Getting to Initial Traction

How Awful It Was in ’08-’09 … And What We Learned

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Jason Lemkin

I don’t know if you’ve noticed, but recently, the public markets have been in a bit of turmoil.  Or at least, under a bit of pressure.

Below is the other day, on the left.  And ’08 on the right.

Screen Shot 2016-01-07 at 5.10.16 PM

In the grand scheme of things, all we’ve seen recently is some (non-trivial) volatility:

Screen Shot 2016-01-15 at 8.12.05 AM

Still, for now at least, it seems like Summer ’15 was a local maximum.  May 10, 2015 in fact.  The highest valuations, the fastest venture deals, the most manufacturing of Unicorns.

But look at the chart above.  What’s happening right now is just a blip, folks.  But it may be an extended blip.  We don’t know.

I think if you are anxious about ’16, anxious about Unicorns, or even Just Plain Anxious (as most of us founders are), it’s worth looking back on a truly horrible time in SaaS: ’08-09.  You can’t imagine how bad it was if you weren’t running a company and exposed to the economy.  The world had ended.

I mean ’01-’02 was really horrible, too.  But only for those for us doing Dot Bombs.  The rest of the world was just fine.   In ’08’-’09, everything was just unfathomably terrible.

And here’s what we actually learned.

A few key learnings:

  • Yes, the funding market kind of shut down.  VCs were petrified.  I remember meeting with one VC in late ’08 who said to me “at least I have my management fees.  What are you going to do?”  Dude.  Another said to me “We finally got back to what it was like in the Good Old (Web 1.0) Days.  What am I going to do now?”
  • The world almost shut down.  My banker from the largest bank in the friggin’ world (at the time) called me.  He told me I had to take half of our corporate cash out of the bank and put it somewhere else.  He was worried they’d freeze my account on Monday.  That the bank would fail.  I said — if the biggest bank in the world is going to fail, freeze and need a bail out — then … where else am I gonna put half.  In my mattress?
  • Screen Shot 2016-01-07 at 5.35.00 PMDreamforce was crickets.  Dreamforce ’08 was surreal.  All the vendors were there.  The booths were already paid for.  But everyone thought no one was ever going to buy.  It was like theatre.  Just going through the pretend motions of meeting non-prospects.  Or like a quiet joke no one wanted to acknowledge.
  • Everyone stopped hiring.  Instantly.  In SaaS almost everyone slammed on the brakes.  Including Salesforce.  (And everyone regretted it later.  See below.  Including Salesforce, if you asked them.)  In fact, in many cases, it actually made many SaaS companies cash-flow positive for the first time.  Stop paying for new leads and hiring, just focus on existing customers and organic leads, and your CAC plummets.  Just so does your growth.

And yet.  And yet at that terrible, terrible time.  When my heart sunk every time I saw CNN while running on the treadmill at the gym …

  • Customers still renewed in SaaS.  Really, almost all of them.  Now — some went bankrupt and under fast.  We lost a lot of customers that simply imploded.  But I think 100% of our customers on annual contracts that didn’t fail renewed.  100%.
  • Upsells didn’t 100% collapse.  Even then, land-and-expand worked.  Not nearly as well.  Budgets were under intense scrutiny.  But we still upsold.  Product footprints still expanded.
  • Pricing came under real, but not unbearable, pressure.  Some of our customers tried to negotiate pricing down at renewals, and we took a hit.  But it didn’t really matter.
  • One-year and multi-year deals provided a real buffer.  Monthly, very-small business customer churn went way up.  But by the time deals came up for renewal, in many cases, the world was still utterly, unfathomably terrible.  But it was slightly stablized.  Pre-paid cash and deals helped a lot.
  • In the end, all that happened was in many cases, we grew a bit slower — even with an entire global meltdown.  That’s the sum of the above 3 points.

So ..

Yes, if your burn is high, and you can only survive as a unicorn … worry a bit.  Things maybe are a little shaky at the moment.  We’ll see.

But otherwise.

Keep calm.  And carry on.

In SaaS, if you are post Inital Scale, or even just post Initial Traction … and it’s real … and your net revenue churn is negative … it will all work out.  Just fine.

 

Published on January 8, 2016
  • Tom Hresko

    Excellent historical perspective!!. Having work through the nuclear winters of software sales in 01/02 and 09/09, I will attest to Jason’s comments. The strong basics of SaaS sales, taking care the customer base and selling solutions that help the customer will always prevail.

  • My oldest company, Parallax.com, had been running profitably for 18 years. Not much changed. And at my then-current in 2008-09 company, Engine Yard, we were thankful that Ruby on Rails was growing so fast and we had already closed a nice Series B, that we barely felt anything in the Financial Crisis. We were lucky, I think. Ruby, Rails, virtualization, SaaS, everything we did was new and growing. Thank goodness!

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