A few financial home truths

Does it take the world's worst financial crisis since the South Sea Bubble to drive home these perennial messages? A storm raged in the blogosphere last week after venture fund manager Sequoia Capital called in its portfolio companies to hear some home truths about survival in the coming recession. What they heard were perennial truths that have always been at the core of successful businesses — they were just missing from Silicon Valley's happy-go-lucky Web 2.0 landscape.

The full content of the presentation is now online but most of it is window-dressing designed to ram home the central theme:

If you're going to survive, "Do everything possible to get to cash flow positive. Now."

For SaaS vendors, that not only means scrutinizing costs and subcontracting anything that can safely be sourced externally for less. It also means being smart about how you generate your subscriptions and other revenues — and making sure you have an efficient system in place for billing and collecting revenues. Which is why I've devoted quite a few column inches to billing vendors over the past year.

The secondary message from Sequoia's presentation was especially relevant to SaaS vendors:

If your product's going to thrive, "[It} should reduce expenses and drive revenue."

In other words, your product should help your customers generate cash, because that's what they'll be focusing on in their own businesses, as much as you in yours. (A useful corollary to pass to your credit controller — you do have one, don't you? — is to collect debts quickest from any of your customers that haven't put cash at the top of their list of priorities).

Of course, SaaS excels at delivering better automation of business processes, with a low-risk startup cost. A SaaS product, almost by definition, either reduces expenses or drives revenues — often both at the same time. SaaS vendors can take heart, then, that in most cases they have the right product in place already, and what they should concentrate on is making their operations leaner and accelerating their revenue collection and recognition.

The only fly in the ointment comes from some other home truths that coincidentally make their appearance in some new research from Forrester: Enterprise 2.0 Apps Will Dramatically Fall in Price. The findings show that new forms of software attract higher prices as they evolve, and then prices fall when commoditization sets in. Well blow me down, the product lifecycle applies to Enterprise 2.0 as well. Who'd have thought?

SaaS vendors must watch out and be honest with themselves how much threat they face from price commoditization. Whether it's the price-deflating effect of cloud economics or rivalry from low-cost business models like that of Zoho, the price pressures are out there, and the new economic climate will lend them weight.