Four Ideas To Maximise Your SMB SaaS Cash Flow In 2016

Happy New Year to everyone. I hope you are ready launch into another SaaS year. I have spent a fair bit of time over the holidays thinking about some of the big topics related to SaaS. You will hear much more about my ideas over the coming months. For this first blog of 2016, I want to concentrate on one specific topic. Cash. 

Every SaaS is looking for money

When I look at the SaaS companies I advise and/or invest in, almost all have one common feature. They have either raised funds in the recent past or they are planning to raise in 2016. In some cases both! So I was thinking about why SaaS businesses always seem to need money. And I came across this post from Jason Lemkin - Why Can’t SaaS Just Mint Cash? Here is one of the gurus of SaaS looking at the exact question. How come even successful SaaS needs more and more money to sustain progress? 
 
It also reminded me of an earlier post by another legend, Tom Tunguz. One of his themes is to analyse the published number of listed US SaaS companies. I think he has a basket of 51 that he tracks. This article highlights numbers for that group of SaaS companies.  Almost none of these businesses are generating free cash flow or GAAP profits. Only 18 (of 48 at the time of the post) have ever recorded even 1 year with positive net income. The cash position is better but it still takes on average 6 years for SaaS to become cash positive.

Why does SaaS eat cash?

​Why should this be? And does the SaaS business model still make sense if the overall economics are so tough? I believe it does because these numbers are a product of growth. Not the result of a fundamental flaw. That does not mean you can relax if your SaaS is swallowing cash. Growth is one factor but it can also highlight areas of the business model that need attention. 
 
The key challenges that create cash burn are:

• The basic SaaS model requires money upfront for every customer you win. Your CAC is spent in advance. Yet the revenue only arrives by month. This is a type of new business strain. As you keep attracting new customers, for a while the cash flow position keeps getting worse.
• You can see the basis of how this works in the chart below. It shows the basic cash flows for one SaaS customer over one year.

• And things get tougher as you start to grow. In fact the faster you grow, the deeper your cash trough becomes and the longer it lasts. In this chart I have compared month on month growth rates of 5%( Low), 10% (Medium) and 20% (Fast).​

• Of course the model does not always work as simply as this. Three things can help ease the cash burn. 
  1. Renewals. Over time customers start to take out new subscriptions. With no CAC attached. 
  2. Up front payments. Many SaaS companies offer a discount so that customers pay a full year in advance. If enough of your base follows this pattern and your CAC payback is less than a year, the number look much better.
  3. Negative churn. Arises when the increase in revenues from existing customers is greater than the MRR lost when customer churn. Levers up the benefit of renewals.

• Jason Lemkin’s article has some ideas on the level these metrics need to reach for cash flow to turn positive.  Although this is biased toward enterprise SaaS. Some more thoughts on that below.
• Once your SaaS is established and in a renewal cycle you should see at least some progress in this direction. If cash burn is still unsustainable then you may be spending too much money somewhere. The biggest outflow at this point is often high CAC. In turn this could mean you have the sales model wrong. An inefficient sales force for example. Or expensive distribution channels with poor conversion.The alternative may be big expenditure on product development and maintenance. Or customer service and support. 

Is Enterprise the only answer?

One option to work your way out of the cash bind is to go up market. Enterprise sales generate more cash. Big organisations are great for upset. More users. New modules. Extra locations. It all adds up to a strong ongoing revenue stream. 
 
This option is not open to everyone. Selling to the enterprise means a substantial investment in sales and service capability. You will get the cash flow right in time. But only if you can raise more cash up front. $100m plus rounds are common in the US. This type of funding is much harder in other startup ecosystems.

4 SMB SaaS ideas for 2016

And maybe that is not how you want to run your SaaS business. Your product and market may be squarely in the SMB sector. In this case spending heavy to hire sales people and sell to multi nationals would be the wrong strategy.
 
So we are back to the start. Every SaaS business needs cash. 2016 could be a year when the business environment gets tough. Fundraising may soon be harder than ever. If you are growing an SMB SaaS business, what can you do to mitigate the cash burn?
 
I have no easy answers. These 4 ideas are worth trying:
 

1. Look hard at distribution options. Just because you don’t have direct sales does not mean your options are limited to SEO and Facebook ads. A growing number of other channels re available. Integration with platforms such as Slack. Get listed as a partner by Salesforce, Xero or others. Find a partner with an existing customer base. An audience that needs your SaaS. And work with them to leverage your marketing spend.
2. Consider discounts and other incentives to persuade more of your customer to pay upfront. Think about renewals. These are customers who have already used your product for a year so why not pay for another full year?
3. Improve the efficiency of your sales model. If your unit economics work, do everything you can to reduce touches. Improve conversions. Make onboarding more intuitive. And reduce churn.
4. Only hire if you are sure you have the right person. Every member of the team has to work well. The biggest cause of expensive and inefficient sales is people. Sales staff who are not achieving the right levels of efficiency. Tough quotas and close management do not fix this problem. You need to follow your instinct and go for the right hires. Whenever you interview remember, maybe means no.

 
Don’t be afraid to invest in what works. When you find a model. Or a channel. Or a person. Back them. One thing for sure. You will never succeed if you don’t spend the money you do have. Find the right solutions and go for it.