Weekly Update: Getting Stronger in a Down Market

A few highlights from the week of 11/14

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The WCLD cloud index sank 9% this week to close at $24.96.

Meanwhile, the S&P and NASDAQ were roughly flat on the week. Why the dispersion?

There are signs that the broader economy remains healthy (for now), such as Thursday’s retail data point showing a robust 1.3% month-over-month growth trend. On the other hand, many public cloud stocks have warned that growth is under pressure from tightening customer budgets.

Jack Altman @jaltma

Even datadog, one of the best software companies there is, is having a mega slowdown in new ARR added per quarter. It's getting rough out there.

Not surprisingly, DataDog’s stock is down 27% in the past 3 months. Another cloud high flyer, ZoomInfo, shared a weak outlook and saw its share price take a nosedive:

Breaking News @MarketCurrents

$ZI - lZoomInfo plunges 25% as fears grow over cloud-software company's sales outlook

seekingalpha.comZoomInfo plunges 25% as fears grow over cloud-software company’s sales outlookZoomInfo shares plunged as much as 25% Wednesday amid reports that the sales and marketing software company gave a weaker-than-expected outlook for 2023.ZoomInfo (ZI)...

Market conditions are hurting the growth outlooks of many SaaS leaders. How worried should other SaaS companies be about tightening customer budgets?

It depends. I think the key question is:

Are you taking share or losing share in your target market?

Even if a SaaS company’s target market is contracting, it can still be gaining market share. For a SaaS product with strong ROI, a tough economy can amplify its benefits relative to competitors that offer weaker ROI. Plus, a down market will be harsher on second-tier players as the leader is more likely to attract funding & top talent.

In other words, a SaaS leader can get stronger in a down market. It might see growth slow in the short-term, but its competitive position will improve - positioning it for enhanced long-term growth.

For pre-product-market-fit SaaS startups, a down market also creates opportunity. A pre-PMF startup is still figuring out who is truly desperate for its product. A customer from last year’s frothy market might not be desperate any more. While it’s painful to lose a customer, it’s healthy if it means avoiding an artificial demand signal.

A recession can be a boon for a pre-PMF startup: it’s a forcing function to find durable customer demand. This can tighten PMF, boosting a startup’s growth prospects as the market recovers. Even better, the tough market teaches critical lessons such as capital efficiency & cultural resiliency - lessons that were mostly absent in last year’s tech market euphoria.

Podcast Recommendation of the Week:

Invest Like the Best had a fascinating interview with Rippling founder Parker Conrad. For those who followed the media frenzy around Zenefits’ downfall, Conrad offers a very, very different narrative.

What I find most compelling is that he realized that the best way to permanently change the narrative is to build Rippling into an enduring market leader. It seems like he’s making great progress.

Reading Recommendation of the Week:

Skype co-founder and Atomico Ventures CEO Niklas Zennström made a great point in a recent interview. The negative stigma around down rounds is over-blown. (TechCrunch link)

It’s well-understood that valuation for a public company is a noisy signal over the short-term. It’s not hard to see the same dynamics for private companies. No company has control over market conditions changing - reasonable onlookers can understand that a lowered valuation doesn’t necessarily reflect anything intrinsic about a startup.

There are many startups with solid businesses that are encumbered by high valuations from last year. They would be better off if they could simply take capital based on current market conditions & not worry about any down round stigma.