Price Smart, Hire The Best, and Prove Your Product-Market Fit: OpenView’s Predictions For 2023
As 2023 rolls in, businesses are still riding through choppy waters. If 2022 was any indication, there are a lot of unanswered questions and potential shakeups that can arise. So what can startups expect for the next year?
In a lively end-of-year session of BUILDing Together, OpenView’s Operating Partner Kyle Poyar, Senior Manager of Talent Maggie Crean, and Kaitlyn Henry, a VP on the Investment team, reflected on their original expectations for 2022 and what ultimately happened as the markets took a dive.
Despite all the ups and downs of 2022, they also shared their insights regarding 2023 and what people can hope to see from the tech industry—especially in regards to investment trends, hiring, and growth.
2023 will be a make-or-break year for some startups
It’s taken years for software to become the investment jewel that everyone looks to find. But software has had a big growth trajectory over the past five years to get to this point, Kaitlyn said. Prior to giving her own thoughts on what 2023 might bring, she took a look at the history of software companies and the timeline that brought the SaaS industry together. Kaitlyn divided the timeline into three phases:
Phase one: The years from 2017 through 2020 brought a steadily increasing growth rate for public SaaS companies. Private markets matched the interest in software, as it was making big moves and eating the world. As a result, software became a reliable trend to bet on.
Phase two: When COVID-19 pandemic hit, there was a rapid increase in revenue multiples in the public markets for SaaS products. From 2020 to 2021, businesses across the globe shifted to remote work, relying heavily on software to facilitate operations. Once again, private markets matched what was happening and there were record fundraising deals, with high dollar volumes being invested into private SaaS companies.
Phase three: This brings us to this year, which Kaitlyn considers a correction of the previous years’ rapid growth. She acknowledges that public market multiples are down across the board—particularly for SaaS companies. Higher interest rates and the associated rising cost of capital, among other things, have caused revenue multiples to fall. Private deal count and volume are also down.
Source: OpenView internal deck, December 2022
“I think what you saw in 2022 was a lot of people recognized [that] the public markets weren’t as strong, the private markets weren’t as strong,” said Kaitlyn. “We saw many founders go out and raise bridge or extension rounds, safe notes, things to extend runway for a short period of time, but perhaps not the normal amount of time that you would see a typical priced round to extend their runway.”
Series B, C, and D stages have seen a significant valuation drop, too. Series D valuations in particular dropped from $3.5 billion in 2021 to $527 million in 2022.
Kaitlyn noted that the only notable exceptions to this slowdown are angel and seed rounds, with less than a 10% change in median valuation.
So what will 2023 bring?
The year 2022 signaled a big shift from the status quo regarding investments in startups across the board, as Kaitlyn noted with the valuation drops. So, in some cases, 2023 may be a make-or-break year for some early-stage companies.
“In 2023, a lot of founders are going to have to reckon with whether or not they’ve proved out the signs of product-market fit or go-to-market repeatability to raise the next round. It may be a tough decision for a lot of companies to decide how to move forward from there,” Kaitlyn said.
Despite the negative trend of 2022, Kaitlyn was keen to remind everyone that software is still a fantastic area of investment. And in fact, the product market for software is still growing, and it doesn’t seem like it will stop.
Companies will have more talent to choose from next year
On the talent front, Maggie noted that today’s state of hiring is largely a reflection of the investment markets. In early 2022, companies rapidly grew headcount and candidates were being pursued relentlessly.
The hiring fever was so high in fact, that companies were doubling their time-to-hire and 86% of candidates saw an increase in comp expectations.
Then the market flipped from record hiring to widespread layoffs in the latter half of 2022.
“I think we’ll continue to see layoffs, and an increase in cost consciousness, but I know there’s still a lot of hiring to be done,” says Maggie.
