Due diligence is extremely important when considering a major purchase that could cost you thousands in dollars and implementation hours.
Unfortunately, many SaaS buyers stop at feature set and don’t dig in to the details about the vendor they’re working with.
There’s no reason to be reluctant to ask about the stability of a potential vendor partner who will be providing a key service for the next 10 years or longer.
Stability of software companies
Here are nine questions to ask potential software vendors:
"Is your company profitable?"
Depending on how they're funded, most tech startups will spend their first few years burning cash without turning a profit. This is relatively normal as their products are built and customer base grows. However, if five to 10 years go by without a profit, or if an established once-profitable company regresses, that should be a red flag to potential customers.
"Is your software company growing year-over-year, and by what percent?"
Knowing year-over-year (YoY) growth (if there is any) can be a trailing indicator of customer happiness and tell if more customers are renewing and being added every year.
"What amount of debt does your company have?"
Debt, like a lack of profitability, isn’t inherently bad, but can be a sign that a firm is attracting outside investment. That could signal a change in ownership, which is often bad for customers.
"Does a regional or national certified public accountant (CPA) firm do a full commercial audit annually?"
This should be a quick yes from the vendor before moving onto the next question. Investing in an independent audit every year is a sign of good governance.
"Are you venture capital funded?"
Venture capital funding is typically a sign that the original founders have given up a percentage of equity or control in the business, which usually culminates in a sale to the highest bidder after just a few years. At that point, the product could be sunsetted, integrated into another product (forcing you to change providers), stripped for parts, or left to languish without product enhancements.
“How are you funded?” is a great question to ask in general.
"What is your annual customer retention rate for your company?"
Similar to year-over-year (YoY) growth, knowing the percentage of annual customer retention or, conversely, the percentage of customer churn, is something to keep track of.
"How does your company make product decisions?"
While knowing logistically how decisions are made (customer focus groups, industry trends, consumer reviews, etc.) is important, it’s also important to know philosophically why decisions are made.
In other words, is there a guiding principle, North Star, or core mission that the vendor holds, guiding its decision-making processes?
"How often do you build features for one customer?"
The answer should be never, unless you don’t mind that the company won’t be around in two years. You either have one client driving the roadmap or keeping the vendor afloat financially. Both are bad for you.
"Do you have a changelog, and is it publicly accessible?"
A change log is a record of every update made to the software, from minor bug fixes to major feature releases. The change log will tell you how often the company is making product updates. Ideally, it’s publicly available and updated frequently.
The answers to these questions should be just as, if not more, important than the feature set of the vendor you’re considering.
Don’t be afraid to press your salesperson or an executive at the firm before making your final decision. If it comes down between two seemingly good fits, the answers to these questions could make an excellent tie breaker.