How to protect your SaaS business during market uncertainty

Public tech stocks have been on a downward trend. This bear market is driven by rising inflation and interest rates, as well as Russia’s invasion of Ukraine. Private market correction has already started. In 2021, we saw large VC rounds at eye-watering valuations. However, private and public markets are intertwined, albeit the private valuations take time to correct. We’re now seeing the private funding market slowing down, a trend that started just at the start of this year. What does it mean for SaaS founders? Access to capital will be affected. The decrease in valuations at exit will put pressure on your investors to drive more value creation per dollar invested in order to reach the same expected returns. There are three ways for an investor to make this happen: Make the company go further with the capital they’ve already invested (avoiding further capital injections) Find additional capital without impacting the company’s valuation (eg debt or non-dilutive financing) Invest more, but at a lower valuation With that in mind, here are four things to look out for from investors during market turmoil: Pressure to cut costs We’re already seeing many high profile tech companies taking decisive action, with the likes of Hopin, Peloton, and others reducing headcount to prolong cash runway. What to do Do scenario planning early and often to stay in control. Our Co-founder & COO recommends founders should switch from occasional financial planning to monthly re-calibration. Declining investor risk appetites Expect slower fundraising processes, as more analysis and discussion will go into investor decisions in 2022. Decisions may be more cautious, and we’re seeing lower roundsizes and valuations as well as less founder-friendly terms. What to do Plan fundraising months in advance, and lower your expectations on what you expect to get from new and existing investors (amount to invest, valuation, key terms, etc.) Investigate alternative financing options Research non-dilutive capital and alternative lenders as they may be able to provide working capital to help you fund or extend your cash runway to delay your next equity round. We’re seeing increased interest in our non-dilutive funding option. What to do Make sure you’re aware of and understand the range of financing options available to you that are suitable for your business needs, stage, and risk profile. Engage early with different providers to understand their offers and plan ahead. Predatory behavior Not all investors take a founder-friendly perspective during turbulent times. Beware of investors offering aggressive terms or changes to your shareholder agreement. Look for things like changing liquidation preferences or voting rights, or valuation step-downs. A down round (equity injection with valuation decrease) may be a valid last resort, but it risks negatively impacting motivation for founders, employees, and early investors. What to do Ensure you have trusted advisors, to help spot predatory behavior. You can read more here: https://bit.ly/3AdoLjj