All is not lost in SaaS VC: Advice from Salesforce Ventures, ICONIQ Growth and Accel

A challenging macro environment. Capital efficiency. Growth rate retention. Evaluation. These words are creating storm clouds in the sky of business-to-business (B2B) software as a service (SaaS).

Companies that approached or met the goal of net new annual recurring revenue (ARR) in 2021 cannot say the same for 2022. Tech startups that miss these ARR goals are realizing that it is difficult to be a decacorn, to maintain a value of 10 billion dollars and to generate basic risk capital returns. On the contrary, SaaS cloud leaders are growing at epic rates well over $1 billion in ARR.

So what's going on in the growing B2B software market and venture capital? Was it just a cloud boom in 2021? What does it take today to grow a healthy business and preserve the environment?

Jason Lemkin, Trusted Advisor, Investor and Founder at Champion of SaaStr, moderated a panel at Reach 2022, G2's annual digital conference, to address these concerns. The panel consisted of a group of venture capitalists: Arun Mathew, Partner at Accel; Doug Pepper, General Partner at ICONIQ Growth; and Alex Kayyal, SVP and Managing Partner at Salesforce Ventures.

Is it all dark and doom and gloom in venture capital and SaaS procurement?

Growth investing has fallen over the past year, but it's not as bad as you might think.

The number of SaaS companies has grown over the past decade. Some have even gone public in recent years, while others have raised at least one additional round in the past eighteen months, meaning fewer growth deals will be made in this market.

This drop in transactions should not worry companies that are just getting started. Their performance over the next three or four quarters will matter. All panelists echoed the fact that continued growth is only possible with the creation of customer value.

Companies unsure of growing in this market should take a cue from Salesforce, which grew more than 20% during the economic downturn between 2007 and 2009. Mission-driven companies with a huge total addressable market (TAM) and healthy balance sheets will become even stronger from the current economic turmoil.

What is happening behind the scenes is a significant deterioration in results compared to plan. Companies that have built aggressive systems based on 2020 and 2021 growth rates are not meeting their expectations. They are probably still expanding but not doubling or tripling as expected.

"The median growth rate was around 83% last year for a very wide range of companies we track. That's degrading to 48% this year."

Doug PepperGeneral Partner at ICONIQ Growth

Plan and execution are no longer aligned, leaving companies in a messy middle position where they are forced to readapt to slower growth rates. Alex Kayyal also believes that the current slowdown in the growth market is a reset in valuations. Additionally, higher valuation expectations make investing difficult for Series B investors and above. That said, critical businesses that need fiscal support are getting attention.

Stay ultra-focused on the margin and essential products

Earnings growth drives long-term value creation. But what is the way out for companies that are not hitting revenue growth rates?

Today's tougher market means buyers are taking longer to make decisions, resulting in longer selling cycles. Companies are faced with a market that is no longer a free money economy where almost anything could be sold. Even if they have not disappeared, budgets are also under close scrutiny. Some companies may be ready, but this is where the rubber meets the road.

Entrepreneurs should use available funds to create significant products that solve key customer problems and fit the off-the-shelf market. They must differentiate between nice-to-have products and must-have products that offer a real return on investment (ROI).

Furthermore, investing in fixing often hidden inefficiencies in sales and marketing growth drivers will help double margin and profitability instead of just...