Trouble has been brewing for a while. Venture funding has been drying up, particularly for early-stage companies; public markets are shaky, and the word “bubble” comes up more and more frequently.
Just recently, SaaS companies’ share prices took a nose dive. That got B2B founders’ attention: the coming crunch might hit them too. The scary thing, if your startup sells to other startups, is that you aren’t just betting on your own company’s resilience. You’re betting on your customer’s staying power as well. That’s why recession-proofing your customer base is vital to your success.
What happens to B2B startups in a recession
The general consensus is that we’re headed, if not to a recession, then definitely a chilly funding climate. It’s going to be harder for unproven startups to raise capital, and for those startups to justify high valuations.
In practice, this causes a cascading effect: lots of pre-seed and some Series A startups will fold, robust Series B companies will retrench rather than growing rapidly, and so on.
But here’s the thing: funding crises are survivable. Solid companies with solid business models, management teams and patience will persist. And the later the company’s stage, and the closer it is to profitability, the more likely it is to weather the storm.
How I’m recession-proofing my business
As a SaaS CEO focused on building a bomb-proof startup, I needed to ensure that my customer base is resilient enough to survive as well.
So I leaned on my investment banker training to assess potential customers’ – and therefore our – risk. To analyze whether a potential customer is likely to survive a downturn, I look at two factors:
Is the company’s product a vitamin or a painkiller? Vitamins are nice to have – think office catering, employee events, and potentially even marketing tools if they can’t provide a clear ROI. Painkillers, on the other hand, address a burning need.
Do the company’s customers have room to grow? I want to know about my customers’ customers, since those second-degree successes influence my own.
Vitamin or painkiller?
If a company’s looking to cut costs, vitamins will be the first to go, but painkillers will still find their advocates. Painkillers usually have one (or more) of the following traits:
Cost-saving: The product offers meaningful, clear savings for the customer. For example, we need to host our website, and paying for Amazon Web Services is much cheaper than owning our own servers.
Sticky: The product is hard to remove. Zenefits, for example, is so deeply ingrained in our HR operations that extracting it ourselves would be more costly than continuing to pay.
Now, it’s worth noting that the second criteria is more common in B2B companies than B2C, and I think that’s fair. Consumer products can be valuable and/or addictive, but are more easily abandoned when money becomes scarce. Another mark in B2B’s favor is that people are generally more willing to spend other people’s money.
Customer long-term growth prospects
The second criteria in measuring a potential customer’s survival chances is whether their customers are durable and have room to grow. I considered companies’ “long-term growth prospects” on two criteria:
Incremental addressable market: Customers have room to grow, preferably explosively, allowing the vendor to ride on their coattails. Twilio, for example, scored Uber as an early customer; the ridesharing app’s growth helped fuel their own.
Proximity to profitability: Customers are profitable, or at least on track to be. This is another area where B2B companies perform favorably to B2C: B2B2B companies enjoy more stability than those whose customers are consumer-facing startups with no clear revenue stream.
Here are a few examples of how companies score on my two axes:
A major caveat: I can’t pick winners (if I did, I’d have my own VC firm). Instead, I want to share my thinking of how my own customers can mitigate – or worsen – the risk to my company.
What this means for our product development
This framework had a significant impact on how we repositioned our product in the last few months. We’re aiming to be:
Cost-saving: Reps can spend 75% less time on sales prospecting using DataFox, which is a demonstrable value.
Revenue-driving: Our sales triggers help alert customers to new opportunities first, and help them engage on a more meaningful level. This directly leads to closed deals, so we can easily show how we’ve increased our customers’ top line.
Stickiness: Over the past year, we developed a Salesforce integration and an API, so our product becomes an integral part of users’ tech stacks.
And we’re aiming for customers who show:
Incremental addressable market: We initially targeted financial services, but realized that we should also focus on the massive, largely untapped sales and marketing use case. We want to sell to more B2B startups, whose customers in turn have room to grow.
Proximity to profitability: Because most of our customers are B2B or financial services firms, we’re pretty confident that they’ll stay afloat during a downturn.
A year ago, by my yardstick, we probably would have been a risky company to sell to. But with a mix of product changes to make ourselves into a painkiller, and repositioning to sell to a sturdier customer mix, we’re well on our way to mitigating that risk.
How you can recession-proof your customer base
Startups are natural early adopters, and it makes sense that they’d fuel other startups’ growth. But with a potential correction in venture funding looming, it’s vital that we be thoughtful about who our customers are. There’s still time to ensure you’ll stay standing when the house of cards falls.
This article has been edited and condensed.
Bastiaan Janmaat is CEO and Co-founder of DataFox Intelligence. Prior to DataFox, he honed his prospecting skills identifying growing tech companies at Goldman Sachs. He is a graduate of the Universiteit van Tilburg in the Netherlands and the Stanford Graduate School of Business. Connect with @datafoxco on Twitter.