Software-as-a-Service (SaaS) startups should have great revenue growth with companies buying more cloud-based tools, the layering of recurring revenue on top of recurring revenue, and the strong investor appetite to fund money-losing businesses. Unfortunately, things aren’t always so rosy. In fact, when a SaaS company’s growth stalls, and has outside investors with a timeline on the business, there’s a serious chance the company will be sold to a non-strategic buyer and put into harvest mode.
What is harvest mode you ask? Good question. Harvest mode is when a significant percentage of staff is cut, typically 30-80%+, for the purposes of maximizing profitability and milking the recurring revenue.
Here’s a simple example harvest mode scenario:
- SaaS company is break-even on $10M in revenue and 70 employees
- Growth stalls and investors, controlling the company, decide to sell to highest bidder
- Company is bought for $30M and 50% of the 70 employees are immediately laid off
- Employee costs represent 80% of the expenses, so a 50% staff reduction results in $4M in annual profits
- Company continues to improve the product and sign up new customers, while revenues and profits slowly shrink
- The financial buyer of the company is able to fund the acquisition with the $4M/year profits
This is a hypothetical example of a harvest mode SaaS startup. I’ve personally seen it happen a few times and it’s important to look out for them, especially if you’re a potential customer thinking about choosing a vendor.
What else? What other thoughts do you have on harvest mode SaaS startups?