How SaaS Finance Teams Can Thrive, During & After the Crisis
Of all the industries impacted by the current health crisis, cloud technology is in relatively good shape. Young, modern companies are usually built to be agile, and new work routines have been quickly adopted.
But that doesn’t mean it’s smooth sailing. Some SaaS companies haven’t been so lucky. And SaaS buyers come from every industry, all over the world.
So how should finance teams in SaaS businesses react to the current situation? To explore this question, we held a live Q&A session with Gainsight’s VP of Finance. This article will share five of the top lessons from this webinar, which you can watch any time here:
About our speaker
Alka Tandan is VP Finance at Gainsight. Prior to this, she held various strategic and operational roles at MetricStream, Actian Corporation, and IGN Entertainment. Alka grew up in Silicon Valley, and after a start in technology M&A has focused mainly on finance in SaaS companies.
Here are the five most important nuggets from our live conversation with Alka.
1. Exercise “human-first leadership”
Finance leaders need to be exactly that - leaders. And Alka’s experience at Gainsight has helped her refine what she sees as strong leadership.
“I’m our CEO’s biggest fan (Nick Mehta). Over the last few years he has focused on this concept of ‘human-first leadership,’ which was really one of the reasons that I wanted to join. And during this time, that framework has basically been never more important.”
This approach is essentially what it sounds like - putting human needs first in communication and decision-making. “First and foremost, we just wanted to make sure our employees were okay. It's been a big transition. It was really important for us to make sure our teams and employees were okay.”
“Then we've been really focused on our customers, trying to make sure that we're there for them. This is where I think empathy also comes into play. We're big on empathy. Then also, the same thing with our investors.”
So what does that focus on humanity look like in practice? “On our internal conference calls, we always say children are welcome, and please bring them to the camera. We try to have a little bit of fun with it. We have great daily stand-up calls, where we discuss a different fun topic every day. Sometimes the C level will join in and it'll be like an Ask Me Anything type of thing as well.
“I think keeping things light as much as possible, while also being sensitive to what we’re actually going through, helps a lot. For my particular team, I've been having a lot of conversations with people. I think people are just understanding now that this might take a little bit longer, and now they're feeling it.”
Throughout the webinar, Alka emphasized the importance of working together as a business sector. That means treating people with respect, taking government assistance if necessary, and doing what’s best for everyone.
2. Focus on “bottom-up” financial analysis
Naturally, plenty of audience questions focused around financial strategy. And specifically forecasting. So what has changed for Alka and her team?
“I think the most important thing in all the scenario planning is that everything now is bottom-up. I would just encourage everybody to really get into the detail.”
“This is not very different than what we normally do. Our planning cycle is very, very tied into operations, and uses insights from each of the functions. Our regular forecast cycle is to talk to people at least once a month.”
“So you first need a good sense of where you're at. And then make sure the broader company strategy is still aligned with where you are now. Then you want to really talk to each of the leaders and make sure that their strategy is aligned to the new numbers.”
“But overall I would emphasize the bottom-up approach. That means taking cues from your own data. We've defined essentially three different categories which can be applied across many different things including bookings, including churn, even collections:
Category one are those industries that are being badly affected by COVID. Those would be retail, hospitality, travel, among others.
Category three are the ones that are actually benefiting from COVID. Those would be telemedicine, Zoom, and industries like that.
Category two is what we're calling the messy middle, because it's essentially everything not in Category 1 or 3.
“I would encourage you to think about breaking up your forecast in those categories and then doing it bottom-up, because it's going to give you a lot more visibility.”
And speaking of forecasts…
3. Forecast your business using different economic environments
The economic outlook is uncertain, to say the least. So how can finance teams build forecasts?
“McKinsey has this great report. They've basically defined the likely scenarios for the economy. The way they defined it is a V shape, a U shape and an L shape. V shape is essentially the economy dips, and then it just goes back up really quickly. It's basically a one-year recovery. It would essentially mean that in 2021 it goes down, and then in 2022 we go back to normal.
The U shape means we just stay in recovery for a little while - economists are saying this means two years of recovery. L means an economic bottom takes longer than two years. We certainly looked at those three scenarios, especially in terms of our business. But I think that the most important thing is to ‘know thyself.’”
More important than knowing how the global economy moves, is knowing your own place within it. “Even though the macro-economic environment may be one way, there's different sectors and different companies that will flourish, and others won't. It's really important to know which scenario you are within the broader economic environment.”
“There will be some industries that will take some time to get back to normal but certain companies that just bounce back quicker. So it's really important to actually model out all three scenarios, and then pick one that is going to be your go-forward plan.”
And naturally, you can use Alka’s three categories from the previous paragraph in this exercise.
4. Define your vital metrics
From there, you need to be able to measure whether your assumptions make sense, and your go-forward plan is coming to fruition. And there are countless different ways to gauge success along the way.
But Alka pays close attention to fewer than a handful. “There are four key metrics that we're tracking religiously. One is pipeline, the second is bookings, third is gross retention rate (GRR), and then fourth is collections. And they all revolve around cash. I think those are the metrics that you essentially just want to be tracking constantly, weekly, at a minimum.”
Any one (or all) of these could be the indicator that tells you whether your assumptions about the industry are correct. If they behave as you expect, then your forecast likely will too. The conversation then turned to one specific metric from the list: GRR. “Churn is very near and dear to Gainsight, since we're a customer success software company.
“We did a survey of 100 executives at late stage private and public cloud companies. Everybody was concerned about churn. But if companies had GRR of 85% and more, they were expecting drops of 3% to 5%, which is significant. But those that had a prior GRR of less than 85%, are expecting a decline in GRR ofn 15% and maybe even 20%.”
There are plenty of drivers for low retention rates. Monthly billing cycles (with no commitment) are a good example. But for Alka, companies expecting high churn can’t just accept it - they need to focus more than ever on maintaining and increasing retention rates.
“We’ve been telling people to work on that categorization of your customers. Understand who’s struggling and how you might be able to help them. Then a lot of it is just productivity, really being there for your customer, seeing how they're doing. That's where I think the leadership aspect really comes into play, as well as empathy. It just requires really, really good customer service at this point.”
5. Work closely with investors, and be careful in fundraising
In your relationships with investors, “I think over-communication is best at this point. This is a time where it's really important to over-communicate just to make sure they're getting the information. And they're also learning a ton from their portfolio companies. Investors are scrambling too and learning best practices.”
And for companies looking for extra investment during this period? “If someone really needs immediate cash flow, I would say go for the government programs. But if you don't need the cash, I think we all need to be leaders and have empathy here. Let people who really need that cash immediately go for it.
Companies raising funding rounds need to be extra careful during this period. “Everybody looking for funding should be reading up on terms issued from 2008 to 2010. A lot of terms ended up not being favorable to companies at the time. For example, liquidity preferences. Some companies came out of that time with 3X liquidity preferences. In the end, they may have had an exit, but the people that had been there for a very long time didn't.”
In uncertainty, empathy may be your best weapon
During this conversation, Alka returned again and again to the importance of treating employees, customers, and investors well during tough times. Of all the industries to be in, SaaS is well-suited to the current crisis. But this doesn’t mean it’s time to take advantage of others.
Instead, work closer than ever with other companies. “Compared with 2008 or 2001, I see a lot more interaction amongst leaders here in the Valley. There's definitely a sense of, okay, we're all in this together. Let's figure it out.”
This is an opportunity to see the creativity and human side of the tech industry, and that’s what Alka is most excited about.
Watch the webinar in full here.
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