Why SaaS startups are ideally placed to weather the storm.
In business, uncertainty can kill you. This is why any period of ‘economic uncertainty’ has such a chilling effect on business sentiment. We are undoubtedly entering a recession, but the shape, scale and length of it appear to be hard to gauge. As a result, a lot of discussion in the tech industry has been about cutting headcount, scaling back growth plans and lengthening runways. Many commentators have pointed to the tech bubble bursts of 2008 and 2000 as indicators of what might happen over the next year.
The mantra at the moment seems to be, ‘prepare for the worst’. However, this position is overly cautious. There is actually a lot we do know that can provide business leaders with the clarity that they need to make better plans for the year ahead.
For tech, we need to look at what has changed in the sector compared to 2008. The short answer is: nearly everything. Fourteen years ago, Europe’s startups focused predominantly on consumer tech: like hospitality and travel platforms or apps, or some small areas of fintech, mostly around cross border transfers and payments. Now, tech is an intrinsic part of every industry. Investment levels and valuations are unrecognisable. For context, in H1 of 2022, European tech companies raised €60 billion across 2,608 deals. In the entirety of 2007, funding hit a record of €7.5 billion: an amount it would not reach again until 2012. The startup community has grown from a niche network of professionals to one of Europe’s largest employers.
All of this is to say that using the 2008 recession to prepare for the 2022 tech downturn is misguided. The tech sector is much deeper and broader. As such, we aren’t going to see the uniform collapse of previous bubble bursts. What we will see is an uneven impact. Some subsectors of tech are going to struggle badly, while others will actually continue to do very well. For founders, this means looking past the messages of doom and gloom to focus on the fundamentals of their own startup and the sector they operate in. One area where this is particularly true is SaaS.
Capchase recently ran the world’s largest analysis of real time financial data for SaaS startups. We found that SaaS startups are still growing – and fast – averaging 40% ARR growth. Other research into SaaS procurement sentiment at major companies actually found that more businesses planned to adopt new SaaS technology over the next twelve months. The average contract agreement for SaaS tech has also lengthened, adding a lot of financial certainty for these startups.
It’s not hard to see why. Most SaaS technology is geared towards creating efficiencies within businesses, allowing them to do more with less. This is an attractive proposition during a downturn. The certainty of costs via fixed licensing contracts also helps during a high-inflation environment. Better to lock in these known costs with a platform that you know works for your business now rather than risk much higher prices a year from now. The SaaS sector itself is also less impacted by external shocks. There is no fear of supply chain issues impacting the sale of goods or the delivery of components, and their client base generally makes more long term purchasing decisions.
Overhead costs are also naturally lower. With the normalisation of remote and flexible working, many of these outgoings have fallen further as SaaS startups are now better able to decentralise their operations. Scaling a SaaS startup is also, relatively speaking, easier than other sectors. There are fewer logistical considerations, and thanks to recurring revenue, making concrete growth plans has less of the dreaded uncertainty.
The SaaS sector has also not suffered from the same funding ‘hype’ that has hit other tech sectors. Although valuations have been generally higher, there has not been the same dash for VC cash. Compared to crypto, instant delivery, mobility and even fintech, SaaS has attracted less dramatic attention. But with funding levels dropping across the board, SaaS remains a much safer, tried and tested option for investors.
If you are a SaaS business leader, the upcoming recession actually provides a great chance to set
up your startup for more future success. There will be a lot of new tech talent available as unviable startups fail and professionals from other industries move to tech. Expansion costs will also fall (notwithstanding the effects of inflation) as talent, office and infrastructure costs lessen in the face of decreased demand. Badly run SaaS companies will still fail: which means there will be good tactical acquisition opportunities.
In short, do not get carried away by negative headlines. For SaaS businesses, and many, many other tech verticals, the future – although a little cloudier – remains bright.