SaaS Capital, a lender to software businesses, published an excellent research piece which examined the performance of publicly traded SaaS businesses during the 2008/2009 recession. If we head into a recession at some point, the data and observations below provide context as to what could happen.
The companies grew. Even during the recession, which is defined as the period from Q1 2008 to Q2 2009, on median, the 16 SaaS companies in the data set still managed to grow albeit at a slower pace (it’s funny to think there were really only 16 publicly traded SaaS co’s at the time). Prior to the recession, median year over year growth ranged from 37% to 52%. During the recession, growth slowed to 10% year over by the Q2 2009. The fact that these businesses were able to grow at all while the overall economy suffered a severe contraction is meaningful.
Operating margin got worse. Operating margin averaged -1% each quarter prior to the recession and -2% during the 6 quarters of the recession. That doesn’t sound like much change, but it means operating margin got 2x worse.
Cash burn was heavy. Prior to the recession, 6 of the 16 companies were unprofitable whereas during the recession, that number increased to 11 companies. Operating profit in the 4 quarters prior to the recession averaged $335mm per quarter whereas during the recession operating profit averaged -$705mm each quarter. That’s a tremendous swing and the only way any company could weather a swing like that is to have significant access to liquidity (cash on hand and credit lines).
In summary, as a SaaS business, it’s not unreasonable to expect to grow through the recession albeit at a slower pace. Additionally, that growth will be much more expensive to achieve as sales cycles blow out, scrutiny increases, contract sizes get smaller, and perhaps upgrades wane.
Having significant cash buffers and access to liquidity is critical. None of the publicly traded SaaS businesses went bankrupt but that’s only because they were able to access cash as operating profits swung heavily into the red.
Big thanks to SaaS Capital for putting together the data. Visit them at www.saas-capital.com to get the full report or talk about credit facilities for your business.
Thank you for reading. Visit us at blossomstreetventures.com and email me directly at sammy@blossomstreetventures.com.