It’s a tough time to be a SaaS leader. The tech sector has shed 42,000 jobs so far this year, and venture investors are closing their wallets. It’s clear that the days when simply having a great product was enough to guarantee success are long gone.
So what’s the path forward? Well, companies shouldn’t count on being able to easily raise capital to see them through the downturn. According to new data unveiled at a recent Maxio and SaaS Capital webinar, the median valuation for SaaS companies is just 6X their current run-rate ARR, down from 17X just one year ago. Even if investors are willing to write checks, SaaS companies won’t be able to fundraise on favorable terms.
To shake things up, SaaS companies need to get serious about driving sustainable growth—and that means innovating and finding new ways to monetize. Investors may be valuing SaaS companies at lower revenue multiples than they used to, but growth rate and net recurring revenues (NRR) remain highly correlated with valuations—so companies that are growing and retaining customers remain attractive to investors, even during these troubled times.
Strategies to drive growth
For strategic CFOs, that raises the question: what strategies should you be using to drive durable growth? It’s important to remember that growth alone isn’t the only goal: investors have cooled on hypergrowth and are back to viewing the Rule of 40 as the touchstone for identifying growing-but-durable businesses. That means leaders need to find ways to grow their business while also ensuring that they have a solid path to profitability in place. That’s where creative monetization becomes a key priority.
Many SaaS leaders are using usage-based pricing models to boost ARR. In fact, 72% are already using usage-based strategies, or plan to start over the next 12 months. That’s a big leap from the 42% of companies that used these strategies a year earlier.
Most companies adopt usage-based models as part of a hybrid strategy. However creating new growth opportunities means introducing new complexities when it comes to managing revenue streams and forecasting future revenues and growth. A recent survey we conducted in partnership with RevOps Squared found that one in 10 companies don’t create usage-based forecasts at all, and almost a third of companies rely on historical trends—hardly the best approaches when you’re innovating for growth!
The way to solve this problem is to make sure your metrics and FinOps solutions are flexible and robust enough for the new monetization models that you’re deploying to fuel growth. With a tech-forward approach, it’s possible to keep track of your revenue engine in real time, and also leverage AI and other automated systems to enhance revenue forecast accuracy, even when testing new monetization models for which your company lacks historical data.
For SaaS businesses, that kind of actionable FinOps intelligence is the key to growing ARR while also retaining and effectively expanding relationships with existing customers—thus building a business that can thrive as we push through the current downturn.
Get ready for growth
The current VC freeze is certainly a dark cloud for the SaaS sector, but it’s one that comes with a silver lining. Today’s low rate of venture investments means that VCs are accumulating significant reserves of cash for future investments; as the downturn ends, we’ll see a new wave of investments flooding into the tech space.
It’s up to SaaS leaders to prepare for that, not just by hunkering down and weathering the current storms, but by using this moment to build strong businesses that are too good for VCs to pass on. That means focusing on the fundamentals while thinking creatively about monetization, and innovating in order to forge growth and retention strategies that drive real value for your business.