Certain ROI

Unless you've been living under a rock - you probably noticed that tech stocks have been getting pounded on in 2016. What you probably haven't heard is why, or what does it mean going forward? Sure, multiple compression has happened, and Tom Tunguz eerily wrote a post on juiced SaaS multiples right before the music stopped, but if you're an entrepreneur or an investor, understanding the implications of a LinkedIn/Workday collapse is critical to managing your business.

In my view, the collapse can be framed one of two ways:

1. Multiple Compression: Public SaaS businesses meet growth expectations, but the market no longer places the exceedingly high premiums on SaaS solutions despite high margins. Turns out that while SaaS businesses are easy to project going forward (one of the commonly cited reasons for why they're so highly valued), so are non-SaaS companies, as shown anecdote-ally through companies like Estimize, which through crowdsourcing can better project quarterly performance than Wall St. analysts. Cash is king, and in an uncertain market, investors turn to staples and dividends rather than growth stocks, which will drive consolidation amongst tech giants and private unicorns.
2. Growth Targets Will Be Missed: Growth is as valuable today as it ever was, however you can no longer spend money to make money, as customers are closing their wallets. In an enterprise environment, typically the first budgets to get slashed are in HR and Marketing, as the ROI they produce is either intangible, or levered to growth. Think of it this way, if I'm not expanding my headcount this year because of market uncertainty (driven by your pick of oil, China, the election, or fed rates), why would I invest in an HR solution that allows me to source, on-board and manage new hires?

The answer is probably a mix of the two, but if you're a startup or growing company right now, specifically employing a SaaS business model, understanding the criticality of your solution to your customers and communicating your product's certain ROI.

Certain ROI, is a return on investment you can communicate to your customers that is not affected by market conditions around your business, or simply put, when the sales decision is a "no-brainer". This is different from uncertain ROI, which delivers levered returns to the environment you're in. Think of a marketing software that allows you to generate compelling ad content. The ROI of this solution can be broken down into its certain (quality, organization, and enterprise integration) and its uncertain (campaign performance) components, which ultimately determine the buying and retention of the product. Uncertain ROIs, while quite high in many instances, ultimately suffer when the music stops and see their valuations suffer.

In my experience, the larger the certain ROI, define-able in terms of cost/time savings, leads to negative net churn in the form of retention and upsell, which will garner investor interest in these uncertain markets.