It’s tough times for startups during the current market downturn. A wave of layoffs, spending cuts, and skittish VC funds has everyone feeling very nervous about the near future. It seems as if somebody accidentally set the business world on fire.
This is definitely not the first time that we’ve experienced such a dramatic shift in business outlook, but some, such as Lightspeed Venture Partners, predict that this current trend may stay with us for longer than expected, stating that “the boom times of the last decade are unambiguously over”.
A bit ominous right…
But as they say, never let a good crisis go to waste! It’s time to come up with a game plan for the worst-case scenario and while you’re at it, make sure software spending isn’t overlooked. After all, for many startups, it’s the second-largest expense after payroll.
So how should you be spending on software? The truth is that there’s no simple answer. Businesses have varying needs and depending on the industry and the complexity of software, no two startup software budgets look alike. But there are commonalities.
Since you have to start somewhere, why not benchmark software spend against other startups to get a leg up. Cledara is an all-in-one software management platform, which means we have a lot of aggregated and anonymized data on how software budgets are allocated, and we thought we’d share it. As a bonus, find key insights on how to develop your software game plan at the end of this article.
Let’s dig in.
The tools of the trade
For context, we aggregated and anonymized the spending habits of startups and scale-ups that have between 10 and 100 employees.
Overall, we see that spend is allocated somewhat evenly across key business categories. No surprise here as these are the building blocks required to run a business nowadays. What’s more, over half of software spend is divided between what we like to call “the big 5 + 1”. That +1 is a big “Other” category that we will share our perspective on below.
Here’s a rundown:
1. Productivity and Collaboration
These are the tools that form the foundation for teams to work together. It’s not just the usual suspects that come to mind, but also a few newer tools that enhance the way teams collaborate. This category has grown in the past few years and we’ll touch upon that in a bit.
Popular Vendors: Atlassian / Google / Microsoft
2. Marketing Automation Tools
Marketing automation tools help streamline the process of relationship building and product communication. This category accounts for quite a lot of budget spend, and competition is as fierce as it’s ever been. That counts for this category as well, since there are already around 10.000 marketing tools available on the market right now. You’re probably familiar with some of the big software players in this category. Yes - marketers love their tools and it feels like this category is ripe for consolidation.
Popular Vendors: Hubspot / Optimizely / SEMRush / MailChimp
3. Development Tools
Development tools are required to, well, develop your product. Whether it’s the actual product or the development of a website, these tools are essential to your business.
Popular Vendors: Github / Jetbrains
4. Customer Service
Customer centricity is the way to go, and the data reflects it. A lot of startups and scale-ups are placing their focus – and their money – on tools that allow for customer engagement. There’s a lot of development in this space, with a range of different tools aimed at improving the interaction between company and customer.
Popular Vendors: Zendesk / Intercom
5. IT Tools
The software tools that make sure everything stays up and running. It’s not just about keeping information systems operating efficiently, but also ensuring that the business protected and secure
Popular Vendors: Solarwinds / Splunk
This is the +1 of the bunch. This category consists of all the other software apps being used. They're usually point solutions and sometimes an emerging tool that has yet to find critical mass. The tools in this category depend on the industry but can be anything from usability testing all the way to a simple, but useful paid add-on. The point here is that the software market is still growing, with Gartner forecasting global SaaS spend to grow another 16% in 2022 to $177 billion, driven by both increased SaaS usage among companies that already use SaaS and more companies using SaaS for the first time.
Clearly, there is a lot of information hidden in such a large set of data. But there are two important things to highlight that give us a clue about the direction that software is heading.
Productivity and Collaboration tools take the lead
It may surprise you, but Productivity and Collaboration tools now account for a substantial part of software spending. The proliferation of tools like Asana, Slack, Miro, and a renewed push by giants like Microsoft and Google to expand the capabilities of their collaboration environments has meant that these types of tools are the new de facto ‘collaborative operating system’ for many teams.
