Venture-backed startups have had to make myriad spending cuts this year in an attempt to either live up to a high valuation, minimize their burn rate or both. But new data from fintech Capchase shows that many startups — especially venture-backed ones — seem to be getting the wrong advice concerning where to downsize.
Capchase, which lends non-dilutive capital to SaaS startups, looked at how more than 500 SaaS startups fared in a number of areas including revenue, runway and growth between August and December 2021 and between April and August 2022. One big takeaway was that companies that didn’t cut spending on sales and marketing were in a better financial and growth position now than those that did when the market started to dip in 2022.
Miguel Fernandez, the co-founder and CEO of Capchase, said he was initially surprised by this finding because that doesn’t line up with the advice many VCs are giving their portfolio companies — at least on Twitter.
However, the results do align with the fact that Capchase also found that most bootstrapped software companies were performing better than VC-backed ones this year — but more on that later.
“It was really interesting that traditionally when companies hit speed bumps they usually cut growth, and to do so it is easy to cut something in marketing and sales because immediately you see an impact to your bottom line,” Fernandez told TechCrunch. “What we have seen in this case, and what is most interesting, is the best companies have actually cut every other cost except sales and marketing.”
He added that while cutting sales and marketing spending may work well for short-term cost control, it won’t generally have long-term positive impacts, which could end up hurting companies down the line.
Yeah, no, most VCs still don’t really care about your path to profitability
“[Companies] have to make up in growth what they are losing in multiples,” he said. “The only way they can do that without cutting into runway is a cut somewhere else: cutting costs in R&D or in products. They need that growth; otherwise, they won’t make it to the next round and do a massive down round in the future.”
If companies do need to cut resources from this area, Fernandez said Capchase found that if a company cuts back on bringing in new customers while still working hard to expand and retain current customer contracts, it can be just as, if not more, beneficial.
“It is much easier to retain a company customer rather than get a new one,” he said. “Investing in retention can be a winning SaaS company strategy. The other day I was looking at a startup that had almost zero new customers but had grown 25% year over year.”
SaaS startups in Europe are much more focused on this strategy, he said, which is why Capchase’s data shows that companies across the pond are generally in better shape than those here in the U.S., at least by the standards of today’s market.
The companies that are currently seeing the best growth metrics of the bunch this year are bootstrapped companies, per the dataset. Fernandez said that since these startups don’t have as much pressure to grow at all costs, or hit certain milestones and metrics for a future funding round, they are seeing much more steady growth and less pressure to cut back spending.
Overall, though, Fernandez said this data shows that for the most part — at least regarding the companies that Capchase looked at — SaaS startups are not in terrible shape as a result of this year’s downturn. But we’ll have to wait and see how the same group of companies will fare next year.
Comment