Is it time to be honest? The truth can hurt. However, the truth enables us to identify solutions.
Today’s Tech Market: Have we sacrificed profit and positive financial business operating for growth?
According to the Blossom Street Ventures article in August 2022 — since October 2017, 73 software businesses have gone public.
- 19 have a positive operating income.
- 29.66% of the software businesses in the negative category are operating at 50% negative of operating income.
- 16.6% of the 54 software businesses are operating at 80% negative of operating income.
Using the spend guidelines in the article:
- 58.9% of the software businesses have a negative operating spend on Sales & Marketing – the most notable being a massive 111% spend of operating income.
- 42.4% of software businesses are operating with a negative income versus spend on their businesses’ core operations.
A key mantra for any software business with ambition is growth.
However, should we sacrifice profit and positive financial business operating for growth? This model will have its limitations.
- With the current tech downturn, I wouldn’t be surprised to see many Pre-IPO software vendors in an uncomfortable financial situation.
- The current tech downturn is showing similar traits to the 2001 Dot.com downturn.
The mantra for all software businesses has traditionally been to focus on growth.
A hiring spree is therefore associated with all aspects of growth. This is fine if business plans are delivered. Pressure builds if they don’t, and efficiencies are required. In terms of recruitment this means redundancies, and this is what the tech market is experiencing currently.
To ensure consistency in growth and “survival”, software businesses must make some basic assumptions when hiring a new sales contributor on income from each sales contributor and the cash burn to enable this revenue achievement. This ratio is usually 1:2 (Income: Cash Burn).
Without going any further, we can see inefficient figures relating to the BSV report.
Figures we do not see are the number of ineffective or poor hires made by software businesses. We’ve all seen reports on this and the overall cost to the business. However, with unbridled over hiring post pandemic, some software businesses may have been betting on the success of new hires and ignore the principles of the cost of a poor hire with the hope of continued growth.
The music has slowed to a little hum. Once lessons have been learnt, we can start dancing again. Maybe this time under new rules.
Adam Tully
JIE Search is a leading authority for VC backed software organisations when building and growing high performing businesses.
JIE Search can build and scale teams for innovative software organisations with no obvious restrictions to top talent.
