Weathering the storm

The most common reasons voyages fail, according to yachtsman and author Jimmy Cornell, are ‘the boat itself, the crew, access to funds, self-sufficiency, attitude to cruising, and life at sea.’ Startup founders will relate to this as much as sailors; especially these days when there’s a storm wrecking everything in its course. If the Coronavirus pandemic is the storm, founders sailors, startups their boats, and employees the crew, what’s the best way to navigate the crisis?

For the past 10 odd years, the startup ecosystem in general and the software as a service (SaaS) industry in particular, has been through a growth cycle. But now we’re staring at a global economic recession, triggered by the Coronavirus pandemic. For many companies, this means there’s a need to go from the mindset of ‘growth at any cost’ to sustainable growth. For many others, the question is even more fundamental: how do we weather the storm and survive?

On Saturday, Girish Mathrubootham, the co-founder of Freshworks and Manav Garg, the founder of Eka Software Solutions got together on an exclusive webinar for founders of the SaaSBOOMi community to talk about how they’re sailing. They talked about the business outlook for SaaS companies, the strategies, and tactics that founders could adopt in these turbulent times. Edited excerpts from the conversation.

How do you look at vertical SaaS and horizontal SaaS now?

Girish: Freshworks is more of a horizontal player so the impact on us is of second order. Because we’re selling to multiple industries, unlike companies that are selling only to industries such as hospitality, restaurants, beauty, and wellness or travel. The first quarter has been okay for us but the impact is coming in the second quarter. I was telling someone from the team that Q1 is Masha Allah (God has willed it) and Q2 is like Insha Allah (If God wills it).

Manav: We’re a vertical SaaS company in supply chain and commodities space. I think of us as supporting somebody else’s underlying business. So if you are a mainline business you’re not going to spend money because of the cash crunch. Globally some industries are very hurt. For vertical SaaS, a lot depends on which industry you’re focused on and also whether your product is mission-critical or falls under discretionary spending.

What about small and medium businesses and enterprises?

Girish: Your gut tells you that small and medium businesses (SMBs) are going to be hurt badly. But surprisingly, we’ve not seen a decline yet in traffic patterns. Since most of our SMB deals are closed online, it was least disrupted. Larger deals are getting pushed because no one is reachable in the office. So our mid-market teams achieved only part of their first quarter target, especially because of the troubles in hospitality and travel. Also, face to face meetings, field events, and lead generation events have been canceled so that affects mid-market. Our mid-market is companies with 500–5000 employees.

Some positive news is that people wanted to buy Freshworks because we are more affordable than the competition. As customers look to conserve cash, they want to go with affordable vendors.

Manav: Since we serve a mission-critical part of the business, large enterprises continue to spend on us. I spoke to the top 15 CEOs and all of them said they will continue to invest in technology. That’s because, beyond the short term challenges, they think automation and transformation will keep them alive in the future. The impact may come in the following quarters. In the last two-four weeks, companies focused on human life and safety. Now they are huddling to plan for the coming quarters. I’m expecting spending to slow down for the next one or two quarters for sure, depending on how long the crisis lasts.

Thoughts on the impact on business apps vs deep tech apps?

Girish: For business apps, pockets of opportunities open up. Broadly there are two trends: customers aren’t in the physical world as much and employees are working from home. This is an opportunity to help companies engage with customers remotely and employees to work remotely. To that end, we saw a spike in certain products like FreshChat and FreshCaller and it compensated for losses in other areas. We were able to identify these opportunities and quickly adapt. So that’s going to be our strategy for Q2.

Manav: In deep tech, if you are a cloud infrastructure company it should do well because of the overall increase in traffic.

What’s your strategy and what are some of the tactical things you’ve done?

Girish: This may not apply to everyone but the idea is to give you a framework to look at for your planning and decision making. At Freshworks, we are well capitalized because we were lucky enough to close our $150 million Series H round last year. Which means we are not in panic mode or survival mode. We were reasonably quick to react.

Our message was that the game has changed. Our original plan for 2020 was to grow almost 60% at our scale and suddenly, when this hit, the plan across hiring, appraisals, marketing spends, and all of that had to change. The analogy we use internally is that of a cricket match where the target has suddenly changed under the Duckworth/Lewis method because of rain.

All our employees are working from home. We now say that Freshworks is working from 3000 offices globally instead of 13. We were very early to shut down offices, even before the government said that. Based on earlier assumptions of growth, we had 470+ open positions but now we have paused all hiring. However, we’ve asked managers to submit a list so we can hire for critical roles. We expect a lot of talent to be available. We also postponed merit increases and promotions to July because what we’d budgeted for was based on the old plan. We have a no-layoff policy and we have a “leave no one behind” strategy which means all our support staff, will be paid even if they are employed by other vendors. In marketing, we’ve cut all travel, and field marketing events have been replaced with online events. Digital marketing is seeing lower competition for keywords so we’ve cut our spending by 20%. We track everything daily.

