5 Tips for Thriving in Tech’s Turbulent Times
For much of the last decade, capital has been relatively easy and cheap to access, and (apart from a very unusual few months at the start of the pandemic) the economy has been consistently robust. In 2020, as COVID hit, capital became even cheaper while digital-first became digital-only. Once the world stabilized (somewhat) from the initial shock of the pandemic, the combination fueled growth and incredible excitement within the tech ecosystem, bringing global venture capital funding and unicorn creation to record highs in 2021.
All of that changed earlier this year as interest rates started to rise, increasing the cost of capital, while life began rebounding to something more resembling pre-pandemic life than mid-pandemic life. The result was a “double-whammy” for tech. The overall market is down, and tech is way down, with revenue multiples in SaaS halving from 11.1x in January 2022 to 5.5x in January 2023. Venture funding and exits have halved as well, down 53% and almost 50% year over year, respectively, compared to historical norms.
This contraction is due, in-part, to the increase in the cost of capital and, in-part, because the whole economy feels it. The former means that investments in growth (organic or inorganic) are more expensive, and the latter results in “belt-tightening” across the board. And so, even if you have capital to deploy, your customers are more likely to scrutinize every dollar spent and sometimes have fewer employees to buy software for, slowing sales cycles and increasing churn and contraction – which typically results in slower growth.
If you are a tech founder, executive, or even an employee reading this, you’ve likely already felt these pressures – in some form or another. At the very least, you’ve seen the high-profile news of large-scale layoffs, deep market corrections, and even company implosions.
And so, it is tough out there, but it is not all bad news. Tech valuations have roughly returned to pre-pandemic levels, and the efficiency gains that good software provides are still real. We believe there is still plenty of opportunity to drive both sales and real value for customers.
And there is still capital for companies that are performing and have the opportunity for further growth. Though some are waiting on the sidelines, some VCs are sitting on a record cash pile, and many are still investing. However, they are doing so under a tighter risk tolerance that prioritizes sustainable unit economics and shifting away from “growth-at-all-costs.”
In the end, while the next year or two could prove quite tricky, we believe opportunities await those that can demonstrate growth in rough times. The Great Recession saw the creation of many of today’s largest tech companies, including Airbnb, Slack, and WhatsApp, proving that economic hardship doesn’t diminish a good business model. Inversely, it can prove a catalyst to sharpen focus, improve messaging, tune up GTM (go-to-market) models, and force a culture of capital efficiency that will prove valuable to the company years into the future.
To help you not only survive but thrive in this new environment, we’ve put together five tips for facilitating a smoother ride through this choppy water:
1. Identify or hone your ideal customer profile
In a tighter economic environment, your sales “degrees of freedom” narrow, leaving you with a tighter set of potential buyers. When their budgets are slashed or under pressure, your prospects will be more demanding, and sales cycles will extend. If you haven’t already, we believe you should take this time to identify (or hone) your ideal customer profile (ICP) – and focus on selling to that cohort. Others might have wanted to try your product when budgetary pressures were lighter, but they’re going to be less likely in today’s market.
Step cautiously into efforts to build new markets, and treat your dollars with scrutiny too. This isn’t the time to “sit-on-your-hands,” but it also probably isn’t the time to be wholly speculative. Each dollar spent is that much more costly, and each dollar generated will be that much more valuable – treat them as such, even before you get a “mark-to-market” in a fundraising or exit process. Focus on nailing your ICP first, and then move on thoughtfully.
For companies in the RAC portfolio, the Riverside Revenue Acceleration System (RRAS) can be a great place to start working through your ICP or honing what you’ve got.
2. Polish your ‘war-time pitch’
As your prospects’ budgets tighten, it’s more important than ever to prove and communicate the value of your product. Value might have shifted in this environment (for example, from a focus on speed to a focus on efficiency), so be thoughtful about how you demonstrate return on investment plan to prospects.
Often, this means being able to answer three questions:
- Does this product make me money or save me money?
- Is this necessary or a nice-to-have (aka medicine or vitamin)?
- For which types of customers is it necessary?
If you offer a necessary product that makes your customers money, saves them money, or allows them to do more with less, your business is well-positioned for tougher economic conditions. If, however, the benefits are less clear, there’s a risk that your product will be considered a discretionary expense and face a steeper road to unlocking budget approvals.
3. Prioritize customer success and retention
While your sales pipeline has likely already taken a hit and new business might take longer to close, it’s important to recognize that your existing customers may be dealing with similar internal pressures and re-evaluating how to allocate their spend. Upsell/expansion in 2023 will likely be more difficult than in 2022 or 2021, and even flat contract renewal is not as guaranteed. Sometimes that churn will be from direct adjustments (layoffs = fewer seats or slashed marketing budgets can mean less volume, as examples) and others simply due to pressure from above to cut spend.
