Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Email him directly at firstname.lastname@example.org, especially founders.
At the link below is one of the best startup post-mortems I’ve ever read. It’s by a founder of a company called Moz. The business had fantastic growth out of the gate, took on major VC money, tried to scale too quickly letting hiring and costs got ahead of growth, and ultimately they had to scale back significantly.
The post is well worth the read, but below I distill the three big take-aways for me.
Avoid the dim glow of big VC. The post states “We’ve raised three rounds of funding: $1.1mm in 2007, $18mm in 2012, and another $10mm in January of 2016. During that stretch, we’ve grown to ~$40mm revenue run rate, mid-market size for a SaaS business.” I don’t know the particulars of Moz’s financials, but I’m willing to bet that the company had fantastic growth and was a beautiful business before they took that $18mm round in 2012. Once they took big VC money, they had no choice but to force even greater growth and go for the huge exit. Even at $40mm of ARR they didn’t exit, likely because the post-money valuation set by the VC required an even larger company be built and the burn was too high relative to growth. If you get a big round form VC, it may seem great initially, but the pressure and risk involved to go for the big exit means high burn and little room for error.
SaaS margins suck. The article makes a statement I partially disagree with: “while software has high margins, it also has very few places to cut expense except people.” The first part of that statement is wrong in my view while the second part is right: Software does not have high margins. It has awful margins and very high fixed costs. As the table shows, the median operating margin for publicly traded SaaS businesses is negative.
Poor margins and high fixed costs makes it extremely hard to cut costs in SaaS because any cut is personnel such as dev, sales, customers success, etc. If you’re a SaaS business, scale carefully and within your means, because SaaS’s low margins and high fixed costs make it very hard to turn back.
Restructure while you still have cash. The post states “With 12 months of cash in the bank and growing revenue, did Moz *have* to do layoffs in August? No. We could have carried on, done our best to limit non-personnel expenses, and tried to get growth fast enough to catch up to our expenses before we ran out of money entirely. But I believe, as did our leadership team and board of directors, that making the company cash-flow positive ASAP was the right thing to do.” These founders had the fortitude and the wherewithal to recognize a restructuring was inevitable: they could either make the cuts now while they still had cash on the balance sheet, or they could burn through the cash and make very deep cuts later when they were out of cash. The former is always the better choice although it’s harder to do.