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Built to Last: What enterprise software leaders can do now to weather the storm

We’ve entered into a period of extreme uncertainty driven by the COVID-19 crisis. While it’s impossible to forecast exactly what will happen, we can look to previous system shocks to see how the enterprise cloud sector might be affected and what startup CEOs can do to navigate it.

The Potential Impact on Enterprise Cloud

During the ‘08 financial crisis, we saw that public enterprise software companies were more resilient than other sectors (see chart below comparing the 2008 SaaS performance to the market indices). 

- Stock performace during 2008 recession -
- Stock performace during 2008 recession -

We believe the core drivers of this resilience are still at play in today’s crisis. First, recurring revenue contracts, particularly for mission-critical software, tend to continue to be paid. Second, enterprise software businesses don't have to grapple with supply chain disruptions that can hamstring hardware-dependent businesses. Third, enterprise software businesses generally don’t have direct revenue exposure to declining consumer transactions. Lastly, SaaS companies tend to be well suited to weather storms, with fundamentally high gross margins that allow for more opportunity to pivot to profitability.

- Average Annual Growth Rate & Average Op Income (loss) as a % of revenue -
- Average Annual Growth Rate & Average Op Income (loss) as a % of revenue -

There, will, however, no doubt be delays in sales cycles as buyers grapple with their own shifting business dynamics. Further, churn will likely increase across the board, though will be much higher for those companies selling more of the non-essential software vs. the mission-critical software. 

But we believe some enterprise software products may see stronger demand during, and most importantly, after this crisis. Just as the dotcom crash was an important catalyst in ushering in the shift from on-prem to cloud, we’re already starting to see hints that the current crisis could usher in a new era of remote work software. As more and more companies around the world start practicing social distancing, products like Zoom and Slack become the core infrastructure upon which work (and education) is getting done. Indeed, as of March 13th, Zoom was the most downloaded iOS app in the US. Earlier stage companies like Salesloft, Chorus, Tandem, and Guru are also building products well-suited to help companies adapt to a new remote reality. We’re deeply grateful to the entrepreneurs working so hard in this stressful time to allow us to stay connected while keeping safe.

Steps Enterprise Cloud Leaders Can Take

While all leaders should reevaluate their operating plans in light of this black swan, each should decide how to respond based on their own unique position (don’t blindly follow cookie-cutter advice). We’re working with each of our founders to help craft scenarios and constantly reevaluate as conditions unfold. 

Here are some of the actions we’re discussing:

  • For leaders of profitable companies, this could be a great time to invest strategically. There will be some terrific talent that comes available, so it’s a good time to be opportunistic and invest such that you’re well-positioned to outpace your peers when the crisis abates. 
  • If you have the capital to cover 12+ months of runway and you are over the $10M ARR threshold, focus on capital efficiency and make a trade-off of some growth for efficiency. Go slower now to go faster later. Be prudent about managing risk and super-efficient with sales and marketing. Focus on your current customers. Make sure they are happy and set up for success. It is easier to generate new revenue from them than it is to close new customers. You can choose to reaccelerate growth after you have data on your and the economy’s performance over the next few months.
  • If you are under $10 million in ARR and or need to raise funds in the next six months, we highly recommend you sharpen your pencils, cut expenses and extend your runway. If you are raising capital now, focus on getting to a closing and don’t over-optimize on terms, instead focus on speed to close and certainty. Ensure you are capitalized to ride out this wave and focus your strategy on making it through this downturn and be ready when the cycle improves. 
  • In terms of your team, clarity of communication is critical. Ensure your team fully understands and is rallied to achieve your new plan. Make sure managers are communicating the important role each person plays in achieving it. If cuts are necessary, avoid death by a thousand cuts. Take your medicine early and treat people well on the way out to soften the blow. 
  • In terms of your customers, use this as an opportunity to get more deeply involved in helping them solve their evolving pain points. If your product can be used to help them navigate this storm, you’ll earn your position as a “board-level vendor” (one that is critical enough that it’s discussed at board meetings). 

Some of our best investments were made in prior downturns—Salesforce in 2002 and Veeva and ServiceMax in 2008. We know that many iconic companies will be born and forged in this period and we continue to have conviction in the future of the enterprise cloud. Emergence is open for business for those intrepid entrepreneurs that want to help change the future of work, now more important than ever. 

One of our three core values at Emergence is “win big in the long run”. The long run, by definition, includes moments of crisis. It’s been humbling to see leaders rise to the occasion in such moments and steward their companies to ensure they’re built to last. Onward and Upward.

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