The software spend squeeze is lessening, new data from Battery Ventures indicates. According to the venture capital firm’s survey of enterprise firms with 100 C-suite leaders at companies around $35 billion in annual IT spend, contract approval timelines are no longer stretching longer, and focus on cutting SaaS spend more generally is fading.
For startups that sell software, the market may be stabilizing.
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However, the same dataset indicates that bottom-up growth — a key method for startups to sell to larger customers — is under increasing pressure. Selling to an individual, later a team and perhaps in time a whole company is one way that smaller companies can land large, lucrative accounts. But the path for such sales could be narrowing, per Battery.
TechCrunch+ wrote extensively about the bottom-up sales approach often during the pandemic, when it and product-led growth more generally became hot terms. But like many things that got big during the pandemic and its ensuing economic disruption, what goes up inevitably comes down.
This morning we’re digging into the Battery data on bottom-up sales and closing with a few notes on the rest of what the venture group found in its recent survey. The kicker is that if you are selling AI-related software tools or tooling, you are probably having a better year than your friends who are building non-AI products.
Bottoms up!
For a long time, developers were often free to choose the software solutions they wanted to use, especially if they were being picked for testing purposes. That activity was a Trojan horse for B2B startups that could then call the developers’ bosses to land organization-wide deals for their software. But that route seems to be closing up.
According to the survey, the percentage of respondents who let their engineers self-select tools fell from 74% in Q3 2023 to 44% last quarter.
It makes sense that companies might want to tighten up their software choices. There’s a cost aspect, of course, but decentralized software sprawl is simply very hard to manage, period. The rise of platform engineering is a response to this sprawl; instead of having each developer assemble their own tool set, they can make use of whichever tools the platform engineering team picked up for the organization.
Cost is not the only factor at play; it’s not just in the current economic environment that companies are making sure their developers aren’t signing up for more tools than they’d like. Per Battery, “survey respondents indicated they will continue to tighten self-procurement from developers in the dev/test environment.”
There’s a bit of nuance to the survey, as respondents “appear less likely to control spending in the production environment.” But only a fraction of companies — 7% last quarter — let developers self-select tools that are used in production.
Whether it is in production or in testing, the new normal is for companies to tighten their hold on self-procurement. This is a multiyear trend, but it also reflects the broader attitude of enterprise buyers when it comes to spending.
Yeah, but
The portion of big IT buyers who are loosening the belt is small. Asked how economic conditions are affecting their technology spend, 3% of respondents in Q1 2023 said that they were becoming less conservative. That doubled to 6% in Q2, a figure dwarfed by the 38% of respondents who reported no change and the 56% of respondents who said that they are acting in a more conservative fashion.
Progress is progress, but it may take a while to show up. In budget-planning terms, 53% of CXOs polled expect their tech budget to expand. That’s up from 46% in Q1 2023. But more importantly, effectively half (49%) are forecasting 0% to 10% growth, up from 40% in Q1. The number of CXOs expecting flat growth fell over the same timeframe; while the number of CXOs expecting a 0% to 10% decline in their tech spend was flat quarter-over-quarter, the overall budget anticipation mix does appear to be improving.
Part of the reason for the modest improvements is a falling expectation that SaaS spend can be cut by the CXOs Battery spoke to. In Q2 2023, the venture firm saw a 34% “drop in SaaS license optimiz[ation],” which it thinks indicates that “buyers now have a better handle on out-of-control spending.” Our earlier notes on companies cutting down on letting employees pick their own tools likely plays a part in the sentiment shift.
Still, with budget expectations picking up and SaaS spend slowing, we’d rate the enterprise IT spend market as alive and kicking, even if bottom-up selling is going to remain tough for the foreseeable future.