Navigating risk like a Pro – Rails SaaS 2023 Athens

Practical application of risk management for startups.

Transcript

1. IRINA NAZAROVA 
 CEO @ EVIL MARTIANS NAVIGATING RISK LIKE 
 A PRO RAILS SAAS ATHENS 2023 Reading version
2. Story: one month ago, two low-probability events happened, and I was left in SF without my lifelines: a SIM and a credit card. Was it worth it to continue with my plans for the day? I identi fi ed the risk as low and called an Uber–and then told the whole story to the unfortunate but very supportive driver.
3. RAILS SAAS ATHENS 2023 3 And it paid off–almost immediately after arriving at the conference, I bumped into the CEO of one of the fastest-growing commercial Open Source products out there, Supabase. We ended up chatting, and we discussed several possible paths we could take together. Overall, it was one of the best networking days.
4. DON’T LET THE RISKS HOLD YOU BACK
5. RAILS SAAS ATHENS 2023 ABOUT ME CEO @ Evil Martians, a product development consulting company for developer tools startups CEO @ AnyCable 5 2x startup founder Research analyst @ J.P. Morgan Investment Bank C++, Ruby on Rails engineer BEFORE
6. RAILS SAAS ATHENS 2023
7. ANYCABLE RAILS SAAS ATHENS 2023 Vladimir Dementyev 
 author and CTO An internal startup that Vladimir Dementyev and I are building. AnyCable allows you to build real-time features–chats, noti fi cations, real-time updates, and collaboration features within Ruby and Rails apps. It scales ef fi ciently and provides delivery and order guarantees, while you keep all data on your servers and save on SaaS costs. The product is an open-source Go server replacing ActionCable. And the paid Pro version is also on-premise and includes features bene fi ting larger applications.
8. WHAT IS RISK? If you ask other people, they’ll tell you that risk is the probability of an unwanted outcome. And that risk, uncertainty, probability are models we use when we don’t have all the information about what’s happening in reality. But if you ask me, I will say that risk is not just a model, but risk and probability are true, inherent characteristics of reality. Reality is probabilistic and non-linear. But I will not bug you with that today! I just want to say something important you should know about risk…
9. THERE IS NO ECONOMIC OPPORTUNITY WITHOUT RISK The interesting thing is that this is a proven theorem. 
 This doesn’t work backwards: there is useless risk, which will not lead to an opportunity.
10. Drag race ⏩ ⏩ ⏩ Formula 1 As entrepreneurs, we take risks all the time. But the rules changed: the past economy was something like a drag race, a straight and simple path to the top. Floor the gas and maximize the speed. Last year this race abruptly turned onto a Formula 1 circuit, with sharp turns and tricky bumps requiring much more precision. You must learn to read the road signs to remain in the driver's seat.
11. RECOGNIZE
12. RAILS SAAS ATHENS 2023 RISKS IN A STARTUP… Market Liquidity Execution / Growth Vendor/Platform Legal Macroeconomics … Technology
13. RAILS SAAS ATHENS 2023 RISKS IN A STARTUP… Every startup is unique, but let’s look at the most common types of risks and use AnyCable as an example. Market – we cannot build and distribute something people want and pay for. Do people want to use the on-premise services instead of PaaS like Pusher and Twilio? And will they pay for the Pro given that there is open-source version. Liquidity – we run out of cash (even if we have the product people want). Can the money we get from AnyCable sustain our salaries and key expenses at least? Execution / growth – can we scale team, product, ramp up sales and marketing. Will people buy AnyCable when it’s not Vladimir Dementyev personally helping you use it? Technology – can we run into technological limitations? Also, can new technology make our product redundant? What if we want to build AnyCable for Laravel, but it is not technically possible? Or, Falcon or new compilers speed up Ruby to such a level that AnyCable is not needed anymore. Vendor / Platform: we are banned on GitHub and Stripe, that we rely on. Macro – US economy goes into a recession. Legal – ActionCable sues AnyCable for trademark violation because of similarity.
14. RAILS SAAS ATHENS 2023 Market Liquidity Execution / Growth Technology Vendor/Platform Legal Macroeconomics … RISKS IN A STARTUP… v2023
