By Mick Cannon and Sean Ryan, Principals, Alexander Group, New York
2022 was an eventful year for the tech industry, with challenges that ranged from inflation rates that dominated news cycles to mass layoffs at blue chip companies. With looming economic uncertainty, in 2023, B2B tech will be forced to reckon with the results of the growth-first focus that has hallmarked the industry for the last decade.
The shift to XaaS – underway for years – brought about a nearly myopic emphasis on top-line growth. Valuations soared on the back of ARR, with the Rule of 40 effectively equating revenue and profitability. In turn, go-to-market models increased in complexity, hiring was put into hyper-drive, and commercial teams set their sights on bringing in the next dollar with minimal concern for cost of sales.
As rates continue to ascend and economic recession takes hold, 2023 will see a renewed focus on profitability in an effort tonavigate hardships and maximize valuation. Looking ahead, expect three trends to control next year’s headlines.
The Tech Talent Hiring Binge Is Over; Involuntary Turnover Will Exceed Voluntary
The years-long focus on the top-line fueled a hiring binge that will come to an end in 2023. Tech companies have long labelled the difficulty acquiring and retaining top-tier talent as the primary inhibitor to revenue growth. The pandemic inflated tech valuations, opening the door to spend on talent at unprecedented quantities. As firms jumped on the newfound opportunity, hiring accelerated andcommercial teams expanded exponentially. Go-to-market (GTM)models increased in complexity, internal Centers of Excellenceproliferated, and revenue operations teams grew.
With profitability taking the spotlight in 2023, expect the tech hiring binge to come to an end, with additional layoffs likely to increase across the industry. Turnover in quota-carrying roles will remain at above average levels (>20%), and will shift toward involuntary with a focus on improving quality and GTM model yield. Top talent will mostly be spared from continued layoffs, but mid-level employees may feel more pressure to perform.
Sales-Led Growth Takes Center Stage
Product-led-growth (PLG) has dominated the tech space for decades. With startups and blue chips alike chasing the next big innovation, R&D spending has been one of the few constants in an otherwise turbulent industry.
With a pending recession, banks will become more conservative with their funds, and industry valuations will be increasingly driven by profitability rather than growth as interest rates escalate the cost of corporate debt. In turn, sales-led growth (SLG) will emerge as a major theme of 2023. Absent a consistent flow of new products and features, tech companies will turn to their commercial teams as a primary lever, relying on persuasive sellers as a differentiator.
Highly skilled salespeople will outpace product development as the primary driver of top-line growth, and go-to-market modelefficiency will emerge as the key to profitability.
Private Equity Will Have a Record Year of SaaS Acquisitions
Inflated valuations across the industry in 2020, 2021, and 2022 have left PE firms to sit on heaps of dry powder. However, as valuations continue to normalize across the tech world, PE will take advantage and start to spend again. Acquisition targets will fit the stereotypical mold of high growth via highly inefficient GTM models. Post-acquisition, look for PE firms to merge portfolio companies with adjacent product offerings with the goal of capturing synergies in product development, driving customer cross-sell and retention, and eliminating redundant management and GTM infrastructure.
Interest in tech startups in 2023 will remain of lukewarm, as the landscape contracts via mergers and dissolutions. Tech startups will need to do more than develop a compelling narrative to win funding–they’ll need to prove themselves as a viable commercial product with profitability on the horizon.
In 2023, profitability will overtake growth as tech’s decisiveperformance metric. The ensuing need to pare down the go-to-market model while simultaneously shifting to sales-led growth will require a delicate balance on behalf of leaders. Proactive adaptation will prove the key to success.
Sean Ryan, Principal at Alexander Group
Sean Ryan is a principal in Alexander Group’s New York office. He is a leader of the Technology practice on the east coast. Sean focuses around leading software, hardware and technology services companies through the difficult challenges of sales transformation, from traditional selling models and building the sales effectiveness and sales compensation structures required to effectively transition.
Mick Cannon, Principal at Alexander Group
Mick Cannon is a principal in Alexander Group’s New York office. He works with clients across multiple industries, including tech, professional services, media and medical. He has experience leading sales organization assessments, client segmentation design and implementation, job role design, and compensation assessment and design.