Take the time to ensure that your customers feel valued and manage renewals well ahead of the event. By tracking key product engagement metrics and keeping the line of communication open between you and your customers, you can stay attentive to any potential issues and address them in a timely manner – rather than waiting to find out about an issue until after a customer has churned. If you’ve been selling to your ICP and driving value with a renewed focus on existing customers, you might even find opportunities for upsell.
In 2019, we conducted a survey of SaaS companies and found that 67% of respondents pointed to inattentiveness and a lack of access to customer data as the leading cause of preventable customer churn. A proactive approach to customer success can help ensure customers feel like they’re getting good value, even during a downturn.
4. Hit those ‘proof points’
While we’re seeing a global pullback in deal volume, there’s a record $500B in venture capital sitting on the sidelines as capital partners wait for the right opportunity.
So what’s typically key to executing a strong raise at a good valuation? We believe it’s a proven business model and the ability to demonstrate results – especially around all the points above.
Capital partners want to know that their capital will be put to good use, and one of the better ways to predict future growth is to look to the past. Consistent quarterly growth, strong unit economics, and product-market fit could make your company more attractive to an increasingly risk-averse capital partners. In this environment, prudent cash management, alongside those other elements, becomes that much more important. Growth-oriented capital partners want to work with companies that are historically successful.
If you’re looking to raise capital or position your company for an exit, focus on the series of ‘proof points’ that can make your business more compelling. These could be around proving your ability to enter a new vertical or geography, to scale marketing at the right LTV/CAC (lifetime value to customer acquisition cost) ratio, or to build out the right team to take the company from start-up to scale-up.
More broadly, capital partners want to see success in converting and retaining customers, as measured in annual recurring revenue (ARR) growth and gross retention. This is often assessed through revenue milestones: $1M, 5M, 15M, and 50M ARR. While the milestones are seemingly arbitrary, they can make a big difference–with many capital partners using these values as minimum thresholds for considering a deal. They’re changing, though, as the market gets more risk-averse, so maintain dialog with current and prospective partners.
Once again, securing right-sized, non-dilutive capital via revenue-based financing can help you add fuel to your growth engine to hit these proof points and position your company for a larger equity round down the road. Working with a partner like RAC can bring additional strategic resources that supplement capital to help companies achieve their objectives and proof points. Some more information on our resources can be found on our website.
5. Keep your employees motivated
Employee morale can often plummet during turbulent times – especially if you’ve had to downsize, implement hiring or budget freezes, or slash bonuses.
Even your top performers may struggle. Your top sales reps are facing an uphill battle to close increasingly price-conscious companies – likely while dealing with fewer inbound leads and greater pressure from the top – and your customers are likely getting more demanding. Equity compensation could be worth less than it would have been 18 months ago, and commissions are likely lower too. Even if compensation is holding up and equity remains valuable, your go-to-market team is almost certainly facing tougher challenges and hearing ‘no,’ more often. It likely won’t take long before they start to feel it. Keep up team morale and remember that you ARE a team – enable employees to support and encourage one another.
And at the same time, don’t forget about company culture. The last three years have introduced many changes to your company and team, likely including a temporary or permanent switch to remote work. In this transition, company culture often becomes a shadow of what it used to be. Team social events are replaced with packed days of Zoom calls; casual conversations are replaced with emails and Slack messages. Consider how your company culture translates to an online environment and look for ways to keep your employees engaged and valued. Even though you need to watch costs, don’t be penny-wise and pound-foolish. Find ways to spend smartly to keep your team happy and engaged. Otherwise, they may start to dust off their resumes.
While no one can say how long the current market dynamics will last, we believe the future will reward those companies that can demonstrate capital-efficient, focused growth in good times and in bad. If you can grow while managing cash tightly today, you should be able to make every additional dollar count that much more when cash becomes abundant once again. If you can hone your ICP and tune your pitch in tougher sales cycles, you should be able to move that much faster as budgets open up again.
By working within their cash confines and bandwidth, entrepreneurs can extend their runway, increase their optionality, and position their company as a more attractive partner or acquisition target (or inversely, prove the ability to scale without additional cash). Efficient capital allocation also means you’ll have a larger safety net if that anticipated raise takes longer to close or a key customer churns. It’s all about hoping for the best but planning for the worst.
Just like we saw a host of now-unicorns emerge from the 2008 financial crisis, we expect to see a new wave of tech giants appear over the next few years: real unicorns built on solid unit economics and sustainable growth.
For companies looking for capital-efficient growth while deferring a valuation until economic conditions improve, non-dilutive growth loans (revenue-based financing) can provide access to the necessary capital, right-sized for their stage and situation.
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