How SaaS Companies Generate Revenue in a Recession

Hey team - I hope you've had a lovely weekend!

If you’re reading this, you’re probably already caught up with the whole Silicon Valley Bank fiasco. Crazy times.

Jason Calacanis did a tremendous job last Friday. He hosted an emergency podcast on his channel to explain the implications of the SVB shutdown — for those interested, I posted the full Q&A here.

-Alejandro

• 🏦 The Federal Reserve has announced no losses for depositors in Silicon Valley Bank shutdown fiasco.

• ☁️ Battery Ventures reveals how startups can leverage cloud marketplaces to generate revenue in a recession.

• 🏷️ B2B SaaS pricing models play a significant role in growth and churn, according to the Maxio 2023 Growth Index report.

• 📉 Economic headwinds and changing investor expectations are affecting the growth of enterprise SaaS companies, leading to tighter capital and increased pressure to cut costs.

• 💸 +6 funding rounds

The Good News First

The Federal Reserve has announced that all depositors at Silicon Valley Bank will have access to their money starting March 13 and no losses will be borne by taxpayers.

Important Lessons from Battery Ventures' State of Cloud Software Spending Report

Battery Ventures recently released a report on the state of cloud software spending.

While the report had some good news for startups hoping to sell software to enterprise clients, there are also headwinds ahead for startups, as money is not flowing as freely as it used to.

Here are the key takeaways:

• Enterprise cloud spend is holding up well, but large companies are looking into vendor consolidation.

• The recession is having an impact on how large companies plan to buy software.

• CXOs are tightening restrictions on self-procurement, even in the dev/test environment.

• This is concerning for the growing number of vendors who rely on a bottom-up sales motion, in which a service gets adopted by individuals or teams before being sold to the organization more broadly.

• Software startups and SaaS companies will likely be the most affected in the short-term, but they may find a useful workaround by leveraging cloud marketplaces.

• Cloud marketplaces can be likened to app stores curated by the three dominant cloud service providers (CSPs): Amazon AWS, Microsoft Azure, and Google Cloud.

• Cloud marketplaces have not always been a high-priority sales channel for many startups. However, in a recession, companies need to find ways to generate revenue at any cost.

• The main advantage of marketplaces is that enterprise clients have already allocated a budget to a particular cloud service provider (CSP), which they can also use to make software purchases.

B2B SaaS Companies Show Resilience Despite Economic Headwinds

• The Maxio 2023 Growth Index report found that B2B software companies remain resilient despite macroeconomic uncertainty and cooling technology markets.

• Of the companies analyzed in this study that process $1M or more in annual billings, 82% grew year-over-year from 2021 to 2022.

• However, growth rates for most companies declined over the course of 2022, with a substantial drop-off in Q4 2022. The drop has been attributed to increased customer churn around end-of-year renewal dates.

Your business’ pricing model will dictate how fast you grow (or shrink)

• The report did an excellent job of segmenting revenue growth rates by pricing model. It revealed that companies with a consumption/usage-based model experienced a more pronounced slowdown in growth rate compared to subscription-based businesses.

• One benefit of usage-based pricing for SaaS companies is that as a customer grows and uses the software more, the SaaS company receives an immediate increase in monthly billings. However, if customer growth slows or reverses, companies using usage-based pricing can experience a contraction in their recurring billings, sometimes unexpectedly.

• On the other hand, companies that offer traditional subscription-based pricing models experience the opposite trend. They enjoy stability and predictability in billing, but have limited upside potential if customers increase usage or expand before the contract expiration.

Your business’ pricing model will affect your churn differently

• Companies that use consumption-based pricing models typically offer month-to-month agreements, while those that use subscription invoicing generally have longer-term agreements of a year or more, with predictable billing schedules.

• Unsurprisingly, businesses in their earliest stages (with annualized billings or revenue below $1MM) struggle disproportionately compared to those with more than $1MM in revenue. Most of these businesses are still finding product-market fit and do not yet possess a stable or loyal customer base.

• Nonetheless, it is important to note that no pricing model is perfect and safe from churn.

• Note: This analysis was conducted using data from 2,000 Maxio customers.

Mixed Results from Leading SaaS Companies in Current Economic Climate

This week, TechCrunch analyzed earnings reports from Zoom, Salesforce, Box, Snowflake, and Okta. The results were mixed, with some companies performing better than others.

Here are the main takeaways 👇:

• Enterprise SaaS companies are facing economic headwinds due to a shift in investor expectations from growth to profitability and macroeconomic factors, such as inflationary pressures and higher interest rates. For startups, this means tighter capital and lower valuations after years of inflated numbers.For larger companies, this has affected their ability to borrow and discouraged spending.Overall, it has pushed companies to cut costs.

• Despite the challenges, the overall SaaS market is showing healthy growth, particularly in categories that have lagged in SaaS conversion, such as ERP and supply chain.

• Companies that operate in the security category have shown to be more resilient to economic headwinds, likely due to the increased importance of security applications in recent years.

• However, startups may face a tougher market for their products, and it's becoming less common to find outlier companies in these conditions.

What can enterprise SaaS companies do to fight short-term economic turbulence?

• Very simple. Retention, double-digit growth, and managing expenses are key factors in staying afloat.

• As mentioned previously, companies are under pressure to cut costs and many have responded with layoffs.

• A strong U.S. dollar has been trouble for companies selling outside of U.S. markets as it has bitten into foreign profits and dragged down revenue growth overall.

• Anthropic | $300m: AI-driven research company that focuses on increasing the safety of large-scale AI systems (link)

• Amelia | $175m: trusted leader in enterprise AI for automation and conversational applications (link)

• Consensus | $110m: intelligent demo automation platform that automates custom product demos to accelerate sales (link)

• MentorcliQ | $80m: employee mentoring software platform that helps upskill and retain employees (link)

• Pidge | $3m: logistics platform (link)

• Houseware | $2.1m Seed: revenue engine for B2B SaaS teams to work with metrics, create intelligent workflows, and drive predictable revenue outcomes (link)