Global stock markets have reacted with shock to bad economic news from China. In the tech world this has led to more comment about a possible bubble in startup valuations. And the risk of a bust. Yet tough economic times could make startups more attractive not less. High growth and possible high returns will be even more rare. The real test will come if there is a liquidity crisis.
Growth And Returns Look Even More Attractive
The recent falls in US Stockmarkets have restarted the bubble debate. Triggered by the far heavier losses in China, things look bad. Lots of focus has fallen on those companies which are post IPO. That is their shares are exposed to the challenges of the market. As those prices drop, fears that the current investment boom may be about to end resurface.
China is a big risk factor. The data is hard to read. But some of the signals could mean damage to the economic prospects for every major economy. Startup and Tech investment is at an all time high. The logic follows that an unexpected hit to the wider economy will trigger a correction.
I have no doubt that the current investment cycle will end. I also know that I don’t have the gift to predict when this will happen. Yet there are reasons why the bust could happen later rather than sooner.
1. When the economy is in recession businesses and the media will scream about cost cutting. But the real problem is always loss of revenue. Anything that offers prospects of growth becomes super attractive. Right now startups are the best bet.
2. The flow of money into startups is also driven by historic poor returns. Traditional investment vehicles have struggled since 2008. This is pulling in cash from institutional and more conservative investors. Stock market losses make the alternatives to startup investment look even worse.
3. Lower prices in stock markets will make an IPO an even less tempting option for Unicorns than it is today. Private rounds remain the only way for investors to get a piece of Uber, AirBnB and many others.
There are still risks on the downside. But like many other factors, stock market indices do not play the role today that they did in the dotcom crash. It looks horrible for Twitter and LInkedIn. There are limits to any contagion.
Liquidity Is The Big Startup Risk
Could some other global event prove the trigger? Predictions as they say are hard. Especially when the concern the future. I venture one point though. All the concern about a bubble points at the sheer volume of funds. And at valuations. These may well be the biggest source of pain when the cycle ends.
But I believe the trigger will be liquidity. Anything that causes a cash crisis will be nasty for big startup investors. Getting money out of Uber right now is much harder than putting it in. On a macro scale nothing is on the horizon. There will be an internal liquidity issue in China. It becomes a global issue only if China stops buying US Treasuries.
It has been clear for a while that smart leaders in tech should prepare for a day when investment is harder to find. This has not changed. But startups should be confident about the virtues they offer. Strong growth. And the potential of high returns….if an exit can be achieved.
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Turning a software from a product into a service will bring big changes. The business model. The organisational model. The financial model. The culture. If SaaS is a true service all will be different. SaaS leaders need to understand why a service is different. And build a company which supports these principles. This applies to SaaS for SMEs and right up to enterprise scale. Now is the time to get ahead of the field.
I worked for the world’s leading professional services organisation for 30 years. The leadership of the firm invested much effort to try to turn services into products. There was a belief that so called repeatable solutions would be more profitable and easier to sell than customised services. On the front line dealing with clients every day my partners and I knew the truth. The companies we served did not want a product. They wanted a professional service. Bought from people they knew and trusted. Delivered with care to high standards. Designed to solve their problem and only their problem.
In those markets products could not replace services. Now I am providing world class small business consulting to SaaS startups. I spend my time helping companies that want to turn a product into a service. The difference is SaaS is succeeding.
Service Is Not Just A Different Way Of Charging For Product
SaaS is a service. The acronym stands for software as a SERVICE. This may seem obvious. But it is not well understood in the software industry. Both established players and startups are entrenched in a product mentality. The mindset seems to be that SaaS is just a different way of charging for a product. The billing changes but everything else remains the same.
B2B Services are not products. Behind the revenue model the way we sell, create and deliver services is different. Service organisations talk of partners and colleagues not managers and workers. Execution is by methods and approaches not by processes. We provide services to clients not customers. The whole culture is different.
4 Principles For Great B2B Service
The software industry is in transition between a product mentality and a service culture. If you run a B2B SaaS business you need to know what makes a great service:
How Will The Financial Model Change?
SaaS will transform as these principles become part of the business model. This will affect the financial picture as well as the operations. The outcome on the finance side could be interesting. Services are lower margin than software. On the other hand they are higher than most typical product industries. As competition increases in SaaS there is bound to be an impact on margins. Most analysts today argue that professional services are low margin. The advice is keep them to a minimum. But could the service approach be the key to retaining strong margins in the long run?
SaaS For SMEs
All this applies to SaaS for SMEs as much as enterprise players. Remember the hairdresser example. Just because your client is small does not mean they don’t expect service. In fact it applies more for an SME. A large company has the resources to adapt to a new IT system. An SME needs things that work just they way they want.
The hairdresser example is useful in another way. Many of the component of your service can be the same for everyone. But you need to figure out where the tailoring takes place and how your SaaS delivers it.
