Software businesses are good businesses, but they still need to be run well

Software business aren’t bad businesses, but many are run in a way that makes it difficult to decided their quality at first glance.

There is a trade-off between growing while making a loss (by investing in product development and sales & marketing) and getting high margins at lower growth (by increasing sales and marketing spend less aggressively and not investing as much in product development).

For ten years or so up until Q4’21 revenue growth was valued ahead of profitability. In addition to product and sales investments that made companies loss-making from an accounting point-of-view, inefficiency (like high G&A costs, very high stock-based compensation) and too many marginal projects with low expected returns snuck into companies. Inefficiency and marginal, low return projects should be minimized even in ‘growth mode’.

Going forward it makes a lot of sense to be more efficient in general and do fewer marginal projects. At the same time startups should continue investing in core product development and building strong sales & marketing teams. Investing in sales and marketing is something Nordic B2B SaaS startups specifically should invest relatively more in, even if it is a short-term cost.

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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