- European software startups, a bright spot in the bloc’s still-nascent tech scene, could be crippled by a predicted slowdown in tech spending for 2020.
- Analyst house Forrester estimated best and worst-case scenarios for software and tech spend across the UK, France, and Germany over 2020.
- In the worst case scenario, software spend would drop 8% in France, 7% in Germany, and 3% in the UK, an average percentage of 6%.
- Forrester analyst Andrew Bartels said smaller enterprise software providers lacked the financial reserves of giants like SAP to see them through a downturn.
- Visit Business Insider’s homepage for more stories.
European technology spend could fall by nearly a tenth in 2020, as businesses rein in their spending and the bloc’s three biggest economies move into recession — and even the burgeoning enterprise software sector will take a beating.
That’s according to a Forrester report published in July, which estimates that overall technology spend in France, the UK, and Germany could fall by 9% in 2020 in a worst-case scenario for the economy, with little growth in 2021. The worst-case scenario is one where recessions last into 2021.
A best-case scenario would see the countries recovering from recession through the fourth quarter, and pegs the spending drop at a 7%, with some recovery in 2021.
The news is worrying for Europe’s burgeoning enterprise software sector, which attracted $7.5 billion in venture capital in 2019, according to data from VC firm Atomico.
According to Forrester’s forecast, software spend in a worst-case economic scenario would drop 8% in France, 7% in Germany, and 3% in the UK — an average percentage of 6%.
“Blood bath” for enterprise software revenue
Enterprise software firms are generally a reliable bet for startup investors, who bank on the predictability of revenue from monthly subscriptions or annual licenses. But several UK-based venture capitalists have expressed nervousness in recent months that revenues at smaller software startups could crater as enterprise clients slash budgets in a tougher economic environment.
One told Business Insider, preferring to stay anonymous, that the fourth quarter would be a “blood bath” for enterprise software revenue, with the expectation that larger clients would not renew contracts.
Sitar Teli, a partner at Connect Ventures, said one route for struggling startups was to offer a free period to customers in order to retain them through a recession.
She told Business Insider: “One of the more interesting calls I had was with someone who had been through two of the previous crises, so 2008 and 2001. They said the advice they were giving to all their software companies, which I find very compelling, was, ‘Look, anyone that calls you and says they’re thinking about cancelling … or don’t even wait for them to call you, call them up and just give them a year free. You’ve lost the revenue anyway, but this way you get to keep them as a customer.'”
Teli continued: “In enterprise, you might sign two- or three-year contracts. So sign the next three-year contract, but the next 12 months are free. And you can scale that up and down.”
Some software startups will be more reslient
It’s possible that the three big European economies could recover, according to Forrester analyst Andrew Bartels, though he is pessimistic for the UK.
He added that larger incumbents, such as German software giant SAP, were better positioned to weather a recession than fast-growing smaller players. SAP reported a 55% boost to its operating profit in the second quarter, to 1.28 billion euros ($1.55 billion).
“Small vendors are vulnerable because a large vendor like SAP has reserves that allow it to run through a downturn where profits go negative,” he said. “A small vendor may not have that cushion.”
He added that companies which raised sufficient funding in 2019 to counter their losses in 2020 would survive.
There are also nuances that may permit some software vendors to survive, especially if they cater to customers who are having to adapt to digital more quickly.
“It kind of depends from a demand perspective,” Bartels continued. “They may see clients who are saying, ‘Look, we need your solution because we need the customer experience [online].’ If a vendor is in those categories, it’s a good chance to get more sales.”
Like Teli, Bartels said there may be situations where customers ring up software firms and ask for a stay on paying bills.
“The worst may be coming come Q4 if you have 20% of clients, or they can’t pay and need a break, and that new deal may be breaking down because people thought the economy would pick back up and it hasn’t,” he said. “For [software] vendors in particular, the worst may well be ahead.”