The SaaS business model will evolve and mature. This will change organisations, job titles and the way software is sold. The SaaS recurring revenue model will also change as business alters and competition intensifies. When SaaS dominates the software industry it will be transformed from the nascent form we see now.
If you have a SaaS startup now is the time to get ahead of the field. To get the best SaaS thinking and advice, sign up for our regular newsletter. And watch out for our tools and guides coming soon.
Feedback informal and improves all business relationships. Process and evaluation can interfere with feedback signals. So it is better to keep them separate. Using informal channels and frequent, two way discussion are key to effectiveness. Feedback is a skill which should be part of your lifelong learning approach. Improving will help you make better decisions and build better business relationships. It so important maybe we should call it feedforward.
Feedback - A Key Business Skill For A Startup
Giving and receiving feedback is one of the most important parts of business. It takes high level communication and learning skills in both directions. Large enterprises often use the word “feedback” to describe a set of internal processes. Staff reviews, Peer feedback. Team evaluation. And so on.
But feedback is a part of every business relationship. A startup is receiving feedback from customers, community and investors every day. Every minute in fact. In these terms, quality feedback makes a huge contribution to making good business decisions. It provides the best evidence you have for the needs, attitudes and goals of customers. Or investors and other stakeholders.
The problem is that feedback is often wrapped up with judgement and assessment. You need to separate the process and listening associated with feedback. Keep the management decisions and actions apart or you will pollute both. When you ask for feedback from someone who knows what you will do with it, their bias changes their response. It can work both ways. Over generous and positive feedback is more common than the negative and nasty kind. Both are of little value as input to your future plans.
Leaders often say “We need honest feedback to help us make the right decisions”. Even saying this tilts the playing field. Natural human behaviour is to give feedback which influences those decisions. Recognising this kind of behaviour is the thinking behind The Mom Test. Rob Fitzpatrick’s excellent book is all about persuading potential customers to tell you the truth. To share their real views of your product or idea.
Why Feedback Matters
It is worth learning this lesson. The benefits of feedback go well beyond improved decisions:
Small Business Consulting - How Great Feedback Works
Feedback is a core skill for anyone in the commercial world. Both giving and receiving. It can be learned and developed like other important capabilities. After 30 years of receiving, giving and observing feedback, here are my tips:
Startups begin with a feedback process. Customer discovery is the foundation of every success. Finding real world problems and designing solutions which offer real customer benefits. You will know that this is not easy. The techniques are hard. When it is done well the information can be full of contradictions and inconsistency. Getting information from customers and acting on it are two different things.
All feedback is like this. Hard to get the truth but worth it in the end. It is the only way to align your business with customers. And the best approach to developing your team. In a startup your first experience is receiving feedback. You will soon be giving it as well. The cycle never ends. Innovation, response to demand and business improvement are all built on this base.
Feedback is integral to building a team, building relationships and growing your customer base. On reflection maybe we should call it feedforward! For more small business consulting tools that will help drive your startup, subscribe to our newsletter below.
Playing To Win is one of the best selling strategy books of recent years. It is intended as an example and method for large corporations. But it includes lessons about clarity, focus and honesty which apply to any business. Be careful though, Some of the thinking is dangerous for a startup
This column is a new diversion for me. A lot of my small business consulting is about applying knowledge. Over my career I have studied pretty much all the biggest business ideas. And I have applied them for the last 30 years. I use my practical experience of what works every day. But I have not found an effective way to share this in my writing. This is my latest attempt. I am going to make a brief explanation of a well known business idea. And then explain what a startup can learn from this thinking.
What Is Playing To Win?
Playing To Win is an approach to strategy set out in a book of the same name. The book was co-written by A G Lafley, long time CEO of Proctor & Gamble. And a strategy consultant who advised him in that role, Roger Martin.
How Does It Work?
Lafley believes that business strategy is sound in theory but abstract in practice. Playing to Win (PTW) is a systematic attempt to explain how strategy applies in the real world of a global corporation. The book is built around examples from P&G during his first tenure as CEO. (He returned to the company for another stint shortly after the book was published). The case studies support a model with 5 major components:
Each of these elements requires careful planning and forceful execution. The stories in the book focus on how P&G delivered. How they achieved the clarity and consistency to make PTW work in practice. It is tough to have a big workforce pull in the same direction. Making strategy happen in large corporates is a complex challenge. P&G’s results during Lafley’s first time as CEO show a high degree of success.
A startup is different in almost every way from P&G. Yet PTW holds some value even for a company at the opposite end of the business spectrum.
Most important is clarity and focus. The diversions and complexity may be less than in a global enterprise. But many startups try to do too much. The key message of PTW is do some thinking and make some clear decisions. Like all strategy it is as much about what you don’t do as what you do.
