How To Avoid “Internal Collapse” In Your Startup

Hello to Canada’s SaaS Community,

Creative founders will often thrive in difficult times—but only if they don’t fall apart first. After two decades of building and scaling multiple businesses, Matt McGowan is now at the helm of Snap Inc., the parent company of the popular visual communications app, Snapchat, as General Manager for Canada. Speaking with SAAS NORTH, Matt shared his insights on how to avoid “internal collapse” in your startup.

Key takeaways:

• Business model best practices are quickly becoming out of date as new technology and consumer expectations take hold.
• Despite market challenges, the biggest issue a young startup can face is “internal collapse.”
• The strongest companies in choppy economic times know how to take best practice benchmarks and customize them so they make sense for their organization.

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The biggest threat to your startup isn’t whatever the latest technology “revolution” is—it’s internal collapse.

Matt McGowan has learned this lesson after 20+ years of building businesses in the tech, media, and software space. Now he’s at the helm of Snap as General Manager for Canada. Speaking with SAAS NORTH as a Steering Committee member, Matt shared his views on three key changes affecting tech today and how to avoid internal collapse before you can navigate around them.

Change isn’t coming—it’s already here

For years, startup growth gurus spoke vaguely of change coming… right before going back to their cheap cost of capital and growth-at-all-costs mentality.

Now it seems that change truly has arrived, said Matt, in three distinct ways.

1. Capital is likely to be expensive for years

For the decade after the Great Recession, low interest rates and a growing global economy meant cheap capital was abundant. Now things are reversed in mid-2023: central banks are keeping interest rates high to fight inflation, growth is stagnating, and major global economies are plunging into recession.

“I’ve been building businesses since the late 90s,” said Matt. “This is probably my third [down economy]. But many of my peers in the space haven’t. This is their first blip in the economy.”

The solution, as people like John Ruffolo have noted, is a focus on profit and EBIDTA rather than simply growth at all costs. But that is much more difficult than spending freely.

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2. Generative AI changes how people build SaaS companies

Matt’s career grew from the introduction of traditional mobile phones through to smartphones—with each innovation came new opportunities. For example, Snapchat was founded in response to smartphones with high-quality cameras.

Now we’re looking at the impacts of artificial intelligence. The technology already created opportunities for founders, but generative AI is changing the game once again, said Matt.

In particular, Matt said that how founders build companies and teams will likely look a lot different compared to the best-practice models of a decade ago that fueled the SaaS boom.

“A lot of guidance and education that has been shared over the last decade might be out of date,” said Matt.

3. Consumer expectations are rapidly evolving

From impulse retail to considered B2B transactions, Matt said buyers are becoming increasingly socially conscious. They want to know the story behind the products they are buying—who made them, what the organization stands for, and the supply chain impacts they are having with every purchase.

This puts founders in an interesting position because they now not only have to deliver quality products and services but also need to verify the fidelity of their offering.

“As founders build new businesses, they need to start thinking about the new consumer mindset and how that affects whatever product or service they’re bringing to market,” said Matt.

Keeping a roof over your head

SaaS leaders spent years creating best-practice playbooks. Now, suddenly, many don’t work anymore. Unfortunately, this chaos is enough to sink a lot of companies; not because of the markets themselves but because founders don’t know how to collaborate to move through the problems.

“I see more companies collapse from internal problems than market problems,” said Matt. “It’s just founders getting in each other’s way.”

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Navigating choppy economic waters with a young startup requires adjusting best practices to fit your business. In order to do that difficult task, Matt said you need a few things in place.

Grit to act on your vision: Articulating a vision can be powerful, but it means nothing if you’re not willing and able to act on it.

Integrity: A question Matt asks himself before investing in a company or taking on a mentee is whether or not, at a basic level, he wants to associate with that person.

“Not all founders bring integrity to the table,” said Matt. “We’ve seen a few things in the news recently that might help prove that point.”

Team focus: Once you have a team (e.g. not just you with an idea at a super-early stage), it’s critical to think about how your whole team fits together to move the organization ahead. And even if you don’t have employees, your “team” could still include advisory board members, mentors, or even contractors you work with.

“I look for them to be a bit cognizant that their network is supporting them and helping them and achieve whatever KPIs or goals they’ve set forth,” said Matt.

In a world where best practices are no longer guaranteed, Matt said it’s imperative for founders to think about what makes sense for their organization.

For example, the Rule of 40, states that your annual revenue growth rate minus your profit, both as percentages, should equal 40. So if you are growing at 40% annually, you don’t need to show a profit. If you’re growing at 50% annually, you could be at -10% profit and still be ok.

Does this rule hold up in every economic situation for every SaaS company? At one point, the answer was pretty much always yes—now, that’s no longer the case.

“There are benchmarks,” said Matt. “We should look for them. We should definitively acknowledge that they exist. But I think the best companies have their own KPIs that are agreed upon by their boards, their founders, their investors, that, if they hit them, will grow their business.”