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The coming sales & marketing SaaSastrophe

15/5/2016

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​If you have not already read Bill Gurley’s article on the dangers of the Unicorn financing bubble then you really should. He outlines current financial exposures. Created by the fashion for mega round private finance in the last couple of years. And sets out how each main group of stakeholders are at risk. With some excellent cautionary advice for founders and employees in startups.
 
As Bill points out, many well funded companies are still hungry for cash. Massive burn rates mean that even the largest funding rounds evaporate fast. Much of this cash goes on sales and marketing. Direct sales teams, commissions, distribution channels, advertising, content and all the rest. This creates an ongoing demand for finance. And also raises a couple of other questions.

Puncturing the investment assumption

​Everything and everyone takes it for granted that the big money flowing into startup companies is investment. Companies raise investment. Angels, VCs and institutions make investments. Governments ease and enable investments. What happens when this (implicit) assumption is jettisoned?
 
All that cash was paid for shares. Then spent on building up market presence. Customers, brand and reputation in other words. Great if those stick when the dollars stop flowing. But for many customer loyalty may fade and the revenues will drift away. Because some companies need to keep spending just to stand still. Never mind grow.
 
Turn off the spending tap and there will be real separation between the good, the bad and the ugly. Companies built on good products will survive and thrive. Those that have built a track record of value and a loyal customer base.
 
Reputations created by spin, PR and heavy advertising spend will fare less well. Expect many more well known names to be tarnished.
 
And the losers  will have nothing on the balance sheet. Nor any intangible assets of substance. Even a few lines of code will look like a solid asset by comparison. There will be some angry investors around when this emerges.
 
In more conservative investment ecosystems this could have a devastating long term impact. I already see a lot of investors who believe in patentable IP as the only solid basis for a technology business. A bunch of stories about "smoke and mirrors" startup growth will not help. The persuasion hurdle may be even harder to clear.  

A potential SaaSastrophe

​SaaS sales & marketing companies will suffer the greatest exposure. Tom Tunguz is the ultimate authority on SaaS data. He points out that Sales (=1st) and Marketing (5th) are 2 of the top 5 business functions for spending on SaaS products. In another piece he looks at the 1875 SaaS marketing companies started by 2015 (2014: 947).
 
I think we all know that every startup uses one or more of these products. They are the vehicle for all that advertising spend. The day to day tool for the sales and marketing teams. And further chunk chunk of investors cash is going to pay all  those subscriptions. 
 
This market is honestly crazy. Yes there are a handful of SaaS that I see everywhere. Hubspot and Intercom are prominent. In the enterprise space Salesforce has a strong position. And I know plenty of companies that generate real value using these products.

But I also see a new product every week. Ranging from the doubtful to the out and out flaky. On top of this I get sales e-mail from new startups most weeks. Offering services which grow more niche and less clearly defined by the month.
 
We have travelled from fragmentation to saturation to glut. Investment will soon be in short supply. Revenue will take a harder hit. There will be casualties. And desperate throws of the dice. It will not be pretty. In short, SaaS sales and marketing is a bubble waiting to be burst.
 
I will not shed many tears. The proliferation of sales and marketing “solutions” has infected the whole SaaS market. In all categories and verticals there is too much focus on sales. And not enough on delivering real value to customers. We need to rebalance. 

A couple of simple precautions

​If you are a startup (or indeed any company) using some of the products what should you do? I would not get too stressed about it. Keep two simple things in mind:
 
  • Make sure you know how to retrieve your data. Transferring to a new system will be a pain but not a crisis. You could even operate for a while with a light touch CRM built out of Google Sheets.  Losing your data will cause serious problems.
  • Try to forget the hype about new platforms. And the expert advice from the gurus on digital marketing. Do what any experienced marketing professional would tell you. Focus your marketing spend on reaching the right audience. And deliver a message that has a clear, achievable value promise for the customer.
 
Contraction in the startup funding market is inevitable. The big dollar losses will be in unicorns that have raised or are raising gigantic private rounds. These are concentrated in the US and in the startup mega clusters. But everyone should beware the ripple effects. 
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    Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.

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©Sunstone Communication Ltd 2016
  • Home
    • Tartan in Tallinn
  • Blog
  • Free Downloads
    • Sunstone Financial Information Survey 2017
    • Sunstone SaaS SWOT Analysis Tool
    • The Book of Business Plan Ephemera 2014
    • SMB SaaS Unit Economics Calculator
    • How technology is killing the CIO
  • About
    • Kenny Fraser
    • The Legend
    • Community >
      • Mallzee
      • Appointedd
      • SaaS Group
  • Financial Model