The structure also provides a useful way of thinking about business strategy. Set objectives and be clear about your markets. Define the differentiation that will allow you to succeed. A template based on the ideas in this book can be a helpful aide. Writing your plans down in this format will give your business plan added credibility.
I also like the emphasis on honesty. You need to be clear eyed about what is unique in your business. And about the capability you require to build your startup. Be honest with yourself if you expect to appear authentic to your customers.
The How To Win section of the book is strong in this respect. Even the largest consumer products company on earth does not have automatic differentiation. You don't need to articulate unique value from day one. Think about the path to competitive advantage.
PTW frames strategy through some excellent questions. They are a good way into strategy for any business:
“What qualitative evidence can support your winning aspiration?"
“How can you write down the critical assumptions that create your where to play approach?"
“What are the biggest challenges your customers/ potential customers face?"
The Not So Useful Stuff
PTW is like most business strategy books. The examples and illustrations come from established global leaders. These are interesting but hard to translate into a startup culture. Specifics about management roles and job titles for example are far too onerous for an early stage company.
There is also a big problem with some of the language and ideas. As the title implies there is much about beating the competition. I find fighting analogies unhelpful for startups. The startup world is not a zero sum game. The efforts of founders and the benefits of technology add to the economic sum. It is not about winners and losers.
Business is not war. I know that some people find battle cries inspiring. It is a short term fix. Your startup needs to have a positive reason for existing. Even if that reason is just to make people a little happier by showing them pictures of cute cats. “We are better than the competition” is a negative outlook.
Next Steps For Startup Strategy
Not every book on business strategy is worth reading. Playing To Win is an exception. It is short and easy to follow. Stories from A G Lafley are in separate sections so it is easy to focus on these. I will be sharing more tools and ideas from the business world. How can big business ideas help startups and SaaS companies grow and develop? If you want to know more, get in touch or subscribe to our newsletter for regular updates.
Partnerships can be an attractive route for SaaS to achieve growth. But there needs to be give and take on both sides. And the partnership is like a new business with a need for its own focus and resources. Follow some simple principles before entering into this type of deal.
Many SaaS startups look to partnerships as a route to market. Larger established companies can bring both customer reach and distribution capability. For a new product aimed at SMEs this could make a big difference. Taking your software to large numbers of possible buyers might otherwise be beyond reach. The costs and infrastructure are just too onerous.
Lessons From Experience For SaaS Startups
One of my jobs in a previous life was negotiating market partnerships. Between large global organisations. Often referred to as alliances in the corporate world. Such arrangements are common and may appear to have enormous scale. Considerable resources are invested in establishing and selling these deals. But in reality the market impact is often quite limited. Damp squibs outnumber success stories by a wide margin.
I invested a lot of time and effort in some winners and some losers. I have also seen many efforts by startups to create such partnership. There are four lessons I think startups can learn from this experience.
Find Real Value For Both Parties
First is there needs to be some real business value for both parties. The advantages of scale and established distribution to a startup are obvious. Too often the win for the bigger company is not clear. Remember that your partner’s leaders need to persuade salespeople. It must be in their interest to promote your product. It may suit the CEO to support local startups but that does not cut much ice in a sales meeting.
You Need Give As Well As Take
As well as both sides winning, the two parties each need to be willing to give something up. This was often the hardest part of negotiation. The two companies each want to own the customer. To retain their own IP. And to control the sales process. This is impossible. Any partnership deal needs some give as well as the hoped for take.
A Partnership Is A New Business
When you do agree a partnership you have started a new business. It may be small relative to one or both parties. But it is separate, a combination with its own offer to the market. And its own priorities and dynamic. To make this work there must be a clear focus. Each side needs to know what it will gain. The new partnership must have objectives and ambitions that stand alone.
Allocate Specific Market Resources
The partnership must also have a strategy and allocate resources for reaching the market. Startups often misunderstand this process. A large corporate has immense market presence. Well established channels. And plenty of dollars to work for it. To the founder of an early stage company it seems this resource must lead to success. However, it is already spoken for.
Large enterprises with big brands do spend heavily on marketing. This is in proportion to the demands of their markets. And the ambitions of their CEOs. Budgets are limited. Careful plans are laid to achieve market share and brand presence. Tacking another product on the side doesn’t fit into this picture.
Commit For A Winning Proposition
This is a key test. If both sides are not willing to commit specific resource, the partnership will wither. It will be added to a long list of grand announcements with no follow up. Negotiate a deal that includes real commitment. Or don’t waste your time.
None of these suggestions is radical. They are a good test of real intent. I appreciate the efforts of the corporate world to support startups. Good intentions will not make a real difference. Proper commitment with a clear focus and objectives. A winning proposition for both partners. These will be good for everyone.
World Class Small Business Consulting A Startup Can Afford
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.