TL;DR

  • On February 5th the entire tech/SaaS industry got a wake up call: public cloud companies collectively lost $28B in market value on a single day.
  • Valuation models have changed: markets are rewarding software companies with sustainable growth + a path to profitability
  • How tech companies navigate this tectonic shift will determine the success (or failure) of their businesses

By now most people have heard the news: On February 5th the entire tech/SaaS industry got a wake up call: public cloud companies collectively lost $28B in market value on a single day. 

Even Linkedin (LNKD), a company that did $3 billion in sales last year, got hammered from $205 to $100 per share. So for Linkedin, the week looked like this:

  • Feb 1 valuation: $24 billion
  • Feb 9 valuation: $11.8 billion
  • Market cap incinerated: $12.2 billion

To put that another way, Linkedin lost the equivalent of Nicaragua's GDP in a six trading days.

What the hell happened?

Answer: the way your company is valued, changed—particularly for high-growth, SaaS, cloud-based tech companies. Markets are rewarding software companies with sustainable growth + a path to profitability

How did the overall market perform?

  • the S&P 500 was down 5.9% in the three months ending 3/1/16
  • if you look at the light blue and red lines below, you'll see that certain software and SaaS companies were down 26.2% and 24.1%, respectively

Okay, so that happened. But what does that mean going forward?

  • for starters, cash is king. For emphasis, cash is king.
  • these companies are moving (very rapidly) to reduce costs
  • these companies are moving (very rapidly) to improve cash flow

Why are they doing this?

  • to avoid imminent failure
  • to earn a better valuation (see: below chart)
  • the market is clearly awarding higher EV/Sales valuations to companies that expect to be free cash flow positive within one year

And finally we get to the meat of the discussion. What is one to do in navigating this unique—but not unprecedented—market environment? At DBT Ventures we don't try to boil the ocean, but rather focus on four pillars of business:

Ideas

  • Given the market challenges, a CEO would be wise to prioritize ideas that enable your business to 1) reduce costs, or 2) increase output.
  • Focus should be placed on "getting back to basics" and doing the simple things to perfection
  • Company first, team second, individuals third

Data Science

  • Increase data science effort on unit economics, specifically Customer Lifetime Value and empowering your account teams to understand the economic tradeoffs between how they spend their time (company money) and revenue (customer money).
  • It's a great time to kill exploratory projects and double-down on DS initiatives that are closely linked with tangible business value, e.g. prospect's likelihood to buy, customer's likelihood to churn/expand
  • Perform outlier analysis on all company-wide expenses to identify areas of bloated budget with lackluster ROI

Customer Success

  • Scale, scale, scale—alleviate the dependency on 1:1 support engagements
  • Get a tattoo: scaling ≠ hiring
  • Prioritize roles with higher output metrics with an emphasis on automation and 1:many deliverables, e.g. virtual trainings, online resources, personalized email drip campaigns
  • Attack churn proactively to reduce the headwind on top-line growth
  • Set a goal to reduce CRC to 10-15% of revenue, or less

Leadership

  • Adversity is an excellent opportunity to exude strength, resilience, and adherence to your cultural values and ethics
  • Give merit based comp adjustments to top performers to reduce the risk of attrition
  • Take the extra time to celebrate wins as a function, team, department, and company—this investment will help improve dour morale
  • Reward AEs for contracts with payment upfront which will help cash flow
  • Overcommunicate. Do not turtle shell. Your company needs you now more than ever
  • Recognize that "constraint yields creativity" and "necessity is the mother of invention" such that you green-light projects that improve scalable output
  • Lead by example: now is not the time to be lavish or spendy
  • If your goal is to go public, recognize that the median revenue at IPO is $83 million—set goals to achieve this number while imparting a sense of urgency at the executive level. Mindset: "the last round of funding was our last" given VC money has become more stringent.

Go forth and prosper.