Money Matters: Market Impact on Venture-Backed Software Companies | News, Sports, Jobs

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“If you are willing to do only what is easy, life will be difficult. But if you’re willing to do the hard stuff, life will be easy.” T. Harve Ekert wrote in his book “Secrets of the Millionaire Mind”.

I like to phrase the same idea this way: “If you take the easy way, life gets hard. If you choose the hard, life becomes easy. Life is tough for many businesses in this economy. Others, however, are seemingly recession proof. What explains the difference? When it comes to venture capital-backed software companies, “taking it easy” means getting as much funding as possible. “Choosing the hard,” on the other hand, means collecting only what you need in the near future and focusing more on customer satisfaction to help you succeed.

As CEO of a venture-backed software company, GUIDEcx, I learned valuable lessons about how these two approaches to fundraising make a big difference in business success through market changes. As this economy presents new challenges, it’s never too late to make strategic changes that can improve your chances of future victories.

The state of the market

In the market we just came out of, silver was relatively easy to come by. In this environment, investors have prioritized revenue growth above all other metrics. So many venture capitalist-backed software companies aimed to raise as much money as they could, no matter the cost.

But things are different now. With the US economy shrinks for second straight quarter, investors are prioritizing efficiency measures over revenue growth. They are looking for recession proof companies.

What happens when you collect as much money as possible?

When the economy is doing unquestionably well, you’ll see companies bragging about how big their funding rounds are. You don’t hear that anymore. This is because we are now entering the harsh reality of a tight market.

There are software companies that have increased their valuations to 100 times their earnings. Unfortunately, in the event of an exit, it is impossible for today’s buyer to pay that amount for the company, no matter how phenomenal the organization. These companies find that they have to work 10 times harder to validate their valuation because investors have extremely high expectations of them.

Why? There is a simple equation that helps illustrate. Let’s say a company grows its $10 million annual revenue 100 times, giving it a $1 billion valuation. To satisfy this investment, they will need to earn one-seventh of their valuation, or approximately $143 million in annual recurring revenue. That’s a little more than their $10 million in annual sales!

With these exaggerated expectations, the company must be ultra-efficient, even laying off employees en masse, despite their huge bank accounts. They must run their business almost perfectly for years to sustain their funding, meet investor demands, and create payoffs for employees. And that doesn’t even take into account what the market will look like. Watch Netflix: Who would have guessed shares of such a popular company would be down 70% of its peak?

Companies in these situations are now in the position of being taken into account rather than being able to act proactively as they see fit. They chose “the easy” and now face the “hard”. On the other hand, more financially conservative companies have much more autonomy in today’s tight market.

The benefits of being a financially conservative company

Companies that have gone “hard” during the good times are doing much better than their high-growth counterparts. These financially conservative companies have taken a more disciplined approach in view of the current market, raising no more money than they need in the near future. This strategy generates relatively high net dollar retention, with high customer loyalty and less need to rely on investors for success.

For example, at GUIDEcx, we don’t collect more than we need for the next 12-18 months. I had investors willing to give us more; my response was that I have confidence in our business, but I don’t know what the market is going to do in more than 18 months, let alone several years. Why create expectations when I don’t know what the market will look like?

It’s best to base your investment thesis on what your productivity will be, not what the market can do. Now that we are in a bear market, financially conservative companies are out of market demand. The market does not make decisions for their business. On the contrary, they make their own decisions without the pressure of their investors, which is the ideal and stimulating situation for entrepreneurs.

In my years as an entrepreneur, I’ve found that strong relationships and a rock-solid support system make all the difference. Each time you fundraise more, expectations will be higher – that’s how it works! Focus on building positive, long-term relationships with your investors and support system. The next round of investors will see how happy your current investors are and will be more eager to contribute to your success.

We are in a bear market, but there is still hope if your investors put pressure on you. Going forward, do what you can to avoid the pitfalls of raising too much capital and follow the principles of financial conservatism as much as possible. As you do this and build strong relationships along the way, your business will be better equipped to succeed despite market downturns.

Peter Ord is the founder and CEO of GUIDEcx, a Lehi-based customer onboarding and implementation project platform.



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