What SaaS Companies Should Focus On To Survive Market Downturns

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If this is your first market downturn, you may be especially confused by the conflicting advice that comes out of such an event. For some, the sky is falling and you must quickly change your model. For others, the pastures are green and the weakened landscape must be taken advantage of. Which one you are depends on what the data tells you about your business.

Right now, the data from the venture capital world may look bleak: Global venture capital funding fell 33% quarter-over-quarter in Q3 2022. SaaS, specifically, has seen valuations fall since early 2022 However, not all companies are created equal.

The valuation drop has been steeper for companies that didn’t focus on their data, specifically their unit economics. In those unitary economies, you’ll find out if you should push to weather the storm or attack the market to expand your dominance. Either way, the decisions you make now must be deeply rooted in the economics of your unit.

Related: Top 2022 Trends Affecting SaaS Enterprise Financing and Growth

The movement of the pendulum

We all benefit from bigger funds and higher valuations. A rising tide lifts all ships; unfortunately, that includes the leaky ones. Excess capital on hand meant that companies that were performing at mediocre and poor levels from an efficiency perspective could still grow rapidly. In some cases, investors pressured companies to take more risk and bet on future growth, sacrificing efficiency and, indeed, profitability.

Those days of “growth at all costs” seem to be behind us. As markets sank and capital dwindled, funders took a closer look at their deals. They are now looking for companies that demonstrate the fundamentals of running a scalable SaaS business, with efficiency and a solid path to profitability as hallmarks.

The metrics that matter

To be clear, SaaS companies can’t survive without growth – dominating your space requires it. But growth can no longer happen at all costs, and companies must show certain critical metrics to support faster growth. SaaS companies must track dozens of metrics, but to attract investment in today’s market, companies must address their efficiency metrics, especially:

  • Gross retention, with a goal of 90%+;

  • Net retention, with a goal of 110%+;

  • Gross margins, with a goal of 75%+;

  • Cost of acquisition (CAC), with an amortization target of <2 years

Achieving these efficiency metrics will help companies maintain or exceed their ratings. If you’re already achieving these metrics, then you’ve earned the right to discuss deploying more capital in exchange for growth. If not, consider slowing growth and redirecting your strategy, especially if capital is tight.

Related: Four Ways to Ensure Your Business Survives a Market Downturn

The cost of capital without efficiency

The higher cost of capital can be incredibly expensive for companies that buy time to achieve efficient growth. Beyond tougher funding requirements and depressed valuations, investors are putting more funder-friendly structures into deals with less fundamentally strong companies, including liquidation preferences, voting rights and even board control to reduce their risk. down. Indeed, later-stage companies with excessive failures may have difficulty finding financing on acceptable terms and may have to explore an exit or consolidation. But those who want to hang on and buy time to see better metrics have options.

What can leaders do now?

Start by examining your business fundamentals and evaluating the efficiency of your core operating teams, then adjust to reduce inefficient spending.

  • Sales: Review metrics such as booking pipeline rate (target 4-5x+) and achieving average seller share (target 65%+). This information will focus your efforts and help you find important improvements before simply growing your sales teams without correcting underlying problems.

  • Marketing: Focus on efficiency metrics like your cost per opportunity across all channels, and overinvest in high-performing channels.

  • Product teams: Consider tracking efficiency against a product productivity benchmark and monitor user-per-issue ratios. You can invest more in client features and platform stability on new builds to increase retention and enable higher conversion upsells.

  • Customer success: Examine retention rates across various customer segmentations to understand the strengths and weaknesses of your customer base. Optimize your book of business rep-to-customer ratios and pay attention to customer net promoter scores and other sentiment metrics.

As you adapt, you may need to downsize your teams and adjust the size of your operation. It’s an unpleasant reality, but you need to fill any cracks in your ship before you renew your growth spurt. This can help control your rate of consumption and buy you the time needed to convince an investor that you are on the path to efficiency.

Related: 4 tips to keep your business afloat in a recession

Where is the financing?

Valuations will likely fall short of 2021 numbers, but companies with strong fundamentals will find funding. Companies that correct their fundamentals and need to buy time with capital will find markets more difficult. So where else can you go?

Start with your current investor base. They have as much to lose as you do, and in the case of venture capitalists, they have often assigned “dry powder” for situations like these. They can also behave more dovish, as poor valuations and a larger structure can often hurt their previous positions. Another way to avoid a short-term bearish round is to go higher via convertible notes.

If equity is not an option, rising interest rates have made debt providers more active, creating an opportunity to explore debt financing. If it’s available to you and makes financial sense, debt leverage allows you to raise non-dilutive capital giving you time to achieve better efficiency metrics. However, timing is important, as the debt market can quickly retrace if monetary policies change further.

The positive side of financing

Companies that downsize their operations and rein in their consumption for the coming year could find a funding pool at the end of the proverbial rainbow. Funds with privileges to invest in private technology companies are riding out the troubled market on the sidelines. As the market improves, the funds will further open their checkbooks to companies with healthy efficiency metrics.

Valuations may not have fully recovered by then, but companies will continue to rise at good multiples if they demonstrate strong fundamentals and maintain healthy efficiency metrics along with growth rates. These companies are better equipped to ride out the falling wave and re-catch the rising tide.

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