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.
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.