What the SaaS Collapse Means for Every Leader
It’s a difficult time in the world and in the world of SaaS. Right now in 2022, Bessemer Venture Partners’ (BVP) NASDAQ Emerging Cloud Index is down nearly 40% from its peak. Since SaaS companies have grown a lot over this time, that means the multiples are even lower.
While the initial impact has been on public valuations, the ripple effects are moving at lightning speed. Investors in public equities are also, in some cases, “limited partners” in venture capital funds. They tell the venture capitalists they invest in to slow down. The same venture capitalists look at portfolio companies that have been or are about to be “marked” significantly in their valuation. And they’re also looking at companies that need to raise money soon, with no path in sight.
The fact is that the glut of capital in recent years has resulted in too many companies in all markets. You can feel it every day when you look at the number of prospecting emails you receive from seemingly similar businesses.
As a legendary Benchmark Venture Capital investor Bill Gurley tweeted Recently, the challenge for many entrepreneurs is that they have never experienced a cycle like this before. The bad news is that not all businesses will survive this downturn. I say this with sadness because I know a ton of people work very hard for their businesses. The good news is that those who do will be many times stronger.
So what do you need to focus on to survive and thrive?
Now, if you’re old like me, a crash is nothing new. I missed the Wall Street crash of 1929, but I’ve been through many of the biggest since then – the dot-com crash, 9/11, the GFC (Global Financial Crisis) and the more recent Covid crash -19.
The one thing I’ve learned after witnessing so many downturns is that sustainably growing companies will not only ride those wild waves, but also be better prepared for future success when the tide subsides.
Here’s what every functional leader should be thinking about as we try to weather these turbulent times:
CFOs should consider moving from an annual budget to a monthly forecast
CFOs are important in times of boom and bust, but they become essential in times of uncertainty. With prices (for labor, for your suppliers, and for your customers) continuing to rise, demand likely slowing, and the cost of capital rising, you will need to plan for several future scenarios.
At the onset of the Covid crisis, most finance teams started creating multiple finance frameworks for the recovery – the famous ‘V’, ‘U’ and ‘L’ shaped recovery models.
While we may need to mine the Greek alphabet to predict what happens next, it’s clear that CFOs need to create a forecasting framework that considers:
- Different wage growth alternatives, moving from double-digit levels to mean reversion
- Variable ability to raise prices for customers as demand slows
- Variable impact on sales and customer retention due to issues in your customer base or industry
The biggest insight I’ve had during these times is that it’s important to get businesses out of the “annual plans” mindset and into a more agile monthly forecast. No budget or headcount is committed – everything is up for discussion at any time.
CROs should consider ways to effectively scale
If the CFO is the star of a downturn, business managers are certainly no less than co-stars. This is true for five main reasons:
- New sales will decline rapidly as fear slows down new decisions, so existing customers become even more important
- Your existing customers need your help because they are probably struggling too
- Your existing customers will notice who is there for them, which will affect who they double up with on a takeover
- Your existing customers will be reviewing results and experiences, which means you need to make sure you stay above the “cut line”
- Your existing customers will be looking to consolidate their spending (more on this in the next section)
While this is all very empowering, if you’re like most companies, be prepared to get an email from your CFO about a “hiring freeze.” Almost all SaaS companies are revising their growth plans, given the likelihood of an economic downturn. So, just like in the early days of Covid, you will be asked to “do more with less”.
The only solution is to consider more scalable ways to reach your customers, including:
- Automation by numeric keys
- Shared approaches to Customer Success
- Peer-to-peer communities to allow customers to help each other
- In-app communications to drive customer success from inside your product
- Better cross-functional alignment towards retention and expansion
Your work has never been more important, so make sure your team is ready.
Revenue managers should consider reinvesting in account management
During times of uncertainty, human beings become creatures of habit. They often continue doing what they have been doing but slow down to try something new. We all saw it at the start of Covid, where sales of new logos came to a halt for most businesses.
While we wouldn’t expect the same magnitude of effect here, most SaaS companies will see some extension of new buying cycles. At the same time, the opportunity of your existing clientele could grow. Businesses will want fewer vendors, so if you have a product suite, there’s a chance to increase your “share of wallet.” And a continued inflationary environment gives sellers more freedom to prolong price increases.
CROs should be prepared to spend more time with their existing account management teams. In particular, the most successful companies will implement more formalized and integrated processes between account planning in sales and success planning in customer success. This will include a structured identification of client objectives and return on investment, defined delivery plans, and documented maps of key client contacts.
CMOs should consider investing in customer marketing
While marketers often have a broad mandate, inevitably the main metric in boom times is the “new logo pipeline.” This makes sense in environments where growth is valued above all else.
Most marketing teams don’t have the same organizational muscle to target their existing customers (customer marketing). These often require a completely different set of strategies. First, messaging needs to be adjusted to align with customer challenges and opportunities. Second, the cadence should be tailored to individual customer journeys, not just the campaign of the month. Finally, marketing teams should work closely with Customer Success teams on these programs to align with the health, adoption, and experience of existing customers.
Product Managers Should Consider Turning to Product-Driven Growth
One of the biggest mistakes companies can make in a downturn is starving R&D. Companies that do this are selling their future in exchange for the present.
One way to balance things out is to consider shifting sales and marketing dollars from the new logo to R&D, specifically to product-driven growth (PLG) strategies. PLG is not, as some think, a binary “on/off” situation. Instead, PLG tactics can be tailored to businesses across different stages of product maturity. For example, you can invest in self-service and guided demos to reduce the cost of new sales or use in-app engagement to reduce the cost of onboarding new users. The fact is, no matter what stage of product growth or maturity you find yourself in, your product can be a frictionless source of pipeline, growth, and revenue.
R&D investments are often the most effective sales and marketing investments. Use the new world of efficiency to double that.
HR managers should consider increasing transparency
The big resignation has kept HR managers and their teams busy lately. As if that weren’t enough, their employees are now stressed by soaring inflation, falling stock values and global economic uncertainty.
As has been the case in recent years, HR managers will need to continue to hone their communication skills (in partnership with the CFO and CEO) to help their teammates understand the new value proposition of working in the workplace. company. They will need to help educate their workforce on why last year’s job market might not last and the risks of this new employment climate. It is also important to share future business scenarios and how and why release/next phase timelines have changed. The worst thing to do in this situation is to say nothing and pretend it’s “business as usual”.
CEOs should consider preparing to emerge stronger
One thing is certain: the companies that hold up in terms of balance sheets, cash flow, customers and culture are the ones that become unstoppable coming out of downturns.
The big leaps in growth for many of the biggest names in SaaS today are the result of smart management throughout the Great Financial Crisis of 2008-2010.
For CEOs, this means that if your company is financially healthy, you are well positioned to:
- Win the “Talent War” again
- Buy competitors and adjacent businesses at attractive multiples
- Access capital once markets reopen
- Consolidate market share as customers choose to work with fewer, larger suppliers
The next few years will be difficult, and the last few years have not been easy either. But if you look at past crises, you realize that the companies we all admire today were created during past recessions. Here’s to all of us going through this!