: Networking plays a key role in attracting foreign investing, so expand your global reach through strategic connections

• Participating in global startup events and competitions: Events like the SaaStr and SaaSBoomi annual conventions are a great place to take the pulse of the global market, advertise your services and forge new alliances

• Leveraging global platforms: Keep an eye out for accelerators, incubators and crowdfunding opportunities to get your ideas off the ground in the early stages

• Highlighting India's market potential: India’s deep talent pool and newly relaxed regulations make it an ideal investment destination, providing great value for VC money

• Developing a strong business plan: Craft a plan that delivers value to all stakeholders and appeals to the global market

• Creating a compelling pitch deck: A winning pitch deck goes a long way in communicating your startup’s story concisely and effectively

• Building a minimum viable product (MVP): Launch a solid MVP to showcase your potential 

• Focusing on unit economics and profitability path: Demonstrate a clear path to profitability to win the trust of investors

• Maintain proper documentation and record-keeping: Ensure that all your financials and documents are in order and ready for the eyes of investors

• Diversify funding: For Indian SaaS Startups, Venture Capital has been the dominant mode of funding to give companies that initial boost. However, to succeed, startups will need to diversify their modes of funding to ensure timely inflow of capital as they scale business operations. One of the best ways to do this is to tap into global sources of funding. There are many countries that offer special schemes to fund foreign startups that are owned by women, or address problems of critical social and environmental impact. Startups can also participate in international startup competitions, accelerators and incubators, or explore alternative modes of funding like crowdfunding.

• Build solid relationships: Building networks with potential investors is crucial to attracting funding. It is important to listen to investor feedback about your pitch and approach and incorporate them. It is also important to be transparent with investors to build trust, communicate regularly, and address issues with the business in a proactive manner. Crises are inevitable, and it is important to convey a sense of calm and steady leadership in these situations. Be sure to make promises you can deliver on, and report needs on time.

• Invest in a winning pitch deck: While creating a deck sounds basic, the first, right, step to getting your message through to the investor is to build an excellent pitch deck. A successful pitch deck is clear and concise, and states the problem, solution, key product features, value proposition, competitive advantage and fundraising requirements in an impactful way.

• Understand different ways of working: Global investors come from countries that have different ways of doing business compared to India, so be prepared for cross-cultural negotiations. Do your research and be mindful of cultural differences while building your relationships with investors.

• Stay on top of regulatory requirements: It's important to stay up-to-date with the latest regulatory requirements. For Indian SaaS firms, this includes global incorporation, choosing the right legal structure, the various compliance considerations around cross border transactions, Data Protection & Privacy Laws, and Tax Implications.

Indian SaaS firms must be aware of the FEMA Regulations, which will help them navigate the international trade landscape with ease. Further, consulting with experts is advisable to understand other key regulations. If you choose to incorporate your startup with its HQ abroad, you will also have to stay on top of Transfer Pricing regulations. We have covered this in detail in our piece on Transfer Pricing.

Legal and regulatory considerations aside, a good rule of thumb to check if your goal is realistic is to check if it’s SMART (Specific, Measurable, Attainable, Relevant & Time-Based). Clear, well-articulated, realistic goals keep your organization productive, accountable, responsible and efficient.

To summarize, Foreign Direct Investment (FDI), particularly from venture capital investors, is the dominant mode of funding for Indian SaaS startups. As more Indian startups prove their worth by building global products and expanding to foreign markets, global investors have retained their faith in the India story by continuing to back Indian firms even during a funding winter.

With Indian startups all set to attract $1 billion in funding in 2024, it is important for founders to build strong networks, leverage global funding opportunities, build strong pitch decks, educate themselves on cultural differences, assess market risks and stay on top of the various legal and regulatory requirements. With India’s abundant engineering talent and the ability to adapt quickly to changing market trends, brighter days await the start-up space. 

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