The cash cliff edge: It’s time to get serious about profitability
The mass of job cuts being made by big tech firms in recent weeks has set alarm bells firing in the tech community. And rightly so.
The thousands of staff being let go by the likes of Meta are deeply concerning, yet, there are lessons to be learned from the approach these firms have taken in the name of business success. The next wave of tech startups would be wise to take note if they are to achieve genuine sustainable growth in the coming months and years.
Of course, it’s far easier to act in hindsight, but as we are going through a turbulent time there’s no real way of knowing for certain that things will improve any time soon, or whether another period of economic downturn will follow the current wave.
However, it’s not all doom and gloom.
Here are just some of the things that tech firms should consider if they are to achieve sustainable growth.
There is always opportunity within adversity
Software and technology are fundamental to the way we live and work today so there is a huge opportunity for tech firms big and small. The latest insight from Gartner indicates that 99% of businesses worldwide use at least one software-as-a-service product, so there will never be a shortage of demand for these solutions.
Furthermore, businesses that are happy with the results of products in times of increased pressure and uncertainty are more likely to stick around in the long-term, thereby generating greater revenue for the company. On the flipside, customers that are left feeling dissatisfied with the value they are getting will quickly leave, increasing the cost of acquisition which, more often than not, will exceed any revenue acquired.
By identifying a challenge and providing the solution, the growth opportunity for startups is exponential.
Building a business case
Market fit is an often-overused term but understanding what it means and how your business is positioned within its industry remains important. When times are tough, ‘nice to have’ products and services are the first to drop by the wayside as decision-makers strive to cut costs.
That is why it’s so important for firms to solve a specific problem or need, and make the value of the product abundantly clear. If this need can be quantified (and you’re ruthless in your pursuit) then you stand a better chance of success. To do this, assess why your customers and prospects need you and the product or service that you provide. What would happen if they were to terminate their contract with you? Would it have financial repercussions for them? Would it impact other valuable resources such as time or people? Has this been proven for customers in one industry sector more than others? If so, that is where your focus should be.
In an ideal world, you want to be in a situation where it will cost your prospective customers more to not use your product or service, than it would if they were to invest.
The cash cliff edge: achieving profitability
To run a business effectively, it’s vital to understand what the business needs to operate. What are the overheads and staffing costs? What does it cost the business to deliver its product or service? How long could it survive without any injection of capital?
This is what is referred to as a cash runway.
With investment levels at their lowest since 2016, as revealed by KMPG, cash runway has never been more important to business survival. From what we have seen, most tech startups have around 4-6 months of cash runway, so achieving profitability is critical. To add to the cashflow conundrum however, many tech firms take years to achieve profitability as they rely solely on the value of the product and the promise of big contract wins to attract investment and continue on the growth path.
Securing investment and driving interest forces startups to grow their teams to meet the demands of customers, prospects, and investors alike. However, this often happens faster than the forecasted business growth. Whilst sometimes effective, when an economic downturn hits, this approach is what has repeatedly led to the surge of job cuts that have dominated news headlines in recent weeks.
By building a business case, delivering value, and growing within their means, the future is bright for startups and growing tech firms. Whilst many are facing a cash cliff edge, there is time and opportunity to avoid the plummet toward business failure.