An unintended consequence of the layoffs is that there’s now a lot of strong talent on the market, which companies can take advantage of. Maggie predicts that this will change the way companies hire in the next year:
- Candidates will prioritize companies that are best set up for success. This means being on good financial ground, with good investors, and producing mission-critical products.
- The year 2023 will normalize compensation transparency. More states are putting laws into place and more candidates are expecting it from employers.
Maggie also briefly discussed 2023 predictions for compensation amounts. “We’re still going to see competitive compensation despite the broader market changes. We haven’t seen a ton of change in people’s comp expectations just yet.
As for roles to hire for, Maggie considers sales to be an especially hot department, especially executives who can drive the team (and the business) forward. “Product roles will be in demand too,” said Maggie, “making sure that the product is rock solid and meets user’s needs if they’re willing to spend on it.”
Prices will rise and pricing models will become more complex
Growth isn’t the valuation measure that it used to be, according to Kyle Poyar. As noted in the 2022 SaaS Benchmarks Report, the basis of company valuations changed from growth at any cost to growth by Rule of 40, with an increased emphasis on profitability.
“Folks are turning to pricing as a lever to drive profitable growth,” Kyle said.
For example, companies like DigitalOcean are now raising pricing significantly after years of not increasing it. In July, DigitalOcean shifted to catering customers’ more specific needs as part of their product offerings. Though they experienced some churn as customers noted the lack of product need as Kyle said, the close monitoring of their pricing eventually yielded some positives.
As a result, they were able to claim additional revenue in 2022, bringing in an extra $13 million, according to their Q3 earnings call.
But pricing is not the only lever that is seeing adjustments. GTM motions and pricing models themselves are also increasing in complexity, as companies move from traditional sales-led subscription models to product-led growth strategies and usage-based pricing.
However, companies are not simply switching one for the other. Hybrid models are now becoming a trend. These tend to offer multiple pricing options for different products and customer types, said Kyle. Hybrid models can support not only PLG and enterprise sales, but usage-based pricing, and traditional subscriptions. All at the same time.
“What I see more of for 2023 is technology that enables that hybrid, more flexible, and complicated motion,” said Kyle. “As well as talent that needs to be comfortable operating in that environment.”
B2B marketing is shifting to micro-influencers
Generative AI is becoming more of a presence in marketing—specifically in the area of content marketing. Products like Jasper and others are making it really easy to generate lots of written content (and even video scripts).
But, Kyle observes, that is causing a shift in customers’ attitudes towards content.
“I’ve been noticing a craving towards authenticity and personal brands. Almost like micro-influencers are an antidote to bland, off-the-shelf, machine-generated content,” Kyle says.
As proof of this, Kyle points to the 2022 SaaS Benchmarks Report, which typically gained views from traditional channels like email campaigns, direct, and organic search.
This year, however, said Kyle, more traffic has come from LinkedIn—specifically, personal brands on LinkedIn. It was the single best performing traffic driver, which was a big departure from years past.
For 2023, the company that can leverage a good mixture of micro influencers while retaining an authentic voice may get more value out of their marketing efforts as the year progresses.
4 key takeaways
- Prove market fit. Software is still a fantastic area to invest in, but VCs will prioritize the companies that prove product-market fit and go-to-market repeatability. Those have been the markers of companies that have survived and thrived in 2022—and they want to see more of that.
- Keep your compensation competitive. There will be a tight battle for the best talent, so be prepared to invest. People’s comp expectations haven’t changed yet, but comp transparency certainly has. If you want top candidates to see you as the ideal employer, that might mean showing your cards early.
- Explore hybrid pricing models. Consider moving to usage-based pricing models and adapting technologies that enable flexible pricing motions. Companies that hire talent comfortable operating in that environment will move faster than their competitors.
- Develop and leverage your micro-influencers. AI-generated content will continue to grow, but that also brings an audience’s appetite for authenticity. Now is the perfect time to encourage company leaders and executives to start building their own brand and hiring people who specialize in social media management.