How to run a thrifty and successful startup in a down market
Layoffs. Plummeting valuations. Stock prices tumbling. It's impossible to avoid the doom and gloom of the recent headlines involving Tech companies. As a founder or decision maker in a startup, this is a time to refocus on financially sound strategies and look for opportunities to cut costs without cutting corners. Companies that embrace a more long term outlook and healthier business model will ultimately win in this environment over those just burning cash to stay alive.
The LogicBoost Labs team gives perspectives and practical advice for what a startup should be considered in four key aspects of the business to make them more successful in a challenging economy. Feel free to read through the whole post, or jump to one of the four key aspects.
How to approach Sales in a tighter market
Elbow Grease Required
Now that we are seeing a shift in the market, founders will need to take a step back and focus on the foundational aspects of growing their businesses, particularly when it comes to sales. At the moment, the market is not strong and we’re going to see startup investor money begin to dry-up, or at least slow down significantly, so founders can’t rely on an influx of capital no matter how well (or poorly) their business may be doing. Fortunately/unfortunately this will bring valuations to a more reasonable place, but founders will need to reach back to the good ole’ days (8-12 years ago 😊) when valuations weren’t bonkers and be prepared to put in some hard elbow grease into their startups. Sure, that is a bold statement and may be overgeneralized, but anecdotally, the number of founders we’ve spoken to over the past 2+ years who do not have an MVP, no revenue, and no customers who believe they will fetch a $10m+ valuation may surprise you.
Having said all that, revenue drives business. Founders or founding teams will need to be in front of customers more than ever. Whether that is on the phone, in email, in person, or on video calls, SELLING their products. It is well-known that many founders get caught up in the full-time job of raising money for their startup, but with the slowdown in investments, they will need to place their efforts elsewhere, and that’s revenue. No longer can sales be put on auto-pilot or outsourced entirely. We are at a point where founders need to be comfortable making the uncomfortable cold call, or pinging people in their network to find business. Back to basics.
Get Back to Basics
Since we understand that founders need to go back to basics when it comes to selling, it is a perfect time to improve their business from all angles. While founders are in the process of selling, there is no better time to really hear the feedback from the market on why your product is or is not working. Customers/users are the best litmus test for your product. Once you have customers, listen to them. Listen to why they are buying, and listen to why prospects aren’t buying. Intentionally ask questions to understand what is working and what isn’t working for your target audience.
For those who buy, they are helping you build your messaging for the problems your product is addressing, and they’re helping you realize many of the true pains you’re solving for them. Make sure you are always tweaking your pitch, your messaging, and your delivery for your sales conversations based on the feedback you are receiving. If enough customers don’t buy for the same reason, they are helping you build your product roadmap. However, be careful not to get caught up in building every feature for every prospect/customer. Take the most common, most impactful issues your customers are seeing and build and sell to solve those problems.
During this downturn, focus your efforts on selling your product. You will learn more about your product, your company, your market, and you. This market isn’t the time to boil the ocean. It is the time to be the most efficient founder you can be. Solve the problems your customers actually face. Think about how their problems are changing in this market, just like you. Empathize. Sell.
How to save money on your Technology
Don’t let your SaaS startup spend too much on SaaS
An often-overlooked source of operational expense is the litany of SaaS service subscriptions that a startup accumulates over time. The number of services tends to grow continuously – changing needs, forgotten explorations, and similar can result in monthly or annual payments that are unnecessary or underutilized in proportion to their ongoing cost.
One remedy is maintaining a written inventory of SaaS services, noting the service, (intended) use, cost, and subscription renewal intervals or dates. Many startups will not have such an inventory in place, so it will be necessary to backfill this list to start, and in almost all cases, the list will be incomplete on the first pass. Your entire team should review the list for completeness and make it a policy that this inventory tracks reality going forward.
As a point of reference, after approximately two-and-a-half years of operation, we (LogicBoost Labs) have 36 active SaaS subscriptions used in our ongoing operations. Most are of modest cost (per-user or company-wide), and a few cross into the thousands of dollars per year. Over this same period, we have removed 12 subscriptions from our inventory – some due to low use/disuse, others because we actively found a substitute that delivered improved cost or capability.
Armed with a current SaaS subscription inventory, look to review it periodically for the following:
- Do you have any services no longer in use? If so, take the time to cancel them.
- Are you paying for seats no longer in use? (For user-based subscriptions)
- Are there services with low usage? Can you do without these?
- Do you have a subscription tier that exceeds your current needs? Look for opportunities to downgrade.
- Are there products from other companies that can consolidate multiple current subscriptions into a single subscription, resulting in reduced cost or complexity?
- For quarterly or annual subscriptions, make sure to review with ample time to cancel. Lead time for cancellation may vary – don't get caught in another payment cycle inadvertently. Don’t forget that contracts can often be renegotiated – get ahead of these by starting the conversation early.
Also, be diligent about free trials where you must provide a payment method. Set a calendar reminder that gives ample time to cancel should you choose not to continue using that service. Pro tip: even for entirely free services, note these in your inventory – basically anything with an account. Social media accounts may be one example of this.
A bit of organization and process in this area can save hundreds, perhaps thousands of dollars per year. Also, it will help streamline accounting operations ("what's this charge for again?"), have a ready-made artifact for future compliance/due diligence needs and improve your security posture by reducing the number of unused accounts with no visibility or attention.
