They Say History Repeats Itself

A blog written in 2008 by SEG’s founder is strikingly applicable to the COVID-19 downturn.

History has a tendency to repeat itself. There are many similarities when comparing the Global Financial Crisis to today’s COVID-19 downturn, including accelerating unemployment, plunging stock markets, and uncertainty about what the future will hold. In hopes of finding trends and insight into how the software industry has performed in previous crises, we dug through our library of 25+ years of research. A piece composed by SEG’s founder, Ken Bender, stood out to us. This blog was written in 2008, and is strikingly relevant to today’s COVID-19 downturn.  

In Ken’s blog, he details the thoughts going through software executives’ minds during the Global Financial Crisis. He describes action items CEOs should be taking, metrics to track, and guidance on operating their businesses during a crisis. It is uncanny how applicable these themes are to today. We continue to share a plethora of content aimed to help SaaS CEOs navigate unprecedented times, including a Decision Tree for SaaS Executives on assessing business strategy, a webinar with advice from three SaaS experts, and surveys gauging activity from strategic and private equity buyers. We want to share this blog as well and hope you find it equally as insightful.

From Ken Bender in 2008:

“What Do You Do Now?”

Mention at a cocktail party that you own and run a software company, and people are still impressed – at least in places outside Silicon Valley. Software is clean, high tech, sexy – and filled with storybook millionaires. To an outsider, you’re in the same business as Oracle, Microsoft, Google, and Facebook. There’s no plant and machinery to maintain, no inventory to manage, no distribution facilities to oversee – and unlimited upside.

However it may appear to outsiders, software is a tough business. Most software entrepreneurs are bootstrapped, with little or no outside capital. There’s fierce competition, and cost-conscious customers that place real pressure on prices and margins. There are underachieving sales reps and long sales cycles. There’s ever changing technology and a host of new modules to develop. There may not be plant and equipment, but fully 70 cents of every dollar you make goes to salaries, payroll taxes, and benefits. There are disparate personalities to manage and personality conflicts to mediate and customers who require a good deal of attention.

Well no one ever promised you a rose garden. You’ve made some pretty good money, created jobs, nurtured careers, and built products that actually solve problems and make people more productive. In the good times, when customers are spending, and sales are easier, you might even say it’s fun. But in the downtimes, when sales are slow, and cash flow declines markedly, it seems, once again, to be a really tough business.

Did I Miss the Boat?

Many software entrepreneurs, who were contemplating exit in the near future, now believe they’ve missed the boat. Some have. But for others, ironically, the prospects of sale at an attractive valuation are as good or better today than a year ago. Buyers, according to our survey, remain actively acquisitive. Most have healthy balance sheets and lots of cash. If they deem you strategic, your chances of a successful exit are still quite good.

For other software company owners, however, the prospects for a successful exit at an attractive valuation are dimmer than a year ago, and will remain so for a time. No one knows how long. Certainly not the economists, analysts or pundits, and certainly not us. It will just have to play out.

So, What Do You Do Now?

If you’re a software entrepreneur, or an investor in a private software company that is unlikely to be seen as strategic in the current market, what do you do now? The prevailing wisdom, and the instinctive reaction of most software entrepreneurs, is to do nothing different. In times of fear, doubt and uncertainty, make no substantive changes other than those that become absolutely necessary, hunker down, and hope for the best.

Indeed, for many of the 200 software companies we met with, screened and mentored in 2008 – from a dozen countries spanning virtually every software category – there’s really no reason to alter course. Sales may have been pushed out and revenue growth may have fallen off some, but no need to panic. No need, really, to do anything different.

We respectfully disagree.

As we’ve often demonstrated, tech sector downturns typically lag economic downturns (and upturns) by a year,and we’ve now been officially in a recession for more than twelve months. Microsoft, our industry’s largest and richest company, just reported an 11% drop in the second quarter profits and announced it will cut 5,000 jobs over the next 18 months. It’s the latest harbinger of things to come. We believe the decline in software spending will be substantially greater than current surveys indicate, further layoffs among most of the Software 100 are likely, an the economic downturn will take a toll on private software companies.

What Can a Software Entrepreneur Do?

Plenty. First, scrutinize your P&L as though your short term health and your longer term exit valuation and retirement depend on it, because they do. Ask your CFO, Controller or bookkeeper to prepare an especially detailed profit and loss statement that breaks down revenue, expenses and margins for each product and each service you provide. Then, slice it by each market and submarket you serve, and by size and type of customer. On the expense side, focus especially on labor, which typically accounts for 70% of a private software company’s expenses. Two organizations deserve special scrutiny: Sales and Product Development.

Evaluating Sales & Product Development

For the vast majority of private software companies, sales is their Achilles heel. Most were founded by entrepreneurial software developers who, of necessity, learned how to sell, but were never especially adept at doing so. More important, many of these programmer-entrepreneurs knew nothing about how to build and run a highly proficient sales organization, develop and refine effective sales strategies, and properly onboard, train, goal, incent and manage sales managers and representatives. Years later, their companies have grown and achieved a measure of success, but their sales organizations remain inefficient and underperforming. Some CEO’s are in denial about it, many others acknowledge the fact but are loath to do anything about it because prior efforts proved to be expensive disappointments. Maybe so. But improving sales process and performance are vital and achievable goals, and now, during the lull, is the best time to consciously address them.

Many software entrepreneurs, mindful of their developer roots, regard their development organizations as sacrosanct. It’s a bit of a paradoc, because a good number of these same CEO’s lament delayed product launches and budget overruns. The skill sets and mind sets of some long term programmers no longer match the requirements of the job, but the programmers are nonetheless retained. New development and product lifecycle management tools are eschewed as too costly or disruptive. The net result of such benign neglect? Unnecessary labor costs that have a direct and dramatic impact on EBITDA, and lost or delayed revenues. Now is the time to align your product strategy and your development team, ensuring you have just what you need – and only what you need to satisfy current obligations and to cost-efficiently bring new products to market.

What’s Dragging You Down?

Finally, turn your attention to revenue and profits. What’s dragging you down?

Are there orphan or old legacy products? Can they be cut, or at least deemphasized? Though it seems counter-intuitive in a tough economy, can products or services priced too low be increased in 2009, at least to the point of reasonable profitability? Is your annual maintenance and support (M&S) under-priced (e.g., 15%-17%, rather than the industry norm of 20%)? Have you resisted imposing annual price increases for M&S because of concern customers might leave, even though you have retention rates of 95% or more?

When was the last time you actually audited concurrent user licenses, desktop licenses and server licenses, transactions fees, etc.? Are there specific products that your sales and marketing organization can tout as genuine cost savers and productivity enhancers, with a demonstrable ROI that would make move them higher up the IT priority list of your customers? If you sell indirect, is it time to clean the channel, eliminating underperformers that require resources and support but deliver little in return?

The current economic crisis is unprecedented, and it may last for some time. Make the hard choices to ensure your survival. But also, prepare now for better times. Do what’s necessary today so that tomorrow, when the economy recovers and happy times are here again, you’re fully poised and positioned for accelerated growth and increased profitability.

Please reach out if you’d like to discuss how recent events may impact your business in the near or long term.

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