Apr 2

Future-Proof Your B2B SaaS Business: Plan for Probabilities, Not Possibilities

Plan for What’s Probable, Not for What’s Possible

While this may sound uninspiring to a CEO and executive team gung-ho on intergalactic world domination, it's often overlooked in setting a sound strategy to future-proof a growing software business.

Based on my previous blog, I discussed the reality of the Valley of Transactions and that most software or software-based services companies will get acquired before they ever become market leaders. While it's 'possible' you will effortlessly achieve market leadership overnight, either because your product is that awesome or because you are lucky—but that’s not what’s 'probable.' If your product is good and you have decent leadership, two things are more likely at some point: you will face financial headwinds (macroeconomic or self-inflicted), or you will get bought, or both.

If these two things are highly probable, would it change the path you are on today? A great strategy would include future-proofing your B2B SaaS business by planning for economic headwinds and for a transaction, even if your aspirations are much bigger than that.

Future-Proofing Strategies for B2B Software SaaS

Here’s what such a path might look like.

It means having a strategic vision, operational discipline, orchestrated execution that’s watertight, and a resilient immune system with top talent. What I’m suggesting is to game the probabilities by picking a multiyear window to prove out your value story and win in specific beachheads.
It means starting with what you want that story to say and work backward about what you need to do to get there.
Pick a strategic playbook that fits the business situation you are that you can execute on no matter what conditions you face, and fiercely focus and execute with urgency against that timeline.
Make the hard decisions as if your life depended on it, early enough for it to make a difference in a transaction.
It means your business deserves thoughtful preparation to compete with an ambitious strategy in a finite amount of time and resources, with intense focus, and with decisive execution using the conditions (or creating conditions) that give you the power to surge - to unlock hidden value in your business in time for a great financial outcome.

What do you have to lose? The worst-case scenario is that you end up with favorable outcomes but no transaction— meaning you will still be farther ahead than you would have been just cruising along.

Strategic Considerations

Let’s talk about the following three major considerations when building a surge-worthy strategy: (1) you should plan for a transaction with a financial buyer within a multiyear timeline, (2) you should plan for a downturn, and (3) marketing is no longer your lifeboat for controlling expenses.

1. PLAN FOR A TRANSACTION WITH A FINANCIAL BUYER

We already discussed the probabilities of getting acquired in this business. If you aren’t already a market leader, or unless you are on a path to nowhere at all, the chances of this are high. Most companies want to be bought by a strategic buyer, but you will be more valuable overall if you have multiple parties interested, so it’s best to plan for a financial buyer as a core assumption. Strategics want to buy you and see you as a possible fit for what they want to accomplish, but they have many hills to climb once you are over a certain size. It's always much easier to build the business case for a strategic party, once the foundational aspects that a financial buyer will desire are already in place. Remember, financial buyers make up the majority of investors overall, so they have the odds.

As you know, there are three things financial buyers look for when they consider purchasing a B2B software company. The first is a recurring revenue model with high gross margins. The second is a large addressable market. And the third is a competitive advantage around the core product or service that isn’t stretched all over the place—the legendary moat. When PE firms are looking to invest in a B2B software company, you must have a good narrative and demonstrated metrics in all three of these areas. Spoiler alert: Modern strategic marketing can help you in every single one!

2. PLAN FOR ECONOMIC HEADWINDS

There are three rules in sailing: (1) don’t fall off the boat, (2) reef well before you need to, and (3) always have a plan B.

Every ocean sailor will tell you that a plan B (or a risk management plan) is critical because something always goes wrong, and it’s always in the middle of the night, in bad weather. The idea behind a plan B is that you are freed up to sail with verve and optimism, but a plan is there that accounts for what’s most critical to get done when things go sideways. The business version of this is deciding how you would operate and prioritize based on the assumption that there could be downward financial pressure. It might come from an actual downturn, or it might come because the growth you expected leveled off because of a lack of sales execution or poor planning.

If you consider recent years to predict what you may face in the future, it’s helpful to learn from other companies that faced major challenges in crises. We can look backward at what happened to companies in previous downturns to understand why some were hit hard and others came out on top. Historically, what we know is that downturns expose flaws for some and create focus for others. You want to be the latter.

Bain & Company executed the Bain’s Sustained Value Creators analysis, looking at what happened in the last financial crisis.

They examined a group of almost 3,900 companies worldwide as they headed into the last major economic downturn of 2008 and determined who posted double-digit earnings growth in the five years leading up to it. What Bain observed was that winners did things differently and fared better as a result. According to Bain’s analysis, as soon as the storm hit, performance diverged sharply, and winners grew at a 17 percent compound annual growth rate (CAGR) during the downturn, compared with 0 percent among the losers (their words not mine). What’s more, the winners locked in gains to grow at an average 13 percent CAGR in the years after the downturn, while the losers stalled at 1 percent. What did they do differently?

