Emerge stronger: Investing in growth while protecting capital.

​Airbase’s webinar, “Balancing cash flow and growth in an uncertain environment,” began with a telling stat. When asked how many times they’d revised their forecast in the last 12 months, 44% of attendees said they’d had to do it more than three times. Speakers Alex Clayton of Meritech Capital and Airbase CFO, Aneal Vallurupalli, weren’t at all surprised. In this volatile environment, finance leaders struggle to find the right balance between funding growth and protecting capital, and many have had to adjust that balance quickly to reflect market realities. 

A seismic shift. 

The need to revise forecasts is largely a consequence of dramatic economic changes and continued uncertainty about what lies ahead. Alex summarized recent events:

“The biggest thing that changed last year was a change in valuation. Nobody really appreciated how heavily correlated interest rates are with valuation multiples, particularly for public software companies“

He noted the recessionary impact is being felt much greater in tech than in other sectors. 

As valuations tumbled in 2022, demand also started to soften. “That caused a lot of companies to rethink their forecasting, particularly in a world where you used to be valued not only on how fast you were growing revenue but how much free cash flow you have as well. So the rubric of how companies were valued completely changed,” Alex noted.

Leading indicators to watch.

As a result of this shift, companies now need to look beyond the traditional sales metrics like ARR and turn more attention to examining the levers that influence those outcomes. That often requires a very granular examination of what’s happening in the sales funnel. 

“We suggest that companies look very deeply into their funnel around conversion rates. Even small differences in sales cycles can have a massive impact on bookings,” said Alex.

Both Alex and Aneal emphasized the importance of careful scrutiny of markets and segments to make sure that investments in them are justified. 

Strategy shifts in an uncertain market.

As businesses adjust to this new reality, some are shifting their product focus and aligning their offerings to the needs of businesses in a tougher market. According to Alex,

“We have a lot of companies that have gone from a company that helps generate more revenue to a company that helps generate greater ROI and efficiency.” 

As a result, companies are building tools like ROI calculators to provide data to justify investments in new products. “On the sales side, anything you can do to prove ROI — not something that is soft, but hard numbers — will help a company accelerate in this market environment,” Alex continued.

Assessing demand. 

The way that companies look at lagging indicators, like closed bookings, is also changing. Alex emphasized that these numbers should be considered more frequently than in the past in order to respond to changes in demand quickly. 

The exact frequency is very dependent on the nature of the business, but the data should be examined at least quarterly. Some businesses might even require a weekly check. The important thing is to always have a finger on the pulse — without getting bogged down.

Alex pointed out that, “on the flip side, you don’t want to end up with analysis spaghetti, where you add so many levers that you can’t figure out the nuances and they conflict with each other.”

For actionable data, a financial operation with a good data infrastructure becomes paramount. 

“The tooling, systems, and processes between finance and rev ops to understand the customer journey couldn’t be more important in this environment,” said Alex.

Why collaboration is more important than ever. 

To obtain the right data to shape strategy, the finance team must now work cross-functionally. The necessary numbers could come from multiple sources, including product usage stats, which can lead to many data silos that must be brought together through a collaborative effort. 

“I’d say the most sophisticated companies are ones that take a really refined approach to make sure all that data comes together,” said Alex.

To accomplish this, Aneal pointed out that it’s important that leaders across departments align on definitions and priorities. When capital isn’t cheap, the cascading impact of little changes can heavily impact a business. Departments have to work together in isolating the core variables, aligning on them, and being able to closely track them.

Alex has observed that companies with strong relationships between FP&A and the rest of the company are often more successful in enacting change. The growing importance of FP&A reflects a shift in finance from focusing on reporting and projections to telling the company’s story with the numbers. This emphasis on storytelling has moved finance into the spotlight, particularly in the current market environment.

Translating investor input to employees.

Alex has heard from a lot of people who are confused by sudden changes in the advice investors provide. He pointed out that technology investors and advisors follow what the public markets tell them. “Right now, the public markets are saying: We value growth and efficiency together.”

He acknowledged that after many years of focusing on the top line and acquiring venture capital, it is often difficult to explain the new reality to team members who aren’t involved in corporate finance. He encourages finance leaders to highlight metrics that leaders in other departments can relate to, like ARR per FTE — how much revenue can be generated with this number of people — which makes it easier to visualize other metrics. 

Modeling cash flow allocations to growth activities.

Doing more with less may sound like a simple concept, but it raises complex questions when it comes to product development. Is it wise to continue investing in product development, even if a new feature will eventually increase the ROI of the product as a whole? It comes down to unique business needs and where you are in the product life cycle. 

“Companies are going to have to make hard choices around prioritization,” Alex said, particularly since a majority of companies will have less cash to invest than they did a year ago. 

He suggests looking at the actual cumulative gross contribution margin for each segment of the business, which will require the right infrastructure and data points to evaluate. It’s often easy to evaluate profitability in departments like sales, but it can be more difficult in areas like R&D. It then falls to leadership to collectively prioritize each area. 

Unit economics as drivers of strategy.

Being able to narrow down segments and features gives valuable insights into the unit economics of decisions. Understanding the profitability per segment helps determine when money should and should not be spent. Aneal said he finds asking “what will we say ‘no’ to?” is a valuable exercise because it helps avoid scope creep. 

Alex agreed that that approach can sharpen a company’s focus and help them determine which segments or features to invest in — and which to divert capital from. 

“There are sometimes hard answers that come out of it but at the end of the day, some of these changes are necessary for companies to endure in an environment where capital is more limited.”

Emerging stronger.

Traditional SaaS growth is centered around spending up front and seeing cash inflow later. But when capital is limited, growth will often slow down. Alex explained that the trick comes down to figuring out a growth rate that can be achieved in a self-sustaining business. 

That may go against the trends of the last couple of years with the emphasis on growing the top line, but since interest rates likely won’t go down for a while, it needs to be “back to basics” to survive. 

Watch the complete webinar.