Are you a nice-to-have or must-have?

The last years feel like a never-ending rollercoaster. In 2022, the world did not only return to normal, but the pendulum swung completely. Markets went from Covid, and the sky is the limit for some tech businesses, to severe economic uncertainty, and now likely a recession... 2020-22 might just have been the most challenging time tech entrepreneurs have faced since the advent of the internet...

Everyone is trying to make sense of the situation. As mentioned in Q2, volatility will continue to define the following months... So, many investors are asking themselves two questions today, when looking at new opportunities, and when assessing the outlook of their current portfolio companies.

Question 1: Is this product a must-have or a nice-to-have?

One thing is for sure – budgets are down everywhere. If you are a consumer business or an enterprise play, everyone is spending less. So, investors are trying to figure out: 'Is this product a nice-to-have or a must-have?' In other words, do you believe your product or service is critical to (potential) customers? Or do they simply 'appreciate' it and drop when things get hard…?

In times like these, assessing the ‘DNA’ of your product is actually more straightforward than usual. You simply have to check if people keep buying even with budgets down. As discussed in my previous post, ‘the winners of the current market are the non-discretionary goods and services. These are the products that people cannot delay buying as they are essential products.’ It is relatively clear by now which companies are hit harder. This does NOT mean that these have inferior products. Their offering is just less high on the priority list of their customers. If they could, customers would continue buying them. But right now, they just spend their budget on other things. These products fall in the nice-to-have category.

The must-have products continue to sell (nearly) as well as previously. From time to time, you have to decrease prices slightly to win a deal, but your product is so critical to companies that they need to buy from you. Just make sure to be creative and structure the deals in a way to catch the potential pricing upside later on. But, right now, the goal is to sell to as many as possible... The lost upside will eventually come back to you.

When looking at new opportunities, investors, especially early-stage ones, are also trying to figure out your business ‘DNA’.

Must-have or Nice-to-have? ‘Must have’ is a loosely defined term at this stage. It typically boils down to whether a product can be a critical component to operate a business (saves time, energy, and/or money) and/or convinces users quickly that it makes their lives (much) better. A must-have product fundamentally alters the way stuff gets done - either changing existing processes to be 10x better or unlocking new value that wasn’t previously achievable. Once used, companies or people will rarely go back. On the other hand, a nice-to-have product will provide good value - perhaps being twice as good as doing it by hand or with spreadsheets - yet isn’t valuable enough to compel a critical mass of adopters or payers.

Of course, you can build great businesses with a nice-to-have, but it might be more difficult to scale. There is higher churn, sales cycles can be longer, especially when times are tough and budgets tighten. A must-have will have a clear ROI for its users. In the end, the best way to test whether you have a ‘must-have’ product is to threaten to take the product away from your early users. If they don’t riot, you might want to think it over.

As a result, budgeting right looks very different these days for nice-to-haves and must-haves.

It is no secret that the pendulum has swung back for everyone since the beginning of the year… from ‘growth at all costs’ to ‘efficient and sustainable growth.’

The difference, though, is that fundraising, from new and existing investors, will be more difficult for nice-to-have products. Therefore, budget scenario planning should consider a potential path to profitability. My general rule of thumb for these companies is that, as long as the market doesn’t get better, let’s focus on getting to profitability while keeping an annual growth rate of 50%+ if possible. Where would the budget of such a scenario land? I know some founders who have been hit hard by Covid and acted accordingly early on. All of them had to pivot (more on this in a later post, stay tuned…). But many are now running profitable businesses and riding the post-covid demand come-back. They all have a smile on their faces. It was brutal, but they are back in the game, and are more robust than before.

On the other hand, companies with must-have products should stay aggressive. Have an open discussion with your investors ongoingly. If they are good investors, they should give founders the confidence to continue executing… Especially great early-stage companies need the confidence to hire and catch their market demand. For these businesses, fundraising with new investors should also ‘work out‘: ‘Recession-proof’ businesses are en vogue these days…

Question 2: Will the post-covid jump continue going forward?

At the start of the pandemic, many were blown away by the accelerated growth some tech products were experiencing. Funnily enough, many that saw their demand vanish during Covid now experience a similar growth jump. Since early 2022, it is clear that we are back to the ‘pre-covid trendline’ for the winners of 2020/21. But, as markets opened up again, everyone is looking to get their hands on the products nobody wanted or needed over the last two years. These post-Covid winners see demand exceed pre-2020 levels. Think of the pent-up demand in hospitality hiring, real estate in major cities, traveling, etc.

But, after the first excitement of being back in the game, it is essential to understand that this jump is probably temporary and that we need to budget 2023 accordingly. Let’s enjoy it while it lasts, but be ready for regular times again...

Whatever your situation, the good thing is that everyone is doing more with less. Everyone, covid and post-covid winners, have gone through budget cuts over the last 2 years, and most entrepreneurs tell me that they feel much better about their organizations. In some ways, it can sometimes be easier to build great companies in down markets. Greatness in execution stands out more again and doesn’t get drowned out by the inevitable over-funding of one’s competitors.

I had the pleasure of visiting Egypt for my honeymoon week this summer. It was my first time in this great place, with a wealth of history and culture that you won’t find in many other countries. Here is a picture of the Great Pyramids of Giza. Probably one of the most impressive sights I have come across so far...

Life is awesome,

Yannick

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