July 20, 2024


Super Art is Almost

Tips from Salesforce Ventures, ICONIQ Growth, and Accel

A challenging macro environment. Capital efficiency. Growth rate retention. Valuation. These words are creating storm clouds in the business-to-business (B2B) software-as-a-service (SaaS) sky. 

Companies that got close to or hit the net new annual recurring revenue (ARR) goal in 2021 can’t say the same about 2022. Tech startups missing those ARR targets are realizing that it’s hard to be a decacorn, maintain a worth of $10 billion, and deliver basic venture returns. On the contrary, SaaS cloud leaders are growing at epic rates well beyond $1 billion in ARR.

So, what’s happening in the B2B software market and growth stage venture capital? Was it just a cloud boom in 2021? What does it take to grow a healthy company and sustain the environment today?

Jason Lemkin, Trusted Advisor, Investor & Founder at Champion of SaaStr, hosted a panel during Reach 2022, G2’s annual digital conference, to address these concerns. The panel was a powerhouse of venture capital (VC) investors: Arun Mathew, Partner at Accel; Doug Pepper, General Partner at ICONIQ Growth; and Alex Kayyal, SVP & Managing Partner at Salesforce Ventures.

Is it all gloom and doom in SaaS venture capital and buying?

Growth investments have taken a tumble over the last year, but it’s not as bad as you think. 

SaaS companies have grown in number over the past decade. Some even went public in recent years, while others raised at least one extra round in the last eighteen months, meaning fewer growth deals will be made in this market. 

This drop in deals shouldn’t worry companies just getting off the ground. How they perform in the next three to four quarters will matter. All panelists echoed that continued growth is only possible with customer value delivery.

Businesses unsure about growing in this market should take inspiration from Salesforce, which grew north of 20% during the economic recession between 2007 and 2009. Mission-driven companies with a huge total addressable market (TAM) and healthy balance sheets will become even stronger from the current economic turbulence.

What’s happening behind the scenes is a significant deterioration in attainment versus plan. Companies that built aggressive systems based on 2020 and 2021 growth rates aren’t meeting their expectations. They’re probably still expanding but not doubling or tripling as was predicted. 

“The median growth rate was about 83% last year across a very wide range of companies that we track. That’s degrading all the way to 48% this year.”

Doug Pepper
General Partner at ICONIQ Growth

Plan and attainment are no longer aligned, leaving companies in a messy middle ground where they’re forced to readjust to slower growth rates. Alex Kayyal also feels that the current growth market slow-down is a valuation reset. Plus, higher valuation expectations make investing difficult for Series B investors and above. That said,  mission-critical companies that need budget support are drawing focus.

Staying ultra-focused on margin and must-have products

Earnings growth drives value creation in the long run. But what’s the way out for businesses falling short of top-line growth rates? 

Today’s tougher market means buyers take longer to make decisions, resulting in extended sales cycles. Businesses are up against a market that’s no longer a free money economy where almost anything could sell. Even though they haven’t disappeared, budgets are also under tight scrutiny. Some companies may be ready, but this is where the rubber meets the road.

Entrepreneurs must use available funds to build important products that solve key customer problems and have off-the-charts product-market fit. They must differentiate nice-to-have from must-have products that deliver real return on investment (ROI).

Additionally, investing in tackling inefficiencies often hidden by sales and marketing growth engines will help double down on margin and profitability instead of just growth. Getting these fundamentals right will get them closer to the ARR plan. 

To be clear, incredible companies doing extremely well are out there even in this market. As these firms keep trading at a certain value, other founders have raised expectations about the value of their business. The current economic situation will realign their predictions and separate the needs from the wants. In the end, building a successful business will boil down to listening to your customers, leveraging buyer intent data, and acting accordingly.

“It’s going to be a stark reality for many companies about what your company is worth if the best companies are trading at the current levels today.”

Arun Mathew
Partner at Accel

Out-of-whack expectations from founders make investing difficult in today’s market. Arun explains, “There’s just a delta between what those companies were valued over the last two or three years versus what that company is worth today. And that’s not to mention what the prospects look like in a harder macroeconomic environment where it is tougher to grow.”

Companies that have raised funds earlier won’t have huge balance sheets over the next year or two. They’ll eventually seek funding to extend the runway and see if they can raise rounds versus flat rounds. While the past has seen a rush to uplift headline valuation, founders have to strike a balance between fair valuation and long-term success.

Capital constraints build capital efficiency in your DNA

There was such a flood of capital over the last two or three years that even the most capital-efficient companies, bootstrapped or not, ended up taking some capital. For example, 1Password, a password manager software company, which had been bootstrapped for 15 years, raised $600+ million over the last couple of years. As the market changes, it will be easier for companies with capital efficiency in their DNA to switch back to a bootstrapping mindset and measure ROI on each dollar. 

Earlier, companies would ask investors about a high-value thing they can do. The shift in the environment has made entrepreneurs take investors’ input on what ROI investment they should be making. The current capital constraint is helping founders focus on what truly matters. 

“When things are going well, it’s sort of easy to celebrate culture and values. When your moments are difficult, culture and values rise to the top.” 

Alex Kayyal
SVP & Managing Partner at Salesforce Ventures

As Alex explains, founders should focus on finding one or two things they can do to survive and thrive in this environment. What matters most is how they consider difficult decisions, communicate with stakeholders, and build a sustainable business despite uncertainty. 

What must businesses do to raise funds today?

While growth is rare right now, investors are putting money into companies that want to attack big markets. To be one of these, you have to:

  • Know your buyers.
  • Build an efficient go-to-market engine.
  • Articulate ROI to economic buyers.
  • Improve gross and net retention by upselling to existing customers.

Businesses weighing their options should understand that no harm comes from doing a down round if you need it to execute plans. But consider getting the cost structure in line and establishing a well-functioning organization before you decide on the amount to raise or the percentage to dilute. 

The sky isn’t falling in SaaS

Now’s an exciting time to be an entrepreneur and an investor. It’s only a matter of time before the previous valuations in the public markets reset and align with growth rates. It will decelerate till then, but use this time to become capital-efficient, eliminate inefficiencies, and build must-have products.

If you’ve created a magical product that solves a niche, good times are coming! Check out these 2023 SaaS trends; all you need is a mad market pull to reach escape velocity and grow through the next year.