Our instruction to every salesperson is clear: If you are closing a new deal you need to understand why customers are buying and what is the new value. Because earlier, people would have been asking for multiple features among other things. But today it’s almost like they’re buying for immediate value. So we are trying to figure out what that is.

For startups that have a repeatable sales model, there’s a framework you could use. We looked at new deals and upgrade deals in March and compared that with the monthly average of Jan and Feb to see patterns on what is changing. The big call out here for us was we saw a huge month on month spike for one of our remote support products. This also validates the hypothesis that many companies want to digitally engage with customers when customers are not showing up in physical stores. So they want to engage through WhatsApp and on Chat on the website. They want to do more with fewer people so automation is picking up.

The point I’m trying to make here is not about Freshworks. For those of you who have a repeatable sales motion, I’d say study the deals in March and look for patterns. We’re using this to fine-tune our plan for Q2 so we can go after these new opportunities where customers are actively seeking solutions.

We also have responded to requests seeking billing relief specific to COVID19. We think this will increase in Q2. We can’t fool ourselves into thinking that the traffic will continue. We have to plan and have multiple scenarios. We’re also modeling data to find our total Annual Recurring Revenue (ARR) exposure in sectors like travel and hospitality which have been hit the most. Maybe even give customers 3–6 months relief because they’re not going to be able to pay anyway. So it’s better to keep them as customers and hope that things work out for them.

We also analyzed risk based on data before and after March 11th (when COVID was declared as a pandemic). We saw that logistics, transportation, education, and e-commerce was going up. Government and healthcare are also seeing an uptick. Sectors such as food and beverages, hospitality, travel, and energy are seeing a drop. That’s a no brainer.

Broadly, our strategy has four key elements that I’ll detail below.

As Manav was saying, we’re also straddling the short term and the long term. So in the short term can we realign the entire GTM team (Marketing, SDR, Sales) to find where customers are seeing value today in this new environment? Focus on automation and remote support and double down on the few industries where we are seeing an uptick.

From a product standpoint, we are investing in the long term where we want to accelerate future roadmap even faster. Because new revenue is going to drop the amount of customer-requested enhancements will go down to some extent. And that’s the extra bandwidth, you may have.

We are using this time to strengthen our internal systems and processes. We are looking to re-implement our CRM (Freshsales), our HRMS (Freshteam) and improve our management dashboards.

We’re asking everyone to upskill. For example, salespeople to get product certifications on multiple products. The focusing is on organizational learning. The idea is to come out stronger when this gets over.

We’re thinking one quarter will be bad and then Q3 and Q4 might see a slow recovery. We don’t believe there’s going to be a V-shaped fast recovery. It’ll be a slow recovery, but we are hoping that things will start looking better. We still have to plan for the worst case.

Manav: We’re focused on three things: safety, survival, and sustainability. For some context, we work with large enterprises, typically any company that has about $2 billion and a minimum ARR of $100k and above. Some even go up to $1 mn ARR.

Their immediate response was to work from home. There was about two to four weeks’ delay in terms of implementation, decision making and buying cycles. Budget freezes have not kicked in. But I think it will kick in in the following quarters.

Most of our customer base is global from China, Asia, Europe, the US, and Latin America. Surprisingly, companies have not learned from each other. People thought it’s only a China phenomenon and were slow to respond as such.

In a mission-critical scenario like ours, the churn is not so much right now. They continue to run their operations. Buying cycles and the size of spend will depend on the credit squeeze. One of the biggest things that I have learned from all the global CEOs and CIOs is that their vendors and their customers may have a shortage of working capital. That’s going to be a critical factor going forward.

In terms of the verticals, we’re focused on supply chain and commodities. Data from the ground is that in China all the ports are up and running. China typically buys more than 1 billion tons of iron, which then goes into construction and infrastructure activities. That is back up to 70–80% of the original levels. Their food buying is back up again. So China is surprisingly fully back again. Asia has been a mixed bag. Singapore and Korea did a good job of managing the crisis. Indonesia and Malaysia are hurting a bit. Australia is continuing with full operations. The western world and Latin America are still behind the curve.

In terms of industries, agriculture is very, very focused on meeting the demand, and all the companies are actually in good shape right now. Mining is dependent on China. Oil is in bad shape right now because of the geopolitical situation. Gas and power are doing reasonably well. We are tracking all the underlying business of our customers and therefore can see the shift in the coming months and quarters.

