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?
David Cummings on Startups 
Very interesting post! I’d love to have a reference for the SaaS vendors who do fit into this category so it would be easier to make an informed decision about whether we should use them or not. Of course I’d understand why you personally might not want to point such fingers.