“When Will The Enterprise Technology Market Slowdown End and How Do The Best SaaS Companies Manage Through It” Part 1: An Update on the Software Market

Times are tough for mid-market SaaS companies. With unstable market conditions and competing predictions as to when the economic conditions will level out, many organizations are struggling to chart a path forward. Even those who, prior to the slowdown, were confident in their ability to drive value are now realizing that what worked before simply won’t work now. To stay afloat and push through, these enterprises need new strategies for ensuring an upward trajectory towards their ideal valuation. 

Designing and implementing these new strategies isn’t always easy—it’s more than just the flipping of a switch. In order to continue to meet their goals and promote an image of strength and profitability, attitudes will have to be changed, priorities realigned, and sacrifices made. Luckily, in the face of difficult decisions ahead, Akmazo Capital wants to provide guidance and insight from some of the best minds working in the market today.

This is why we hosted our latest CXO Roundtable, entitled When Will This Enterprise Technology Market Slowdown End and How Do the Best SaaS Companies Manage Through It? Held on October 11th, this was the latest in a series of conversations we’ve hosted that dive into the unique challenges and opportunities that SaaS businesses encounter in the current climate. Led by Akmazo Chairman and Founding Partner Jaime Ellertson, this event brought together Peter Falvey, Managing Director of Shea & Company; Scott Landers, two-time CEO and CFO; and Bart Cloyd, CFO of JRNI.

Each of these three speakers came to the table with a unique perspective on where the SaaS market currently stands, and where it might potentially be going. More crucially, they each offered concrete and actionable advice for C-level executives at these organizations to not only endure any hardship in the future, but to continue increasing the value of their enterprise: dynamic solutions for material results. Just a few of our key agenda topics included:

• What is the general environment for mid-market SaaS today?
• How have valuations of mid-market SaaS companies been affected?
• When will this enterprise technology market slowdown end?
• How do the best SaaS companies manage through the downturn?
• What are the most important metrics to track going forward?
• How do you get team buy-in for difficult budget decisions

For those who were unable to make the roundtable in person, we’re pleased to present our three-part Roundtable Recap Series. In each installment, we will provide an in-depth look at the subject matter covered by one of the speakers, so you can leverage all of the insight shared with our live audience. 

In this first post, we will be discussing the session hosted by Peter Falvey, entitled SaaS Market Update.

Where the SaaS marketplace stands

In his session, Peter Falvey set the stage for exploring the economic conditions of the moment, giving guests a picture into the current state of the market and when this downturn might alleviate. 

Unfortunately for those looking for an easy answer to the second question, Peter doesn’t believe there is one. While everyone wants to be an optimist and forecast a turnaround on the horizon, this attitude hasn’t born out as well as many hoped in the last 18 months. As a result, Peter believes, companies can’t just bank on this being a temporary setback. They need to work quickly to address the biggest reality facing them right now: with a soft market, valuations, IPOs, and investments are all down.

That means that conservatism will be key for the future. Businesses need to make sure they have plenty of cash runway to sustain them for the coming months, which demands that these organizations take a serious look at their spending and see where they’re actually getting substantial revenue return that’s supporting their profitability.

While this may seem obvious, it also flies in the face of how a lot of these enterprises had been operating up until the slowdown—and some even well into it. In the past, SaaS organizations often operated with a mindset of growth at all costs, putting actual profitability in the backseat. This attitude, that SaaS companies are designed to lose money in their youth while demonstrating their growth potential to investors, was widely accepted as the way to do business. Not anymore.

In order to catch the eye of investors now, SaaS companies need to focus on a “growth-while-remaining-profitable” approach—one cannot come at the expense of the other. Now, this naturally means that that growth rate will likely slow down for most enterprises. If in the past, you grew at a rate of 50%, you might only be able to manage to grow at 30% now. However, if you’re demonstrating that, alongside your growth, you’re accumulating sustainable, long-lasting value, investors won’t be troubled by the decrease in overall growth.

Then vs. Now

In order to easily visualize how attitudes need to change, Peter provided the roundtable audience with a simple chart addressing what businesses might have valued in the past, versus what they should be valuing in the current market. As he puts it, these are the key themes driving market valuations at the moment:

Yesterday	Today
Growth, Growth, Growth: It doesn’t matter if you’re profitable, as long as you’re growing.	Profitable Growth: In order to demonstrate value, growth and profitability must coexist. If the former needs to shrink to accommodate the latter, that’s what must happen.
TAM Size: The value of your solutions. can be judged by the total available market	Mission-Critical Solutions: When money is tight, businesses spend less on “like-to-have” solutions. The products that drive your value will be the “must-haves.”
Net Retention: Your growth factors into how investors assess your revenue stream.	Gross Retention: Growth is no longer the priority, so revenue should be judged without factoring in potential growth metrics.
Revenue is Revenue: All deals are good deals and money is money.	Not All Revenue is Created Equal: You can’t expend resources chasing short-term revenue streams. The deals that matter are the ones that will continue to pay out. This means diligence is more important than ever.
The Easy Approach: You can execute M&A roll-up utilizing cheap capital.	The Strategic Approach: Focus on strategic M&A with real revenue synergies.

Top Things CEOs Can Do to Prepare in 2023

Knowing the trends is one thing, but finding ways to put them into action is another. Especially for C-level executives, finding ways to effectively adjust their approach to business in time for it to actually make a difference is front-of-mind. For those looking for tips, Peter offered the following:

Diligence Ready Now	Understand Your Retention	Pipeline and Forecast Scrutiny	FP&A
Are you familiar with diligence request lists from sophisticated strategic and financial buyers? Do you have your legal and accounting house in order? How fast could you populate a data room if necessary?	Can you realistically get to 90%+/100%+ gross/net retention (preferably 110%+ net)? Do you have any big contracts coming up for renewal that you can get in front of? Are there any contracts you can convert to annual from monthly or quarterly?	Can you show pipeline coverage and conversion over time? How have cost cutting efforts impacted your ability to deliver numbers (e.g., if you cut S&M expenses, you can’t expect revenue growth rate to increase)?	Do you have a strong FP&A capability to support a driver based operating model? Do you have a weekly, monthly cadence to review actuals against budget, prior year and an operating model to forecast?

Understanding changes in the market is then first step to success

It’s easy to catastrophize in the face of turbulent market conditions, especially when no one seems to know how long those conditions will last. But, while the current economic environment does present challenges for mid-market SaaS companies, it doesn’t necessarily have to torpedo their hopes for valuation and increasing profitability.

As Peter Falvey explained, the key points to understand are how the economic climate is forcing businesses to adjust their priorities and how investors gauge the value of an organization. If your company is able to act quickly and adapt to these new expectations, this downturn needn’t spell disaster.
We hope you’ve enjoyed this first post in our Roundtable Recap Series When Will This Enterprise Technology Market Slowdown End and How Do the Best SaaS Companies Manage Through It? Tune in for our next installment, in which we’ll break down Scott Landry’s advice on how to operate within the market conditions described.