AI startups positioned to transform India’s IT services, despite SaaS setbacks

“Over the last 15 years, SaaS as a category has fallen short of expectations in terms of where we expect more than $5 billion worth of companies to emerge in India,” said Dev Khare, partner at Lightspeed Venture Partners. Mint.

Needless to say, India hasn’t seen its share of SaaS success stories. Freshworks is listed on Nasdaq, while Zoho continues to scale by moving from small and midsize business deals to larger enterprise deals.

But only a few innovative companies came from that period; these include health technology company Innovaccer, contract management company Icertis, and data observability platform Acceldata. Notably, these are companies founded by Indians who started them in their home country before moving their headquarters to the US.

The problem, according to Khare, was the large number of fast-following companies that emerged at the time, compared to firms focused on pure innovation. “In the pre-AI era, Indian companies could still enter mature categories in the US or Europe and move from the small and medium business segment to the mid-market,” Khare said. “It was essentially the same product, just at a lower price.”

Fast followers often enter markets immediately after pioneers, allowing them to spend less on research and development, take fewer risks, and gain market share with a more mature product.

With But the fast follower model of artificial intelligence (AI) no longer works, especially in the enterprise market where customers are looking for innovators. “I don’t think India now has the opportunity to wait 10 years to wait for AI market leaders to emerge and then disrupt them from the bottom up,” he said. “Entrepreneurs need to address problems immediately and, if possible, take the lead.”

go to IT

But while India may not be able to fully realize its SaaS potential, AI startups here are positioned to disrupt the country’s information technology (IT) services sector, disrupting a trend that has already begun.

Broadly speaking, Lightpseed sees opportunities in three areas: app building from scratch, software implementation services, and application maintenance services.

“There are large revenue streams across the three segments of non-automated IT services,” Khare said. “India has a good chance given its legacy” IT services are here.”

On the applications side, Lightspeed invested $23 million in a Series A round for vibration coding startup Emergent last year. It also participated in the startup’s $70 million Series B led by SoftBank Vision Fund 2 and Khosla Ventures in January. The company is currently exploring opportunities in two other segments.

Companies in the remaining spaces include AI-powered Salesforce application and automation company Ressl, which raised $500,000 from Y Combinator earlier this year, and Realfast, which raised $2.75 million from RTP Global, DeVC and Peak XV Partners in 2024.

As with most new technologies, most AI startups have yet to prove they can do things that established companies do better. A PwC report this year found that despite pilot projects and experiments within their enterprise ecosystems, only one in eight CEOs (12%) say AI delivers both cost and revenue benefits. Overall, 33% reported an increase in cost or revenue, while 56% said they had not seen a significant financial benefit to date.

speed of light It is the latest addition to a growing list of venture capital and growth funds seeking startups trying to change the way the $283 billion IT services industry operates. While funds such as Bessemer Venture Partners, Peak

While the AI-first disruption of IT services is still in its early stages, Khare said a rollup or consolidation is inevitable, as few startups have made major inroads so far. “These will probably be smart entrepreneurs who will buy IT companies operating at 20% net margins, move them to their own platforms and then increase margins up to 40%,” he said.

AI disruption continues to be a concern for IT services companies. Last week, announcements from US-based Palantir and core model startup Anthropic sparked concern among incumbents, given their ability to automate jobs that traditionally underpin IT services revenue.

Palantir said in its earnings call Monday that its artificial intelligence platform Hivemind can now autonomously move data from legacy systems to new ones, something that has historically been done by IT services firms.

In January, Anthropic announced Claude Cowork, an agent AI system designed to make the job of white-collar workers easier. Later in the month, it released a series of plugins that automate tasks across multiple applications under a single system. Such intermediary AI platforms have been an investor favorite for some time now, and Indian venture capital firms are increasingly looking for category winners.

Investors’ concerns about agent AI were quickly reflected in the share prices of Indian IT services companies. TCS, Infosys, HCLTech, Wipro and Tech Mahindra fell 6.95%, 7.19%, 4.22%, 3.73% and 4.12% at market close on Wednesday. Despite a partial recovery even on Thursday, the Nifty IT index fell by 0.56% and eight out of 10 stocks in the index still finished the day in the red.