We banned international travel in February last week. Then all travel in March. Our business continuity plan kicked in from March 2nd week. We stopped hiring and increments are frozen. We have not laid off anyone as of now and don’t plan to do it at least for another quarter, making sure that the continuity remains. This is more about human life and the stress is going to be high. I’m grateful that every employee understands this and many have even offered to take pay cuts. We are focused on making sure that people do not go through that stress. Without social contact, working from home can be difficult. It looks good for the first two days but then everybody starts feeling lonely. There’s also a lot of negative news in the media and WhatsApp is affecting people. I’ve stopped consuming any news that comes on WhatsApp groups.

Then there is survival. I was from a trading background where we saw ups and downs daily. But for SaaS, we have been through the last 10 years of growth. Every year has been better than the previous year. So it was all about growth. But now is a chance to go from growth to cash flow mindset. Here you have to understand that all revenue is not equal to cash. There will be delays in how much cash you are going to collect and that is going to determine how you think about survival. The common mistake we all make is to equate revenue with cash. Which won’t hold in this scenario. Asian companies have done well because they were very nimble and they conserved cash immediately.

Being in the SaaS business, we’re all very lucky with respect to cash flows. Imagine if you were a brick and mortar business. If you’d opened up a hotel or a new mall with a $100 mn investment. SaaS businesses operate on a very high gross margin (at about 70- 80% of revenues). We put all the cash into two buckets: essential spending and non-essential spending. These can vary from company to company. But for us, it means we’re going to focus on making sure customer projects are ongoing. We will still need basic sales because we don’t know if there’s going to be a lot of conversions. Field sales have little value in an online environment so we’re going to rationalize field sales expenses. Our R&D is focused on how we can build more collaborative features. How can we integrate our mission-critical software with MS teams and other collaborative software out there? We have kept strategic marketing because we believe positioning, and messaging to the customer base is really important. That is a longer-term initiative than short term.

In non-essential we have advertising. We’re spending less on Google and LinkedIn. Instead, we’ve increased our digital touchpoints. We’ve increased direct contact with our marketplace and we have the advantage because our primary focus is 10,000 companies globally, all of them above $2 billion. So we know exactly which companies to go after. We have muted global PR. This is the time to solve the crisis and don’t see any value in PR at this stage.

We have a 450 member team of which 350 work from the main office and 100 from co-working spaces. We see less value of co-working going forward. The thought is: can you imagine a paradigm where 20–30% of your workforce is working from home? We’re looking at infrastructure spending. Travel is zero. The main thought is survival and adaptability.

Now that we’re going to focus on cash flows, scenario planning becomes important. First, you need to model the churn. In mission-critical software, we have a 5% churn. But now we have to ask what happens if churn goes to 30%? Some businesses may also shut. Now, what does that do to my cash flows? It varies from industry to industry. But if you are in the retail industry, travel, hospitality your churn could be as big as 70- 80%.

Secondly, we have not assumed that any sales will happen in the next 12- 18 months. That doesn’t mean no sale will happen. But in terms of the worst-case scenario planning, we have assumed no new cash is going to come. We’ve also assumed delays in cash collection.

On the cost side, you can cut some. You can cut non-essential costs. But in the case of SaaS companies, the human cost is nearly 80% and this is a human crisis. So you literally can’t lay off people to cut costs. You have the option to defer salaries or pay cuts but bring the human factor into people management. Balance is going to be the key there.

The good part is that now customers are available to talk to you virtually. I used to find it difficult to travel across the world but now they are all available virtually. I’ve been talking to our customers to understand what would help them. Based on what you see in the market, you can give them relief. But the key point is the continuity of the service. So even if a customer is under distress, we are not saying we’re going to switch off the service just because you can’t pay us in the short term. There are other strategies you can use. Maybe the discount can be paid over a period of one or two years. We’re expecting delays in collection though we haven’t seen any yet.

The next piece in sustainability is about your employees. There are three parts to this: working from home, taking them along and stress management. Working from home can be challenging, especially if you look at women employees. We have to be very cognizant of that. We started giving medical help online because people are really worried about what’s happening. So, we are handling a change to not have small but really important HR practices. But the critical point is taking them along. It’s also important to help go through it together and seeing employees as partners and managing stress together.

You also need to look at shareholders and investors from a sustainability point of view. Do not assume that they will be able to provide cash because they are also going through pain since their portfolios are marked down. They are equally hurt. It’s important to increase communication with your board or the shareholders. I send them a weekly update and get on a call with them every fortnight.

Broadly, we’re in this together. I’m very thankful that at least the industry I’m in is the least affected. I have friends who run travel, real estate, and manufacturing businesses and I’m just not able to fathom the pain they are going through. As SaaS businesses, our problems are first world problems. Twelve months out, we’re going to see a lot more opportunity because after every crisis there’s usually a lot of automation that happens. It will never be growth at any cost again. It will be about sustainable growth.