Here’s what the research suggests as it relates to building a modern GTM engine today:

1. Plan for cuts, but don’t cut line-item expenses across the board. Instead, cut in places that would create headroom to invest in modernization to fuel future growth.

2. Focus on the core of the business to improve business processes, operate more efficiently, and cut low-priority activities.

3. Maintain marketing and prioritize improvements to the customer experience by investing in modern digital capabilities.

Notice the focus put on core strengths and directing investments in modernization, customer experience, and the creation of an engine for scale and growth, not just cutting everything. Even in bad times, companies that want to succeed despite hardship double down on marketing and customer experience. Unlike their competitors, winners lean into these things instead of dialing back.

Suppose you plan conservatively and build on top of it, versus planning optimistically and cutting in the year. In that case, you have the upper hand in making sure you are growing revenue, growing value, and building a sustainable growth engine. There’s an opportunity to apply these learnings to your plans so your business strategy has risk management built in, and you can execute effectively.

Why is planning this way a good idea? I can honestly say that through the length of my career, there have probably only been a handful of times the business has come to marketing to give us extra money at the end of a quarter. Mostly, the business comes to marketing as the lifeboat for managing expenses due to some kind of financial pressure that should have been planned for originally. Most B2B software businesses underinvest in marketing to start with, so further cuts create deeper problems. These cuts are felt more acutely in marketing, cause stops and starts, and are likely why you aren’t getting what you need out of marketing.

3. DON'T DEPEND ON MARKETING AS A LIFEBOAT FOR MANAGING EBITDA

In the olden days, CEOs and investors were able to get away with looking at their organizations’ marketing program as a line-item expense versus a long-term investment because in the past, marketing would mostly spend money on things such as trade show booths, paid placements, nifty campaigns, and big PR firms—all things that would be easy to do less of in a bad year. When they hit a bad quarter, that was an easy bailout option. Today, that line of thinking doesn’t work.

In today’s digital-first model, marketing is the electricity that powers the customer-led experience, and it is how your customers and prospects engage with you 24/7. Cutting marketing now can have disastrous consequences in a world where the customer experience is always on and driving demand, user traffic, and pipeline. Modern marketing is about creating an ever-present customer experience, always learning, responsive, and personalized. It can no longer be thought of as a transactional expense that delivers discretionary tactics. It’s now become the cost of doing business to enable you to dynamically shift investments around as the market changes. Market downturns or tough times are precisely when you should lean into spending on modern marketing and strategic positioning, not when you should pull back. Yet pulling back is exactly what many B2B software companies default to. Consequently, they manifest the outcome they most feared: irrelevance in the market and an inability to grow. Furthermore, there is a tendency is to pull back on marketing to protect EBITDA leading up to the transaction (sometimes as early as 18 months), which creates strange outcomes and consequences that are difficult to rationalize during a deal.

Creating a resilient company requires an investment in modernization, customer experience, and the creation of an engine for growth, which requires time, discipline, and resources to do right. This is where expectations on ROI can go awry. Determining ROI can be a challenge in companies where marketing is still in its infancy and where the foundational engine and data analytics haven’t been created yet. For these organizations, it’s challenging to track impact end to end, let alone predict buyer propensity in the virtual buyer’s journey. That’s why your marketing might seem like a black box to you—because there’s no foundation in place to expose what is and isn’t working.

If you have an earnest desire to truly create customer value over the long haul, marketing is an investment in a business system that fuels your customer experience. In this model, you mustn’t think of marketing as day trading but as building for the long game that you and a potential buyer will value. In such a model, there’s an understanding that while the market will fluctuate, over time the strategy will create value based on the combination of decisions that were made to offset market conditions outside your control.

If you can think of marketing as an investment, you have a chance at growing at a winner’s pace of 17 percent in a downturn—so just think about what’s possible when times are good!

Summary

The Valley of Transactions is quickly evolving from an open ocean of endless exploration, where just being on the water makes you a success, to a place where the unprepared will simply sink into the depths of irrelevance. Mergers and acquisitions are inevitable, as are downturns in some shape or form. Having a quarter-to-quarter mindset is no longer sustainable because the market will get increasingly volatile, and luck and optimism alone won’t help you create a valuable business.

Being a successful B2B software business is not just about having an aspirational idea about the future and having a great product. You also need to anticipate and plan for alternative scenarios that both keep you safe and deliver positive outcomes despite downward financial pressure. To thrive, you must commit to a strategic, ambitious path, but consider the probability of being bought by a financial buyer looking for a predictable, operationally sound investment. With good planning and a sound strategy, you can make quick decisions, position yourself for success, and avoid months, and maybe years, of unnecessary woe.

Marketing has evolved to become the central nervous system for how you engage digitally with your customers and prospects, and you can no longer rely on cutting it when times get tough. Having a clear strategy sets the foundation for you to use marketing as a competitive advantage to get the impact and ROI you are looking for, in good times and bad.