CEO Mike Hoffman oversees operations and aligns business functions with SBIbusiness strategy to achieve scaled growth and customer success
Over the past decade, tech companies appreciated have skyrocketed (registration required). The valuation of these companies were primarily driven by their revenue growth rates. Subscription technology and SaaS companies have benefited from revenue multiples that have grown to almost inexplicable levels. Although their behavior was questionable, they did what works. Why change behavior that is rewarded with positive reinforcement?
For a new company with good hopes for the future, growth at all costs, for example huge investments in R&D and S&M, makes sense. The problem for these companies, particularly in the technology sector, is that this reliance on external investment continues well beyond the start-up phase. Like children who eventually have to take off their training wheels, at some point these companies have to stop asking investors to back them.
We’ve all heard of tech companies that have huge valuations in the public markets without ever turning a profit. The problem is that when you are valued by sales multiples, every dollar of sales growth is a good dollar. The end justifies the means when it comes to generating new income. In my experience, even when pursuing cohorts of customers with an average lifespan of only 3.7 years and a customer acquisition cost (CAC) of 5 years, payback has worked in this climate.
Years ago, when I was in private equity attending a sales conference for a large publicly traded company, I said to a colleague, “If this company were private equity owned, at least 35% of the people in this room wouldn’t be working here.” The board was broken. Like other similar companies, it seemed that no one was paying attention to the store. But the companies and their management teams were not lazy or inept. Rather, they were winning the game they were rewarded for.
But in a recession – or living in fear of a recession as we are now – this has changed. The cost of capital has risen and the bells have started ringing in the companies described above. Their tactics give companies a black eye on the public markets and they can’t correct course fast enough. They have to make a change or it will be made for them.
I believe companies need to go back to focusing on their bottom line. Gone are the days of being content with unprofitable customers leaving before reaching their CAC refund. Companies need to move away from prioritizing revenue growth and instead focus on the cost of capital versus return in the P&L, their internal rate of return and what generates the greatest value.
Growth at all costs has been the name of the game. But now it might be wise to start asking questions like, “Can we accelerate growth without increasing operating expenses or even just maintain growth in exchange for the opportunity to keep operating expenses the same and put more money into operating income?” ?”
Levers to turn things around
To support this shift, companies will need to look at the available levers and consider the following:
1. Wait and see is not a strategy. Know exactly where your productivity potential lies. Organize your GTM data and let your operations teams prioritize market segments. You need reliable information to make fact-based decisions about where and when to allocate resources.
2. Beware of overcorrection for a possible recession. Focus on recognizing immediate efficiencies within your GTM system so you can adjust your value creation model. Avoid market discounts, activation and customer operations and operational costs.
3. Staffing is not always the way to think about sales capacity. Analyze the turnover per employee and where people concentrate and spend their time. Organizations should look at every role in the organization and ask whether that role pays for itself. If a sales rep isn’t bringing in enough revenue to cover their salary, drive growth, and bring money down, you should ask yourself how to increase productivity in sales training or methodology.
4. Analyze sales and marketing spend as a percentage of total sales. Shift from top-of-funnel to account-based marketing and narrow ICP activation (ideal customer profile). Focus on driving qualified opportunities with higher win rates and shorter sales cycles. Identify and address buyer issues by prioritizing convenience within their internal buying process.
5. Confirm that you get our products to the right buyers in the most efficient way. Ask if your channels are getting products for the most ideal customer profiles with the highest willingness to pay and the best profitability. If not, ask yourself whether you should focus on different categories of existing customers – or new customers – and consider the significant difference in acquisition costs between the two.
Public tech companies should challenge themselves to consider the above because if they don’t, they could face the prospect of living under a new governance model. Private equity firms have collected a huge amount ($1 trillion plus) dry powder. They have patiently waited for opportunities to make “private” deals, and they are experts at pulling the levers described above. We have already seen a trend in this in recent years, which technology companies are now taking into account 50% of take private up from 30% a few years ago. So if you’re an executive in a publicly traded tech company, you can change and control your own destiny or wait for a PE sponsor to take you private and do it for you.