This category has grown in share of wallet in the last two years, and we believe this shift in budget allocation by startups is attributed to the new, mainly decentralized way that we work. Flexibility means teams are working remotely – across timezones – and require platforms that mimic the invaluable experience of in-person collaboration at an office.
To succeed, decentralized teams still require some of the basics that served us so well in our pre-pandemic work environment: a whiteboard to ideate (Miro), communicating ideas at the watercooler (Slack), and a shared hard drive or operating system that holds all of our work (Gsuite / Microsoft).
The explosion of SaaS continues
Jason Lemkin over at SaaStr summed it up nicely:
“Cloud stocks may be down, but the cloud remains on fire”
At Cledara we’re seeing the same. Up until now, SaaS spending has been firing on all cylinders and as we welcome new customers, we’re discovering the true diversity of SaaS used by startups and scale-ups. In 2020 we had about 70 categories for the software managed on our platform.
At this point in 2022, we’re almost at 1,000 categories of SaaS. There’s an endless amount of niche software solutions entering the market, and since it’s so easy to subscribe to and deploy software nowadays, companies are quickly onboarding the latest point solutions to get an edge on their competition.
For this same reason, our ‘Other’ category of software forms such a big piece of the pie.
So what about the rest of the budget? Even though the remaining categories constitute a smaller share of the pie, they’re important nonetheless and it’s exactly why we’ll be digging deeper in a follow-up article. To be the first to read it, subscribe to our newsletter.
Your 5-Step software game plan
After a record decades-long expansion - with the pandemic serving as jet fuel to an already overheated tech market, the global economy and markets are finally taking a breather.
It’s moments like these that you need to be sure that the software you invest in drives real value. In fact, it’s estimated that 30% of software spend is wasted on forgotten, unused, and duplicate applications.
Here are four steps you can take right now to take the reigns and get in control of your software:
Take stock of the software you already have
Do you even know which software you and your employees use right now across the company? Chances are the answer is no. In the old days, they called this Shadow IT - unnoticed and usually unapproved software that exists in your company. With the rise of cloud software, it’s easier than ever for your teams to try and buy new applications. Check out how you can get an overview of the software that's actually being used - or not used - across the business with Cledara Engage.
Track all your company’s subscriptions in one place
If you are like the typical startup, you’re subscribed to anywhere between 13 and 66 different software applications (that you’re aware of) and you probably keep track of it all in a few different spreadsheets. Perhaps it’s about time you conduct an audit of your subscriptions. Go down the list of the applications you know about, scan through your company credit card statements, and chat with other teams to figure out what’s being used. Once you’ve built that overview, securely manage that information with a tool like Cledara. If you are a startup, check out Cledara's Startup Program.
End free trials to avoid expensive mistakes
It’s no secret that much of the software we end up paying for starts out innocently enough as some form of a free trial. Once you’re in, vendors know that it’s easy to keep you after they manage to deliver some initial value. It’s up to you to stay vigilant and challenge the value you’re getting, and cancel that subscription once the value is just not there anymore.
Automatically collect your invoices in one place
While you’re at it, make your finance department’s lives a bit easier by automating software invoice collection. Centralizing your software subscription management and using virtual cards to pay for subscriptions allows you to automatically capture and match invoices to subscriptions, freeing up time for finance to get important work done.
Craving for more insights? Watch this space for more data-driven insights into how companies like yours use and find success with their software. Be sure to download our free eBook on the State of SaaS Management in 2022.
Don't miss Startup Programs
The right software powers exponential growth for startups but according to our data, companies are spending an average of 17.9% more on software than they did a year ago. Software costs are rising and startups can't always afford to purchase the latest software out there.
Luckily, software companies are well aware of this and many offer programs for startups to access their software at a price they can afford. To make things easy, we compiled a list of the 18 programs we like the most for you to check out. Make sure to give it a look before your next purchase, as Startup Programs will save you a ton of money and allow you to access great software.