A Quiet Plan B For When The Good Times Are a Smidge Less Good
The other day Mashable had an interesting post featuring SaaStr Annual ’15 and ’16 speakers Parker Conrad of Zenefits and Stewart Butterfield of Slack. Both, with a little scar tissue from the ’08 and ’01-’04 downturns, respectively, saw their recent Unicorn fundraising as not just opportunism, a chance to grow even faster, crush the competition … but also … as insurance.
As Stewart Butterfield put it – “Literally we will be in 2056 before we run out of money.”
That’s pretty reassuring to any of us that were around in ’00-’04, or ’08-early ’09, or heck, even back in ’93-’94:
These days really are the Very Best of Times for SaaS. Maybe valuations will go up another 2x. Maybe unicorns will grow even faster. But even if they do, it won’t be that much better, it won’t feel that much better. Companies may grow even faster, valuations for Super Hot startups may grow even higher. But going from 9.6 to 9.9 on the Best Of Times 1-10 scale won’t feel that different. It’s just soooo much better than any time I’ve been in SaaS since ’05.
Any yet … we all know really, it can’t last, not at these levels. Or at least, the bull run has to come to an end. It always does, it always has, and it will again.
No matter what, the best SaaS companies will continue to grow faster than ever. Amazing new startups and technologies will continue to be born. But the unprecedented multiples we’re seeing, which breed all these unicorns — they probably can’t last. I mean, does it really make sense that Salesforce is only worth 15x Slack? Is Workday really only worth 4x Zenefits? Really? I mean, not unless the entire world truly, really has changed. Not unless all the private SaaS unicorns really deserve such higher multiples than their public compatriots.
So at some point, startup valuations and multiples will come down. That means funding will get harder. That means startups will have less to spend, because burn rates will have to come down.
Ok, ok, you say. Gravity is inescapable.
But so what?
I remember when I was called up in ’08 (when the world had ended, in global crisis) to talk about what to do with one of my investors. Had I seen the “Sequoia Memo”? Of course I had:
And it was useless for me in SaaS.
So my answer was: Nothing. No change. As a post-Initial Traction SaaS company that was reasonably capital efficient — there was nothing to do in a downturn. We had to keep growing. We had an efficient sales model. We still had $3m in the bank. Nothing’s going to change, except maybe we’ll hire a little more slowly (which we didn’t), and maybe we’d get to cash-flow positive more quickly (which we did, for better or worse … probably a mistake with hindsight).
And even if you’ve leveraged a high valuation — the beauty to SaaS is you can grow into a valuation pretty easily, just given time. If valuations fall 50%, and you grow say 125% next year … maybe you’re just back to where you were last year. That’s OK. The world won’t end.
And once you are at Initial Scale ($10m+ ARR), you really can just “dial it back”. I remember in early ’09 being on a panel with the CEO of Eloqua. He said they’d gone profitable for the first quarter ever as a reaction to the financial meltdown. How? Just hired less in sales, and spent less in marketing. It probably hurt them long-term. They didn’t invest for growth. But it also was a simple, “easy” plan B to implement once you are post-Scale.
So really, Plan B just has to do with money, cash burn, and cash reach.
I’d break things up into 3 types of SaaS companies:
- Lean, and pre-Initial Traction (pre-$1-$1.5m in ARR): No need for a Plan B. You need every single resource you have. Keep doing what you are doing.
- Fat, and pre-Initial Scale (<$10m in ARR). These are the ones I worry about. Somehow, a lot of founders in Hot and really pre-Hot SaaS companies have come up with some magic metrics about how much they can lose per employee. So the more employees they have, the more they lose. A lot of SaaS startups around $2m in ARR are losing >$400k-$500k or more a month, if they are well funded. This is where the crunch will be.
- Fat or Skinny, post-Initial Scale ($10m+ ARR). As with the Eloqua example above, I say no need for a Plan B — you really can dial back without layoffs or much drama if things get worse — but … raise more money. Do what Stewart and Parker are doing. Take the little bit of extra dilution (it’s cheap, anyway) and put away another 12 months of runway.
To that second group — a few million in ARR, burning $5m+ a year … congrats on the funding … but you do have some danger.
You may want a Plan B. That Plan B will be either to grow even faster, get to Initial Scale ($10m+ ARR) even faster, and grow into that third type of SaaS company above. I like this Plan B.
Or understand how, and if, you could cut half the company in your Fat, pre-Initial Scale SaaS start-up if you don’t get there quick enough.
Bear in mind though — cutting people and scaling back is just terrible in SaaS. This is the real risk with the Fat Startup that isn’t yet at $10-20m+ ARR. If you ask anyone senior at Salesforce what the company’s worst strategic mistake was, they’ll tell you it was underinvesting in hiring in the ’08/’09 downturn. Since SaaS compounds, if you take a year or two off in pushing the pedal to the metal — you lose so much growth on the back-end.
But at least knowing how Plan B can really work, in the back of your mind, may help your sanity just a smidge.