How Software Can Be Resilient to Recession

Are we heading into Recession? The “Big R” talk of early this year quickly
subsided, economic growth returned, the markets appeared to vindicate the
optimists. US Presidential Candidate John McCain repeatedly said the economy
was fundamentally strong… until just days ago, when he quickly switched to
declaring a crisis. The Wall Street Journal says we’re in the Worst Crisis
Since '30s, With No End Yet in Sight.

I don’t claim to be an expert economist, so whether the Big R is
looming is not my call – but if you believe we’re in a strong economy, I have a
bridge to sell you. Let’s just focus this discussion on how Software businesses
can survive in a financial crisis, which is undeniably here.

Not all will survive, and it’s probably healthy they won’t. Tim O’Reilly,
Father-of-all-things-Web-2.0, asked the question at the Web
2.0 Expo last week:

Global warming. The U.S. losing its edge in science and technology. A growing
income gap. "And what are the best and the brightest working on?" O'Reilly
asked, displaying a slide of the popular Facebook application SuperPoke, which
invites you to, among other things, "throw sheep" at your friends.

"Do you see a problem here?" he posed, showing another slide of the popular
iPhone app "iBeer," which simulates chugging a pint. "You have to ask yourself,
are we working on the right things?"

The poster-child of the Web 2.0 boom may very well become the symbol of what
went wrong:

useless
consumer-only
ad-driven

Actually, the problem is not what they do, but how seriously they were
taken. Will Price,
a very smart VC said long ago:

It may well be that Slide raising $55m from mutual fund companies at $500m+
pre-money will be the “what were we thinking” moment of the current
cycle.

I’m glad they did not go public, at least not a lot of people will get hurt
holding the bag. But enough of what’s wrong, here’s what works:

go where the money is, and that’s businesses (“Enterprise”
vs. consumer, even if it means small business)
deliver value – useful functionality that improves business
charge for it – companies actually prefer to pay for
reliable, good service.

The last point brings up the price issue. Credit will dry up. Whether we’ll
officially declare Recession or not, the fear of the Big R is enough for
corporate budget cuts, the disappearance of any CAPEX spending. Even
worse, an entire sector almost disappeared as IT buyers. Did you know that
Lehman Brothers spent over $300M on IT in just the last quarter, right before
declaring bankruptcy? How do you sell in this environment?

The after-bubble nuclear period of “no IT spending at all” found me at a
startup in 2001-2003. We did not exactly hit it big, but did not go under,
either, and that’s because our model allowed us to get in the door way below the
threshold that would have required higher authorization. Not classic SaaS,
rather SES (Software Enabled Service), we were essentially data providers and
often got into an “enterprise” account at $3k for the first month … eventually
ramping up to annual $60-$100K. Anyone familiar with Enterprise Sales knows
the term Economic Buyer: typically getting involved later at the sales
cycle, approving or nuking the deal. Well, we saw no Economic Buyer: being
under the threshold, we sold to the User directly.

Of course my little business is not the only proof: Salesforce.com &
WebEx thrived during the last recession. The secret is the business model:
pay-as-you-go. SaaS offers lower risk to enter, no initial cash layout, the
subscription fees come out of OPEX vs. CAPEX, and is
often approved by the User, not the mysterious Economic Buyer. The barrier of
entry is much lower: once you’re in, it’s up to you to grow.

In fact I suspect the looming downturn will accelerate the
structural changes in the software industry: SaaS players will thrive,
traditional on-premise vendors will shrink, many will disappear.

That leaves a final point to discuss: financial solvency. For startups,
it will be increasingly hard to find investors. For larger businesses the lack
of late-stage investment, the credit crunch may be a serious impediment to
expansion. Discover the beauty of bootstrapping – you actually get to do what
you believe is right for your business, not what your Board tells you. Do less,
take small steps. Frugality is key to survival. Small is beautiful will get a
new meaning.

In summary, Software businesses that combine good old business
sense: frugality, spending wisely, delivering value to businesses and
getting paid for it, with a new business model, SaaS are likely
winners in the downturn. The rest are playing musical chairs. (Oh, and the
bridge is still available)

Update (9/27): A much-related article by Sramana Mitra @ Forbes: 'SaaS-ing' Back At The Economy.

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7 responses to “How Software Can Be Resilient to Recession”

Sridhar Vembu September 22, 2008 at 8:06 pm | Permalink

My own personal belief, based on Austrian (aka libertarian) school economics is that we are going to have a long hard economic winter. There have been too many excesses, driven by easy credit policies of the Federal Reserve, and aided and abetted by central banks around the world. Mainstream economists didn’t anticipate the severity of the events we are experiencing, but anyone following the Austrian school clearly saw this one coming – as with such things, predicting the timing was impossible, but the overall direction was fairly clear.

Japan stands as the proof that such a long winter can happen to advanced industrial nations in the modern era of elastic, floating currencies. Japan has many impressive economic advantages, yet that didn’t stop them from suffering prolonged economic stagnation.

We are all Japanese now.
martyncrew September 29, 2008 at 1:26 pm | Permalink

Not that this is a scientific sampling, but all of my actively billing clients and most of my inbound inquries, are either SaaS business model based or are SME plays leveraging using Open Source technology.

Having worked 30+ years in the enterprise software space it will be very hard, if not impossible, for the licensed SME software vendors with their relatively high-cost bases, to respond to the challenges of a SaaS based pricing model from low-cost producers.

On the other hand, no-one should underestimate the ability of the licensed vendors maintenance revenue streams to sustain these companies for many years to come. On that basis, I would not expect to see many of the SME vendors disappearing anytime soon but I would expect to see their new sales revenue continue to decline in the face of SaaS based competition.