Any business that you start will go through a negative earnings period: you’ll spend a lot more than you earn. I started a business in 2012 called First Choice Wheels and Tires (Cyber Rims Inc.). The first month brought in a whopping $274: we sold 1 wheel. The second month brought in $5000.00. The third month $10,000.
After 2 years, we were averaging $100,000 per month. I wont go into specifics here, since this is not what this article is about, but we closed the business in 2019. What is important to note is that we were breaking even and/or losing money each month the first couple of years.
I had first hand experience with this specific industry, but read other individuals’ experience and you’ll realize that each industry goes through a similar phase. After reading books on real-estate investment, I felt deflated due to the amount of money that you’re most likely going to lose the first few years. I quickly realized that real-estate investment is just another business and everything made sense to me. You write those expenses off each year and keep doing it until you grow enough to become profitable (or you run out of money).
I’m not sure why reading real-estate investment books jolted this thought, but I realized that starting a SaaS business during economic hardship would be an advantage (not a disadvantage).
It’s Never the Right Time
You can always find a 100 reasons not to start a business, regardless of the environment. I have a friend that created a business plan in an effort to open up a distribution place of his own; his father has his own distribution company. It’s proving difficult for my friend to get in due to the other partners of the company. After he created the plan, he presented it to the SBA; they thought it was solid.
After months of planning, he was ready to start, and then the inflation started to rise. Freight has skyrocketed cross-country and from China due to gas-prices and lockdowns. He finally told me that “it’s just not the right time to pursue this.” He’ll continue “after the country bounces back from the recession.”
I sat down with him and we walked through his fund-raising strategy. I poked holes in it the entire time. I finally told him that I don’t see a difference in trying to obtain funding now or after the economy recovers. His service based approach will work even better while everyone else is struggling. He’s going to lose money the first couple of years anyways, so why not lose less money while everyone’s struggling. He can look like one of the big players out there since the already established distributors will most likely cut costs in order to sustain the “hurricane.”
Why Should You Start a SaaS Business?
It’s for the same type of reasoning that I said to my friend: you’re going to lose money the first year or so, at a minimum. While the economy is down, you might get others attention. If a company is paying $1000/month for software, and you come in with a comparable product at a fraction of the cost, you can steal that customer significantly easier than if business was booming.
If you’re a software developer, wow do you have an advantage over everyone else. Creating an MVP application and partnering up with businesses to help it grow is in your tool-belt. Approaching businesses while they’re looking to cut cost is a huge opportunity. If you’re not familiar with economic cycles, after a recession comes growth.
I’ve done my research on the SaaS products of choice and have developed my own set of products. I know the customer’s pain-points and those are the ones that have made it into my MVP application. My approach is to contact companies and offer a considerably discounted price. Even if I can’t get a single customer to pay for the application, hosting is not expensive. I’ll give away products for the first year for free. At 200 non-paying customers, that’s roughly a $1000/month at $5.00/month hosting fees, which is $12,000/year. That’s something that I can afford to write off.
After a couple of hundred accounts, testimonials, etc., the business should start to expand organically. All new customers will be paid accounts; the existing non-paying accounts will need to be transitioned to paying accounts. Once profitable, I can start to attract the attention of investment companies.
Conclusion
Even if it completely fails, my financial investment is minimal. Following the MVP approach, even if you don’t know how to code yourself, your up front cost should be drastically reduced. Developers might even cut you a deal during the economic downturn. Do your research and see what you’re willing to lose, since you will. However, I still believe that this is the right time to start a SaaS Side Business.