Categories Articles, SaaS

If you’ve been paying attention to the world of Venture Capital in the past few weeks, you may be feeling anything from mild concern to a full-blown panic attack.

Yes, it’s true — there has been a downward market correction. To be more specific, SaaS valuations have dropped 57% and 77% of VCs believe funding will take longer than it has in the past. We all knew the insane acceleration of SaaS growth couldn’t last forever, and we have to adapt to this new reality. Just take a deep breath, and stay calm.

A slowdown in funding does not mean there’s a SaaS bubble, and it will not cause companies to fold overnight. However, it does mean that the way growing startups operate has to change. In a down market, the key to business success isn’t rapid growth — it’s survival.

No one knows this better than SaaS VCs themselves, many of whom predicted the slowdown long before it happened. The top VCs are already strategizing with their portfolio companies to help survive this tough funding climate, and come out ahead on the other side.

In a down market, the key to business success isn’t rapid growth — it’s survival.

The reasons behind this slowdown are numerous. What you really need to care about is what your business should do now. As a SaaS business leader, pay attention to advice from VCs and make adjustments to your own business strategies. Don’t stick your head in the sand and ignore the realities of the market — take action now and ensure your company is one that perseveres.  

Forget About Your Valuation

If your company has been lucky enough to reach unicorn status, you may not be part of that exclusive club for much longer. Down rounds have become the norm, valuations are dropping rapidly, and there’s nothing you can do to stop it. In the past few years, valuations were incredibly overinflated and the billion-dollar club grew at an exponential — and unsustainable — rate.

2012

2013

2014

2015

Startups Valued at More Than $1 Billion

10 Startups
15 Startups
38 Startups
71 Startups

Source: CBInsights

That dollar value, unfortunately, doesn’t mean much anymore. Heidi Roizen, Operating Partner at DFJ Venture, worked in Venture Capital during the dot-com bust, and shared some of the painful learnings from that experience. In a down market, she said, you have to forget about the excitement of the past, and make a plan for the future survival of your company.

Stop clinging to your valuation.

Heidi Roizen
DFJ Venture

“Stop clinging to your (or anyone else’s) valuation,” she advised. “ You know what somebody else’s fundraise metrics are to you? Irrelevant. You know what your own last round post was?  Irrelevant. Yes, I know, not legally, because of those pesky rights and preferences. But emotionally, trust me, it is irrelevant now.”

Roizen said startup leaders must redefine their definition of success, and accept the adjusted value of their company, instead of clinging to a unicorn label. What matters more in today’s market is how your company performs overall. Start measuring yourself by the numbers that matter today, not yesterday.

Lower the Burn Rate

It sounds incredibly simplistic, but because money is now tougher to raise, startups have to spend less money. In the past few years, hyper-growth startups were purposely spending far more than they made in order to keep up in a highly-competitive, growth-focused market. However, that’s no longer the situation. If startups continue to have such a high burn rate, they’ll quickly find themselves with nothing left, according to Mark Suster, General Partner at Upfront Ventures.

“The hardest question to actually answer is, ‘What is the right burn rate for your company?’ and if anybody gives you a specific number, I would be a bit skeptical because there is no universal answer,” he said.

He explained that your burn rate should be directly correlated to your access to future funding, the round you’re raising, your relationship with current VCs, and your appetite for risk. But for most companies today, instead of ramping up hiring, increasing marketing spend, and investing in technology, SaaS leaders should be cautious. Don’t push for rapid growth, slow your spending, maximize profits and — if possible — become cashflow positive.

Change Your Growth Goals

Less money pouring into SaaS means less growth, no matter how you shake it. If companies focus on becoming profitable and spending less money, it logically means those companies will grow at a much slower rate. But that’s ok, according to Tomasz Tunguz, Partner at Redpoint Ventures.

We may be entering an era when 50% annual growth is the norm.

Tomasz Tunguz
Redpoint Ventures

“We may be entering an era when 50% annual growth at cash flow breakeven is the norm, rather than 400% annual growth, burning multiples of revenue,” he said. “Many software survivors of the dot-com crash pursued a more conservative strategy and were rewarded for their prudence. From 2001 to 2007, Concur grew between 0% and 35% each year. It took the company nearly five years to double revenue from $35.7M in 2000 to $71.8M in 2005, but they were nearly cash-flow break-even throughout the period. Ultimately, Concur sold for $8.3B.”

Tunguz warned that startups operating this way have a much tougher journey to success. It takes much more work, over a longer period of time, to reach the same amount of revenue. However, if this funding environment continues, there’s simply no other way to operate.

Prepare Your Team

Your employees are probably also paying attention to the markets, and they’re aware of what it means to the company. Whether your company is about to have a down round, or you’re struggling to raise money, transparency is always the best option, according to Ajay Agarwal, Partner at Bain Capital Ventures.

“This may be the hardest challenge, given how actively some startups pursued unicorn status to accelerate recruiting efforts,” he said. “Now, despite two years of massive progress and growth, you need to tell employees that the next round may be flat — and convince them the company isn’t losing market momentum. It’s important that your employees understand the cost of capital will go up and down based on market dynamics (not just company performance).”

Honesty is key, because you don’t want to lose some of your best employees due to a misunderstanding. VCs understand that the market will fluctuate up and down — it’s just the nature of the market. However, your employees may know just enough to be worried, but not enough to have perspective. Make sure you give them the right perspective on your changing business strategy.

Convince them the company isn’t losing market momentum.

Ajay Agarwal
Bain Capital Ventures

While it might seem like doom and gloom, we’re all in the same boat. Even if your SaaS business grows more slowly, at a lower valuation, and with less funding, so is everyone else’s. It’s survival of the fittest, so adjust your expectations, make the right changes, and your business will survive.  

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