Bracing for the Impact: Micro SaaS on the Eve of a Recession
Is winter coming for tech startups?
The second quarter of 2022 was not so bright for tech startups. The Federal Reserve raised the interest rates for the first time in more than three years, followed by two further increases in May and June, setting the alarm bells for tech startups that benefited from the funds flooding the market for years. Venture capital firms like Sequoia Capital were quick to awaken to the possible ramifications of this development, reminding their portfolio companies that this is a different market now and that they must become cash flow-positive.
The exit challenge
Founding and leading a startup was no walk in the park even before the recent downturn in the investment markets. Setting off, a startup founder has his eyes set on the ultimate prize of making an exit in the form of the sale of the company for a huge sum or an IPO. However, making a successful exit is an uphill battle. Reports tell us that 90 percent of the startups and 75 percent of the venture-backed startups fail, with only less than half making it to their fifth year.
A regular SaaS business requires a serious commitment in terms of time and resources to be successful. Not everyone might have the means or the willingness to invest huge sums in building infrastructure, hiring a large staff of developers to build a product, and sustaining that effort for a long time. The median time for a SaaS startup to make an exit or IPO was 9 years. In Europe, it takes companies an average of 15 years to make a successful exit. Very few people can cope with the demands of running a startup for such a long period.
Such a long journey is only possible if the startup achieves profitability or finds ways to extend its runway. Achieving profitability is a distant dream for a startup because growth is king for a SaaS business, and investing in staff and marketing are the only ways to keep growth going. However, this kind of investment brings diminishing returns in terms of growth as the market gets saturated. So, a dollar spent on hiring new developers and launching new marketing campaigns does not generate as much growth in later stages as it did at the beginning. In other words, sustaining a certain level of growth requires the investment of increasingly more resources. As a result, SaaS startups are always cash-hungry.
The not-so-bright side of entrepreneurship
The life of a startup founder isn’t an easy one. He has to work on his product to make sure that it is positioned right, leverage new marketing channels to sustain a high growth rate, expand his staff, and deal with personnel-related issues. Another task that needs constant attention from the founder involves talking to potential investors to solve the cash drought and prolong the runway.
Family, friends, and angel investors can offer support in the early stages of a startup. But a journey that may take years is not viable without some institutional investors chipping in. Pitching to investors and trying to lure them becomes a staple in the schedule of a founder who wants to keep his business growing. In the meantime, he has to ensure that his company remains attractive for a possible acquisition. Networking and engaging in negotiations to look for a possible buyer for a company can come to occupy an outsized part of a founder’s schedule, distracting him from other duties. This can be a costly mistake, as it usually results in lower performance of the company and a lower valuation.
Just like looking for suitable investors, planning for an exit cannot become the only task on a founder’s agenda. And neither is planning for an exit something you can delay until the time comes. You have to plan your exit right from day one, the day you found your startup. Starting to think about your exit after you land an offer to sell your SaaS would be too late for making the necessary preparations. A founder would be well advised to keep his financial data in order, receive expert mentoring, work on different acquisition scenarios with conditional payments (earnouts), and ensure that the company achieves its business goals even before receiving a single offer for his company.
Life without an exit
The micro SaaS concept shows us an alternative way: Not chasing exits at all. At the heart of a micro SaaS endeavor is the product that solves a well-defined customer pain, not investor interest. In time, the product gets better at solving the customer pain, nurturing loyalty among the existing but limited customer base, and triggering word-of-mouth to entice new customers.
A micro SaaS startup is a bare-bones, no-nonsense type of organization. It avoids vanity expenses many venture-backed, cash-rich startups are prone to and runs quite efficiently. Therefore, it can stay on a budget and finance its operations with its income, leaving the founder a healthy profit so that he doesn’t need an office job. With the looming economic downturn and dwindling prospects of free money, we can expect more entrepreneurs to set out with a micro SaaS game plan instead of trying to lure investors. The stars are lining up for micro SaaS businesses.