The (not so) Hidden Costs of Cloud Services
Your SaaS application is assuredly deployed onto one or more public cloud services, such as Amazon Web Services (AWS), Microsoft Azure, Google Cloud Platform (GCP) or the like. In general, it is not practical to prescriptively assert what those costs should be for any SaaS solution, since there are far too many variables to consider.
However, there are several broad, budgetary items to note when it comes to cloud services:
- As a startup, if you are the beneficiary of credits from your cloud vendor, anticipate when these will be consumed. Don’t be surprised by your first real invoice! Likewise, if you have not been the beneficiary of credits, check with your vendor and see how you may qualify. Every little bit helps.
- Audit your invoices. Are you paying for capacity that is not needed? Do you have testing, development or other environments that do not need to run 24/7/365? Are you still paying for resources from that experiment that ended long ago? The list of considerations here is endless, but these are good places to review for under- or non-utilized resources.
- Most cloud vendors provide the ability to set billing or budget alarms – use them. Consider setting your first alarm at 80% of your intended budget. That way you are less likely to be surprised by overspending and have time to understand or address whatever may be causing a potential budget overshoot.
The technical architectures for many SaaS applications are not optimized for cost, certainly as a primary concern – most are happy prototypes or MVPs that have escaped into the world! So, while many SaaS applications may benefit from some architectural tidying or rework, tread lightly here. Changes that represent low hanging fruit are fine, but efforts that are more involved, including the dreaded “rewrite” should be approached with caution.
How to run your Marketing effectively on a leaner budget
As money gets tighter for your company a normal reflex can be to reduce the overall spend across all marketing campaigns or channels. This can be counterproductive in two ways: 1. By not getting the most back for the dollars spent 2. Creating an aversion to trying new ideas including improving on what is already working.
For a startup looking for a point of reference for their budget, a rule of thumb for SaaS is to expect to spend around 10% of revenue on marketing. That proportion could go up to 40% depending on the growth and maturity of the business, or if there is a mix of sales/marketing. In general, it's helpful to think about that 10% measurement as a yardstick and realize that the key is to not automatically cut all spending across the board, but rather focus on reducing spending that doesn’t have a direct and measurable impact on revenue.
Cut the fat, but double down on strengths
In the early growth stage, it's not unusual to see a lobsided marketing funnel. In fact, it's more common than not to see situations where 80% of leads come from 20% of efforts. It could be that one social channel is driving traffic, or a few blog posts have most of your web visits. No matter how that weighting is playing out, the economical way to continue driving growth is to expand and iterate on what has already proven to be effective.
Some practical considerations:
- Data integrity is key to evaluating what should be cut. This really can't be overstated. If your attribution isn’t reliable, it will be impossible to identify which marketing efforts should be continued and which should be paused (or dropped)
- Identify and eliminate any efforts that haven’t had a 1:2 ROI in the last six months. If you aren’t getting two dollars back for every dollar you spend, that effort hasn’t met the minimum threshold for success
- Reduce your weakest programs but put some of that money back into the top lead generators. For example, if you have 6 PPC campaigns you may want to pause 4 underperformers and push a portion of that budget to the top 2 campaigns.
- Consider smaller bite size versions of bigger money commitments. If there is a large audience tradeshow with a big-ticket price tag, look at attending multiple smaller events instead.
- For your most effective campaigns and channels, benchmark them against industry standards to make sure you are getting the most out of them. Raising your average conversion rate for your top web pages from 2% to 3% could have a significant impact on your overall leads (and revenue)
- Look for opportunities to lower your threshold for evaluating what's working. If for instance, you run social campaigns for three or four months by default, you may have statistically significant data at two months on whether those campaigns are effective.
Focusing on profitability can be healthy overall
In great markets good companies are successful, in bad markets great companies are successful. Pursuing marketing strategies that provide a higher ROI will give your startup a longer runway while also building team skills that will be invaluable at later stages. Companies that burn cash early and often in the name of “brand awareness” are going to have a hard time surviving a period where investors have tight wallets. Those marketing teams that have the measurement tools, nimbleness and overall discipline will be in much better shape to weather any challenging macroeconomic situation.
Focus on what you already have- your customers!
When money and resources get tight, focus on your existing customer base! They are your key to success as they already believe in your product, company and vision. Check in with them more often, use them as a sounding board, and ask them for their input on the direction of the company/product.
Focus on understanding your customers' use cases and feedback
Set up a regular cadence with your existing customers. Form a partnership with them and involve them in the direction of the product/company. Asking your customers tough questions will open the door to positive and negative feedback. The most important thing you can do is act on this feedback as an entire company. Example questions:
- What areas can we improve?
- What enhancements would you like to see?
- Why didn’t you choose our solution?
- and even… what made our competitor the right choice for you?
Knowing the answer to these tough questions will help your company to make informed decisions on the direction of the company and product. These companies already trusted in your product enough to buy it to solve their use cases, take advantage of their knowledge of how they are using your product to attract additional customers.
Focus on retention and upsell
You did the hard part already- you got them to be a customer. Retention will remain high if you check in regularly, ask tough questions and act on their feedback.
When your customer is deeply engrained with the product, now is the perfect time to upsell them. Focus on selling them to a higher edition, adding more users, adding more features or expanding the product company wide. Provide enterprise-wide discounts, customer referral discounts, case study discounts. Some companies may be hesitant to provide discounts during this time, but it will lead to more customers, and more opportunities all while providing brand loyalty.