Running a tight ship
The panel agreed that in a volatile market, public market investors are looking for high-quality and reliable companies with plenty of cash on the balance sheet; the ‘must-own’ companies not the ‘nice-to-own’ companies. In the private market, VCs are going to avoid riskier assets and pay less for quality assets. SaaS founders should broaden their focus away from simply growth, and onto operational efficiency, in order to get control of their unit economics and lengthen their cash runway to be in the best position when the market upturns.
At Paddle, we have 3000 software company clients facing into this environment. As a provider of payments infrastructure for SaaS businesses, there are several key topics coming up in our quarterly business reviews and meetings with potential clients.
Reducing operating costs: Factoring in all elements of payments infrastructure (processing, platform fees, merchant infrastructure, compliance, support and FX) is expensive, and there are no economies of scale when it is built in-house from a variety of tools. This is often the 3rd biggest expenditure item in a software business (after salaries and hosting), and many companies are actively looking for a more efficient solution to improve their margins.
Reducing resource costs: The investment in people needed (both technical and finance) to build, maintain and run a piecemeal payments infrastructure is always more than expected, and a frustrating distraction from running your core business and developing your product. In a growth-at-all-costs market, an endless hiring plan is fine, but in today’s market, automation is absolutely necessary.
Improving retention: Overlooked optimizations such as involuntary churn and payment conversion rates are easy to deprioritize in good times, but they hurt burn rate and impact valuations. Suddenly, these shoot up the task list, as easy wins.
Ensuring compliance: We have seen several funding rounds where compliance issues (eg back taxes for sales tax in multiple regions) have been used as reasons for re-trading on valuation when in fundraising due diligence. As the pressure on valuation multiples is felt over the next months, a strong compliance stance can help defend the company valuation.
Whether sitting pretty with a war chest from a recent fundraise, or getting concerned at the risk of a planned fundraise in late 2022, it’s time to get serious about your operating model. Are you running at the rule of 40? Is your burn multiple under 2? And most importantly, do you have the cash you need to execute the next phase of your plan? Your business can survive almost any crisis, but running out of cash is usually terminal.
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