What Do SaaS Companies Have to Prepare for 2009?

November 26, 2008

A whackload of trouble. (See, I answered my own question!)

As 2008 comes to an end you should be well on your way to planning 2009. And what a year it will be! The economy is in shambles, it’s getting harder to raise capital (and it was already hard!) and customers are freezing budgets. 2009 won’t be the prettiest year ever.

And SaaS (Software as a Service) vendors have to be very careful in their planning and rigorous in their execution of what will most likely be some very difficult plans. Companies will have to cut somewhere, and take a hard look at each employee, business strategies, pricing, etc. Basically: Look at everything.

Mark MacLeod includes a presentation from Bessemer Ventures in a recent blog post to show you what some top-tier venture firms are looking at for SaaS businesses. I’ve included it below as well:

Bessemer 5 Cs of SaaS Finance
View SlideShare presentation or Upload your own. (tags: software-as-a-service botteri)

SaaS Startup Focus Points

The presentation isn’t very long, but here are some highlights of critical importance for early stage SaaS vendors:

  • Valuations are dropping. The top SaaS vendors out there have lost considerable value recently; you can expect that your SaaS startup will be hit as well. Valuations for early stage companies are in the $1-$3M pre-money range, that’s just the reality of the situation.
  • Growth isn’t king. Cash is king, and you’ll need to keep as much of it as possible, even at the expense of growth. Cut marketing spend that’s not driving great ROI. Cut sales people that are not hitting their numbers. You need to get to a month-by-month cash flow positive position as quickly as possible.
  • Churn will kill you. Churn will hurt a SaaS vendor in good times; in bad times it’s absolute doom. If you’re not effectively renewing customers on a monthly or yearly basis you’re in big, big trouble. Bessemer suggests a target under 12%. To improve your renewal rates, focus on building stronger relationships with customers. Invest in customer service, maintain an aggressive tracking policy, hold customers’ hands more frequently and bend over backwards to keep customers on board. That doesn’t necessarily mean slashing prices (which will kill revenue), but great customer service is critical now more than ever.
  • Stay focused on what’s important. R&D is great. New features are great. More capacity in hosting or more scalability are great. But none of them will necessary improve sales (at least quickly), or minimize churn – especially for early stage SaaS providers. Take a hard look at your product roadmap and only focus on the essentials and highest value features. If you don’t know what they are — ask! That’s part of building good relationships with customers too.
  • Don’t turtle. As much as you’re looking for things to cut, and you’re sitting in a dark office plowing through Excel spreadsheets and financial models, don’t turtle and bury yourself in the sand. Get out there and make noise! Build up your presence in the market, especially when others are floundering and customer confidence in competitors is weakening. This is critical for SaaS startups — now is the time to build brand, differentiate clearly, generate PR and attract attention.

2009 will be a tough year.

But SaaS vendors can still survive and do exceedingly well through tough times. The key is to stay afloat, focus less on growth and more on efficiency, proper target metrics and existing customers (look at renewals and upsells!)

Revenue is critical. And generally SaaS companies are better at generating revenue than many others. At least it’s a real business model. Look under every rock at your company. Evaluate and question everything. You will need to be more ruthless and aggressive at times, and more cautious at other times. Hold your cash but don’t roll over and die. Focus on a couple key metrics and work on those metrics daily. And be ready when things turn around — which they always do; by staying lean, improving customer relationships and keying in on critical metrics, you’ll be well positioned for much faster growth as soon as customers open up their purse strings again.

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Tagged as: 2009, mark macleod, saas, software as a service, Startups, valuations

Comments
  • I agree fully, the economy is in such bad shape throughout the world that large business will be looking on how to stretch the dollar further this is why Half Cent Printer Service is here to support you, everyone needs to save since we don't know what tomorrow may bring, and if you’re on a tight budget already the best is yet to come.
  • By Dan D. Gutierrez
    CEO of HostedDatabase.com

    Excellent analysis of an econmic downturn and its effects on our industry. We launched the web's first Database-as-a-Service in 1999, another well known downturn known as the bubble-burst. We managed to survive using many of the tips you highlight. It wasn't easy.
  • All very true i am based i the UK and really think next year is going to be truly dreadful in the UK. Don't think a day goes by anymore without news of companies cutting back.
  • Thanks for the comments. I survived the last tech bubble burst as well (although this isn't exactly a tech bubble burst like 2001 or so) by also focusing on many of the things described above. It was a challenge, but we survived.
  • chuckypita
    Companies have so much to look into in today's turning economy.

    I did agree with your last statement though- there's always room for marketing. The company that is able to pounce on "fear" and turn it into an alliance will prove successful many times over.

    In this type of economy, people are always looking for leadership.
  • I know the economy is struggling, but am I the only one who sees this as a tremendous opportunity? While I am all for wise planning in tricky times, I see these times of economic uncertainty as an opportunity to promote my business in an aggressive way so that when the economy rebounds, my name will be on everyone's lips.
  • I'm happy I'm not in the software business, because you are correct, times are going to become tough for those firms. Inevitably many of them will die, but that will just make it easier for the others to survive.
  • I'm excited in the year of 2009 wondering what changes will happen..
  • We just met with an analyst from Gartner who pointed out that Saas is one of about 6 key trends that are stronger than ever, even with the economy. We have had 3 record months in a row as people are starting to sell remotely more than ever. We are finding an immediate shift from worrying about valuations to cash flow and profitability, both strengths with Saas.
  • @Ken: Thanks for the comment. I think it's time to focus on cash flow and profitability, although if you're raising $$ then valuation is key. And the reality is that you'll suffer on valuation when raising money, there's no two ways about.

    What I've heard is that flat is the new up, and down is the new flat. So if you get a flat valuation from your previous round that's considered a huge win. If you get funded at a lower valuation that's still considered a win.
  • I would tend to agree with Ken. Saas is something I see growing in 2009 but perhaps we'll see something different this year.
  • @Mike: I think the growth of SaaS is inevitable, although it won't be as robust in 2009 with the recession. But with powerhouses like Amazon behind cloud computing, you can't really get away from the overall SaaS model at this point in time.

    When I started in SaaS - around 1998/1999 - companies were afraid of a lot of things - security, stability, paying monthly - but most of those fears/concerns are gone.
  • I know of some companies who are looking at SaaS as a way to cut internal costs by reducing internal system administration and focus on their core business compentencies. In the case of NetSuite, the ERP offering is very appealing ot companies using an enterprise ERP system which may be too big and complex for them. Moving to NetSuite still gives them an integrated system more appropriate for their budget and company needs.
  • David - SaaS is commonly recognized as a way of saving money, as well as spreading the costs of software / IT over time more effectively. Generally I think SaaS can save companies money. I also think they can buy simpler, "smaller" products via a SaaS model and worry less about ultra-long sales cycles and bloat-ware.
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