15. RAILS SAAS ATHENS 2023 RISKS IN A STARTUP… v2023 This year key risks have grown: - Liquidity is a larger risk because money is much more dif fi cult to raise - Macro risks escalated because of global recession, war, post-covid logistics and production problems - Platform risks play more often - Finally, AI brings new technology risks Now we have recognized the key risks and got a ballpark idea of their magnitude. Is there a more precise way to evaluate risks?
16. EVALUATE
17. RAILS SAAS ATHENS 2023 BASELINE FORECAST
18. Start with a Revenue model: – where does the revenue come from? Simple model for SaaS revenue: – new users generate average check, existing users have a certain pro fi le of retention – you spend money on getting new users
19. Monthly retention, or what % new users remains active (continues purchasing the product) in N months after the fi rst purchase. Normally, you have to start with a model predicting retention. Later, you adjust the model to the fact based on the cohorts you already have.
20. Next, forecast expenses by modeling key types of key expenses: user acquisition, payroll, legal and accounting services, Cloud and SaaS cost, etc. Make sure to differentiate between fi xed and variable cost. Variable cost should be linked to the number of active users or other variable.
21. In our example, there are a few variable expenses: – support team size is 0.3 specialists per 1,000 active users (rounded) – cloud and PaaS cost is $0.9 and $1 per active user – user acquisition cost is $30 per new user
22. Finally, we forecast cash at the end of the month as cash at the beginning of the month plus the operating pro fi t (revenue minus expenses) and plus the net change in “accounts receivable”, i.e. money that clients and partners owe us. This is how we get the 4 key parameters forecasts: revenue, expenses, operating pro fi t, and cash at the end of the period.
23. RUN A 
 STRESS 
 TEST
24. Now, let’s run a stress test to estimate how a certain risk can affect our vitals. 
 Take a market risk, for example, the risk that our new marketing strategy fails. We notice it and start looking for a new strategy, and we need to build something new to support it, so in total, it erases 6 months of growth in new users.
25. This will create a major problem down the road: we will need additional $43k to survive the Fall and Winter of 2024.
26. PLAN OPPORTUNITY FOR A PIVOT
27. RAILS SAAS ATHENS 2023 Budget to pivot = minimal team * runway till fundraise or break-even 🔒 Keep this budget intact in secure liquid assets SOLVE IT BACKWARDS
28. SLIDE WITH A MEME ABOUT BORING SPREADSHEETS
29. RAILS SAAS ATHENS 2023 MODEL HELPS YOU DRIVE WITH PRECISION Normal people. 
 Afraid of risk. Too slow. Entrepreneurs. 
 Too risky, too fast. You. 
 Driving with precision, like a pro. Evaluate your decisions on the information available ex-ante. Avoid “resulting”.
30. RAILS SAAS ATHENS 2023 1. This is a C-level job, you know better. Don’t outsource it. Don’t worry about IFRS and GAAP. 2. Keep it simple. 3. Get the team on board. PRINCIPLES
31. ADD ROAD SIGNS to guide you while driving at high speed
32. U - TURN AHEAD LAST OPPORTUNITY FOR A PIVOT AHEAD PRIORITIZE FEATURE DELIVERY (FOR THE NEXT 3 MONTHS)
33. MINIMUM HIRING SPEED 40 55 MAXIMUM HIRING SPEED
34. MINIMUM REQUIRED ROI 
 ON MARKETING CHANNELS 40% RIDE WITH CAUTION DURING ECONOMIC TURBULENCE
35. ENTERING FUNDRAISING MODE 40% FREEWAY ENTRANCE PREPARATION REQUIRED FOR THE BLACK FRIDAY SALES
36. U - TURN GET 
 A DASH 
 BOARD
37. RAILS SAAS ATHENS 2023
38. ACT
39. DE - RISK
40. RAILS SAAS ATHENS 2023 Agile / lean methodologies: – Release fast – Cut the scope – Build feedback loops – Talk to customers Market SOLUTIONS
41. RAILS SAAS ATHENS 2023 RAILS SAAS 2022
42. Liquidity RAILS SAAS ATHENS 2023 Focus on doing more with less: -Cut unessential expenses -Bring your whole team on board -Economize by moving services from SaaS to on-premise, like AnyCable! Improve your fi scal policies SOLUTIONS
43. LEVERAGE RAILS
44. RAILS SAAS ATHENS 2023 DE - RISK WITH RAILS Market Liquidity Execution / Growth Technology Vendor/Platform Legal Macroeconomics … LOW TIME TO MARKET EFFICIENT FULL - STACK TEAM RAILS SCALES MATURE ECOSYSTEM NO VENDOR LOCK
45. DIVERSIFY
46. RAILS SAAS ATHENS 2023 Can you avoid a critical dependency on any single… – client – platform – distribution channel – vendor – bank – bank (!)
47. DRIVE
48. RAILS SAAS ATHENS 2023 FOLLOW THE ROAD SIGNS AND DRIVE WITH PRECISION AND CONFIDENCE!
49. RAILS SAAS ATHENS 2023 Be a Pro: 1. Recognize risks 2. Evaluate risks and use Road Signs 3. Act: de-risk, diversify, and drive 4. ?
50. HAVE FUN
51. RAILS SAAS ATHENS 2023 The spreadsheet: THANK YOU! Follow @evilmartians, @any_cable and @inazarova on Twitter