OK, so this I think the first negative, or at least “bummer” post, I think I’ve ever written on SaaStr in 8 years. We’ve been through ups and downs in SaaS since 2012 (the start of SaaStr), flash crashes, multiple contractions, as well as the crazy bull run of 2020.
And almost entirely, I’ve tried to stay out of Debbie Downerisms. That stocks are overvalued, that SaaS unit economics don’t make sense, etc. First, as a SaaS CEO myself, I didn’t believe any of that stuff. And second, so what? So what if valuations are too high? As a founder, it’s just a variable. And in any event, recurring revenue recurs. Keep your head down, and your customers happy, and in SaaS we can plow through almost anything. Even a global pandemic.
And every single SaaS company I work with or invested in had a better July. July was good for SaaS.
But this is the first “Sky is Falling” post on SaaStr, but only for a very specific reason — 2021 Planning. In SaaS, we will all be fine. But we aren’t all, IMHO, planning for next year yet properly.
It’s time to start. We’ve gone through 5 phases of change since March 15 (more on that here), and now, it’s the New Normal. You know your new growth rate, your new retention rate, your new churn rate. It’s repeating again, and it’s time to calmly plan for 2021.
First, start with an L4M plan. Take the average of your trailing growth rate for the last few months, and roll it forward into 2021, and see what you see. That can be your base plan to start, for both top line (revenue) and burn rate. More on that here:
Second it is the harder part — the conservative plan and assumptions. Cloud is on fire. Shopify, Zoom, Zoom Info, Datadog, almost everything is on fire.
But this one time, this one year of the past 8+ at SaaStr, I want you to be even more conservative in your planning for next year than the numbers right now suggest.
Why? I think it’s going to get a lot, lot harder in the coming months:
- The U.S. isn’t coming out of this pandemic until Q3 ’21. We didn’t do the right things, we’re crossing 5m cases, and it’s too late now. Well, it’s not too late, but we lack the will to change things. So we’re gonna have to ride it out. And that will take another year.
- Every airline without government support will collapse. U.S. support ends shortly. Outside of the U.S., bankruptcies are already picking up storm. No one is buying airplanes anymore, either, which is huge part of our economy with 1,000s of suppliers and 100,000s of jobs that will all disappear.
- Much of retail will be bankrupt. Already, it’s Neiman Marcus and Men’s Warehouse and Lord & Taylor but that is just the start. Much of retail simply will not survive our economy shutting down for 18 months.
- Tourism and entertainment are going bankrupt. Our holiday hotels and cruise ships and destination travel aren’t coming back soon enough. It will be over a year. That’s too long. The spiral here has only begun. This is an enormous amount of our global economy.
- Offices in tech aren’t reopening for a long, long time. Every business that relies on this is under severe pressure now, and so many will be bankrupt soon.
- Downtowns will shut down almost entirely soon. Restaurants won’t make it in the winter, with nowhere to eat outside. All the stores will close. Downtown is going to be boarded up.
How much did you drive in July? Me — only 84 miles.
So, not to be too dour. You can challenge some of these assumptions. SaaS overall is going to continue to outperform and be fine. We’ll get better at treatments and testing. But I think as CEOs, as founders, we have to plan September 2021 as the return to Normalcy. At least for financial planning.
So what are my suggestions?
- First, maybe model a material uptick in churn going into next year. It may not come, but it’s only prudent. Trillions of government support is ending soon. It can’t hurt to model a return to a higher churn phase next year. (Just don’t let the team off for high NPS!)
- Second, raise that extra 20%. The “war chest” idea I don’t completely get, but this may be an exception. If you can quietly raise another 9-12 months of runway that isn’t too dilutive, I’d do it now. Just to reduce stress here.
- Third, maybe model more pricing pressure from CIOs next year. CIOs have been in cut-cut mode, but also a “hurry up and spend on collaboration and security mode”. Aaron Levie and I just chatted on that below. But once the collaboration software is all purchased and deployment, cut-cut will come back as #1, #2 and #3 priorities. It has to, if your customers’ customers are under severe stress.
SaaS and Cloud can’t escape the mass bankruptcies coming. Recurring revenue is real and powerful, and can power us through even an 18 month rough patch. It certainly did in ’08-’09.
But it’s not rational to plan that we’ll be out of this in the U.S. before September 2021. We can look over wistfully at our friends in Europe, and Canada, and Taiwan and wish. And wish we’d done that.
But we didn’t. And we need to plan for well, not just another 13 months of this. But at least as a base plan, of it getting worse in 2021 before it gets back to a real normal. That’s just our job.
(Ok, after that, back to our regularly scheduled Positive Programming. We need it. This is all hard enough as it is.)