Doug Pepper says companies extrapolated 2020-21 growth, built P&Ls for higher growth, and are now burning too much and laying off.
ICONIQ's public portfolio companies are down 60% to 80%, with private revaluations still coming.
Pepper advises CEOs to plan conservatively to survive until 2025, make hard cuts, and sell ROI to CFOs who now gate purchases.
SaaS founders must cut burn to reach 2025
SaaS companies built 2022 and 2023 plans on 2020 and 2021 growth, so they are burning too much as growth slows. This downturn is concentrated in tech, unlike 2008, and public companies ICONIQ is involved with are down 60% to 80%. ICONIQ's answer is to cut to a conservative plan with enough runway to reach 2025, sell to the CFO on ROI, and protect core infrastructure categories. Multiples have reset to the long-term average around five times ARR, not the 20 to 50 times of 2021.
Takeaways
Growth plans assumed 2020 rates would last. ICONIQ's portfolio had nearly 100% of companies meet plans in 2021, with average growth around 83%. Companies drew a straight line from 2020 and 2021 into 2022 and built P&Ls for growth that did not arrive, leaving burn too high and layoffs as the result.
This tech downturn differs from 2008. The 2008-09 recession hurt the broad economy but barely touched tech. This downturn landed squarely on tech. Public companies ICONIQ is involved with are down 60% to 80%, private revaluations are still coming, and crypto looks like 2000.
Sellers must reach the CFO, not users. Buyers who swiped a credit card in 2021 now need CFO approval, often without knowing it until signature time. Sellers need productivity and ROI messages, plus calculators that show immediate payback, and not every rep can make that transition.
Core infrastructure holds while add-ons struggle. Companies hitting plan fell from almost 100% in Q1 to about 20%. Data infrastructure and security hold up. Analytics is durable. Sales and marketing add-ons struggle, and HR tools do too. Pepper urges companies to position themselves as core infrastructure, as Salesforce is for sales.
Runway and burn multiple set the bar. Average runway was 18 months in 2020 and over 36 months earlier in 2023, with some companies now under two years. A burn multiple over 2 is inefficient. Retention is degrading. Pepper prefers 80% growth with less burn to 100% growth with a huge burn.
Plan to survive until 2025. Pepper favors conservative multi-year plans reviewed quarterly, with investments unlocked if performance beats expectations. Budget processes now run for months and often require 20% cuts. ICONIQ uses historical data on how top companies grew from $20m to $50m and $50m to $100m ARR.
Multiples reset to long-term average. Five-year SaaS revenue multiples are back near five times ARR, the long-term average before the pandemic. Pepper says the market has overcorrected and multiples could reach seven or ten times, but they will not return to 2021 levels or the 20 to 50 times range.
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