Its so hard for software companies these days.

Its like you’re playing hid and seek and nobody is seeking.

“Hello?

The State of the Software Industry

• Why Read: 

  • Insights into the current software industry recession, valuations, sales dynamics, and future outlook.

• Featuring:

  • David Cummings (@davidcummings), CEO, Founder at Atlanta Ventures

• Link: 

  • “Software Recession Continues”

Key Concepts and Tactics:

1. The Software Industry Remains in a Recession:

   • Point: Despite hopes for recovery, the software market is still experiencing a downturn, with only small pockets of growth in areas like AI investment.

   • "As economic cycles go, I was hoping that by now, nearly 2 1/2 years into the software downturn, we'd be seeing more green shoots and signs of recovery. While there are some small pockets of growth, especially around AI investment, the software market is still in a recession."

2. Valuations Have Fallen and Stabilized:

   • Point: Software company valuations have decreased significantly from their peak in 2020-2021 and have settled into a more sustainable range.

   • "On valuations, they are still down dramatically from 2020 and 2021, and rightfully so. The valuations got so far ahead of themselves and were so distorted based on the accelerated demand for products from COVID and the zero interest rate environment. After valuations peaked towards the end of 2021, they started to fall dramatically and have since fluctuated in a more sustainable, long-term average range."

3. Software Companies Often Sell to Other Software Companies:

   • Point: The downturn has revealed the interdependence of software companies, with many relying on sales to other tech companies.

   • "From a software perspective, for sales, churn, and renewal rates, this downturn has highlighted just how often software companies sell to other software companies. Much like in the dot-com heyday, high flyers with fast growth sold their products, ads, and solutions to other tech companies."

4. Reduced Investment Impacts the Entire Software Ecosystem:

   • Point: When software companies receive less venture capital, they become more cost-conscious, leading to layoffs and reduced spending on software from other companies.

   • "Once the new investment stopped, most of the ecosystem fell apart. Today, we're in a similar situation outside of the AI investments. In other words, software companies are the early adopters for other software companies. When software companies stop receiving large amounts of venture capital at favorable valuations, they become much more cost-conscious. They let go of employees, cut back on their own spending, and stop buying software from other software companies."

5. Non-Software Company Sales Remain Slow and Steady:

   • Point: Software sales to non-software companies have been stable but slow, as the overall economy is not growing rapidly when adjusted for inflation.

   • "Of course, plenty of software companies sell to non-software companies. By and large, the economy is doing fine but not growing fast adjusted for inflation, so the sales from software companies to non-software companies have been slow and steady."

6. Uncertainty Surrounds the End of the Software Recession:

   • Point: It remains unclear when the software industry will return to a more aggressive growth orientation, with hopes for a recovery in 2025.

   • "When does it all end? I don't know. We're still bouncing along the bottom. At some point, things will pick up, and we'll get back to a more aggressive growth orientation as a software industry. Hopefully, that's in 2025, but you never know."

Product Market Fit Score vs Net Promoter Score

Why Read: 

• Guides founders on effectively using PMF score and NPS to measure product-market fit and customer loyalty, emphasizing proper sequencing and filtering for accurate insights.

Featuring:

• Sahil S, VC at Stedu Fund

Link: 

• “PMF Score Vs NPS”

Key Concepts and Tactics:

• Understanding the Difference Between PMF Score and NPS:

  • Point: PMF (Product Market Fit) score measures how well a product meets users' needs, while NPS (Net Promoter Score) measures customer loyalty.

  • "PMF score simply measures how well your product is meeting your users' needs. To use it, ask your users how disappointed they'd be if they couldn't use your product anymore and give them the options of 'Very', 'Somewhat', and 'Not at all'. You want over 40% of qualified responses to pick 'Very' — that's an indicator that you're meeting the core needs of enough users to start hitting actual PMF, which is notoriously tough to measure."

  • "On the other hand, Net Promoter Score (NPS) measures how likely customers are to recommend you and classifying users as Promoters (9-10), Passives (7-8), or Detractors (0-6) based on their response. A higher percentage of Promoters indicates stronger customer loyalty. If they do recommend, it drives growth and saves on paid marketing costs."

• Knowing When to Use PMF Score:

  • Point: PMF score is most useful when actively seeking product-market fit, either in the early stages of a new idea or during a pivot.

  • "The PMF score is most useful when you're actively trying to find PMF (either in the early stages of a new idea, or when you're navigating a pivot). But this doesn't only mean in the early days of your startup. When I worked at Uber in 2017 we used PMF score for new product launches, even though it was years after Uber's core ridesharing service had found PMF."

• Filtering Responses for Accurate PMF Score:

  • Point: Only consider responses from users who have used the product recently and more than once to avoid skewed results.

  • "Another, often overlooked point about PMF score is that you should only care about responses given by people who have used your product recently and more than once. A PMF score from a new user who's only gone through your signup flow is useless (and not filtering those out can skew the results)."

• Investigating Reasons for Low PMF Score:

  • Point: If users answer "somewhat" or "not at all" disappointed, segment them and conduct interviews to understand why the value proposition isn't resonating.

  • "If they answer 'somewhat' or 'not at all' disappointed, don't give up. Segment them into groups and dig into why by interviewing them, looking at referral sources, to understand why the value proposition isn't resonating."

• Calculating NPS and Understanding Its Significance:

  • Point: NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters, and a higher NPS indicates stronger customer loyalty.

  • "% PROMOTERS - % DETRACTORS = NPS. If 50% are Promoters, 30% are Passives, and 20% are Detractors, the NPS would be 30 (50% - 20%)."

• Sequencing Customer Research for Effective Results:

  • Point: Ask NPS only after finding product-market fit using the PMF score to avoid the situation where customers are likely to recommend but not disappointed if the product goes away.

  • "If customers recently experienced your core value, use the Sean Ellis Test for fit. If they're not disappointed if your product went away, find out why. If disappointed, use a Net Promoter Score survey later to see if they'd recommend it. If likely to refer, make it easy with referral programs and make them product ambassadors. With tweaks to sequencing experiments and discovery, you'll understand customers better."

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