Ways to keep your business moving forward in a time of economic uncertainty. As the end of January approaches, the barrage of content about tech predictions finally begins to drop off.
We usually look forward to “Trends Season,” however, 2023 provided a gloomy outlook for the tech industry. Insiders — Tom Tunguz’ 2023 Predictions, CB Insights’ State of Venture Report and Tech Trends 2023, and Pitchbook Data — expect the venture capital fundraising market to thaw, but at materially lower multiples than the first half of 2022, leaving many startups high and dry when it comes to growth capital.
On a positive note, the year of sobriety ahead of us provides an excellent environment for relevant and disruptive new startups, since tougher markets demand better product-market fit. Boom cycles often begin this way.
The bottom line: 2023 will be an interesting year for tech.
For tech companies that are in the market for venture capital funding, it would be wise to wait until valuations improve to avoid over-dilution. In the absence of venture capital, there are ways to stabilize your business to withstand tough market conditions — and even grow your revenue. We recommend keeping a sharp eye on key business health metrics, investing in areas that will drive growth, and using non-dilutive forms of growth capital, if required.
Business Health Metrics to Watch
The great thing about running a SaaS business is that you have the data and metrics at your disposal and you can move the dials to determine how your business reacts to various events.
In an economic downturn, two metrics will help you remain in control of your business and extend your runway: cash burn rate and net revenue retention.
1. Cash Burn Rate
Cash burn rate measures the rate at which a company is using up its cash reserves. It is typically expressed as a monthly or annual rate, and is calculated by taking the company’s operating cash outflows (such as operating expenses and capital expenditures) and subtracting any cash inflow (such as revenue or financing).
A high cash burn rate can be a sign of financial trouble for a company, as it may indicate that it is spending more money than it is bringing in and may need to raise additional funds or cut costs in order to stay afloat.
There are multiple ways to calculate cash burn and even more ways to interpret it. Our favourite version is Income Statement Cash Burn (ISCB). This is net income +/- non-cash items in the income statement. It specifically excludes changes in working capital items (i.e. increase in accounts receivable) that occur over a month. This gives us the clearest view of how much cash a company is burning.
The ISCB rate — expressing cash burn as a percentage of revenue — is an important metric to watch during tough economic times. If the rate is too high, it indicates one of the following problems:
- Gross margin percentage is too low
- Customer acquisition costs are too high relative to your customer lifetime value
- Onboarding costs are high
- Product development is behind schedule relative to sales
- General and administrative costs are too high
2. Net Revenue Retention
Net Revenue Retention (NRR) is a metric used to measure the ability of a company to retain its existing customers and increase revenue from them over time. Paddle provides a good description of NRR here.
Basically, NRR is calculated by taking the current period’s net revenue from existing customers and dividing it by the previous period’s net revenue from those same customers. A high NRR indicates that a company is successfully retaining and growing its customer base.
NRR = (Contraction/Lost MRR – (Churn MRR + Expansion MRR)) / Starting MRR
If you identify a problem with NRR, dive deeper to see the cause:
- Look at NRR by product line, customer segment, or industry
- Examine NRR by customer cohort (customers by age, payment terms, etc.)
- NRR by product usage, CSAT, and engagement
Where to Invest Time, Energy, and Money
When the tech economy turns a corner, startups that have made smart investments during the downturn will be primed for success when the boom cycle starts again. Here are a couple of ways to prepare your business for success down the road:
1. Invest in Strategic Functions
As many other companies decrease their spending on organic marketing, software development, and sales, there is an opportunity for startups to create a competitive advantage in these areas during a downturn. For example, if competitors pause investment in content creation, there is an opportunity to gain a higher SEO ranking or achieve more competitive prices on PPC keywords.
2. Snag Top Performers
If your business is healthy and continues to grow during the downturn, there is an excellent opportunity to hire some high-quality candidates. According to Layoffs.fyi, 1024 tech companies laid off over 150,000 employees in 2022. Among these layoffs are some of the best and brightest employees in the industry. Startups with solid metrics and runway stand to gain some incredible talent if they hire wisely over the coming year.
3. Retain High-Value Employees
Despite the economic uncertainty and layoff risk across the tech industry, employees are still quitting in record numbers, according to Payscale. Software development managers are among the most likely to quit so, if you value your development talent, it’s time to put some measures in place to keep morale high and high-performers motivated. Consider work-from-home opportunities, retention bonuses, exciting projects, and other measures to keep your employees happy.
How to Access Capital
When I founded JUDI.AI, I was so consumed by the hundreds of day-to-day challenges facing a startup that there seemed no time to focus on where to access capital to grow the business or consider the type of capital. I just needed money to reach the next milestone.
Accessing any type of growth capital can be a mistake at the best of times, but in a downturn, it can be hugely detrimental to your business.
I learned that not all growth capital is good for your business. For example, dilutive venture capital at suboptimal valuations will cost you greatly in the long run. Short-term debt lenders can kill your business altogether — using short-term ARR to MRR loans to fund cash burn is unsustainable.
Consider term loans from reputable providers like TIMIA Capital. Our loans are tailored to your unique situation and allow you the flexibility to pay interest only for several years so you can keep working capital in the business for as long as possible.
For more information, contact our team.
Looking for non-dilutive capital?
TIMIA Capital works with B2B SaaS and software-enabled
companies between $2 – $20 million ARR.