The #1 Thing To Do When Times Are Harder

So as we’ve talked about many times on SaaStr, tougher times are here for many, but not for all. The pain and the so-called “downturn” isn’t evenly distributed.  OpenAI, Stripe, Palantir, Cloudflare, Monday, Shopify, HubSpot and more are on a tear. ZoomInfo, Zoom, Bill and other leaders we love are hitting some of the same headwinds many startups are. It just really varies.

We’ve written a lot of I think good advice on SaaStr over the years on what to do in Tougher Times.  Here are some of our favorites:

• Try Micromilestones to Push Through Slower Growth
• You Just Gotta Push Through the Tough Times. It Always Pays Off.
• What to Do If Your Business Decelerates

But if I had to summarize all of it, it’s this: Just Do Better Than Last Quarter

So the other day a CEO reached out to me about advice on an acquisition.  They wanted to do three things:

• Enter a space they had no product or customers in today; and
• Add on at least $10m of extra revenue for the year; and
• Not add too much to their burn rate.

So this CEO really wanted to buy a startup at around $10m ARR, that actually wasn’t remotely close to #1 in the space, and wasn’t growing anymore. I’d actually invested in the #1 in the space, which today is at $200m+ ARR. So I knew the space fairly well. But the CEO really wanted to enter this adjacent space to their existing product line.

So in the end, they bought this smaller competitor that was at $10m ARR … but growing basically 0%, albeit cash-flow neutral. But barely growing at all. And they paid effectively about $80m for it.

Is a SaaS startup at $10m ARR growing basically 0% objectively worth $80m today? No. It might be worth close to nothing based on a DCD analysis. No VC would touch this startup for a Series B round. No VCs at all. Even a PE firm wouldn’t buy it with no growth at all, I don’t think.

But sometimes, a bigger player really wants to enter a space for strategic reasons. And the #1 and even #2 players are just too expensive, and/or too complicated, to buy.

This edition of the SaaStr Daily is sponsored in part by Cisco

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“Doubling Down” is a new series where we hear from top B2B SaaS investors on their most recent activities and takes on the current market. We had a great one last time with Lucy Deland, Co-founder & General Partner at Inspired Capital. Check that out here.

This week we’re focusing on Luci Fonseca, Partner at Base10 Partners!

I think in SaaS, it’s when you have a handful of customers, and they are happy, and it’s been 9+ months … and you are growing, but slowly.

If you have no customers, it’s not really a pivot or tilt, it’s a restart.

But in SaaS what can happen sometimes is you are close to a product the market really wants, close, but not quite there.

You’ll close a handful of customers, and do whatever it takes to make them happy. But even after 12, 18 months the demand won’t quite be there. You’ll be growing a little bit, but not enough.

It’s a frustrating time. You may have a 60 NPS and a neat piece of software, but you are stuck at $10k, $20k, $40k a month and not growing much.

The good news is you are usually close-ish. Oftentimes, you just need to build something broader. Or deeper. In the end, often something more valuable. A bit more a solution. And/or, a bit closer to a version of the solution that is close to a bigger pain point.

Take a pause and listen. Your prospects, the deals that almost close, will have some of the answers. So will your existing customers, who are happy, but aren’t buying more.

Then go built that tilt, and make your existing customers even happier. You can get there. At least, if you want it badly enough.

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You don’t. Instead, you drive it down. Each quarter.

You can’t eliminate churn. It’s a fact of business life in selling a product with recurring revenue and thus recurring sales. You can hide churn (e.g., by signing multiyear contracts). And you can drive it down. But you can’t eliminate it.

My top suggestion is:

• Measure churn carefully, and consistently.
• Then segment it. Usually into Small, Medium and Large customers. Usually, your smallest customers will churn at the highest rate.
• Then set quarterly and annual goals per segment.
• And set a big annual goal to drive churn down say 20%.

Assign owners to those goals, and make driving down churn in the aggregate a Top 5 company goal.

This drives churn down, almost always.

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