The Pre-Seed Angel Fund for SaaS Startups
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Building a SaaS Startup shows some similarities to driving the washboard roads of Africa. When you start driving, the corrugated road shakes and rattles your car and you start to fear that the vehicle is breaking apart any moment, certainly well before you reached your planned goal. If you are frightened to speed up and gain momentum, your car will soon break apart indeed. The only way to succeed is the bold acceleration until you reach a more stable stage at a certain velocity.
If you think of your company as a vehicle driving such a road and yourself being the driver, the message becomes clear: You need to quickly gain momentum in order to safely continue the journey to whatever goal you have set for your business. This requires fuel, the money that you will have to raise, and it requires a durable, powerful engine, the key people in your company.
The better you plan the amounts of cash you need to reach certain milestones along your road to success, the more you will be able to participate in the gain your company will produce. In other words:
Before you start talking external money, develop a conclusive, risk taking, but yet not breakneck, funding strategy for you startup company
This document is the continuation of my LinkedIn publication Early Funding For SaaS Startups. In this updated and newly structured document I summarize my SaaS funding experience based on many rounds of financing within my SaaS portfolio. You can find ballpark figures of minimum requirements (KPIs) for each individual funding round and the resulting dilution of founder’s ownership. With this benchmark figures at hand you, the SaaS founders and entrepreneurs, should be able to develop your individual funding strategy for your company.
The provided figures are based on real data collected from my exposure to early stage, European SaaS companies, including some of my own B2B SaaS portfolio companies. This document does not claim to deliver a complete overview or a statistically relevant set of data.
Raising early funds for any startup company is much about exciting other people about the business opportunity which you have spotted, your ideas to embrace the opportunity and your plans to make your vision become reality. During the next weeks and months you would probably do a lot of research to proof that the opportunity is real, your ideas are realistic and your execution plans can be financed and implemented.
Once you have collected enough market data and insights from analyst reports, own research and surveys and first and foremost from a handful of people or enterprises (B2B SaaS) who you know well and who have been willing to actively support and guide you, you can start preparing some material for your very first fundraising event, the funds from your Friends & Family.
Most likely your friends and family make a living in a very different field but not software and high tech. You almost owe them some third party opinion about the problem you are going to solve and the opportunity behind all that. A combination of some market analyst reports and data combined with you own findings (ideally from own surveys) underpinned with feedback from a few typical customers, i.e. executives within your target market will provide a quite balanced sight on your planned venture.
Once some of your friends and family members have built some trust in your ideas,they want to see how you are going to make this all work. That’s what you have to put in a rather basic, rudimentary, 5 – 10 page presentation. You may highlight the team and the team member’s very suitable backgrounds for the planned business. No need to show any detailed financial forecasts or pricing models. Your friends and family members may want to see some ballpark figures just to get a feeling about the magnitude of the venture.
It is unlikely that you can already demonstrate a first version of your product. Nevertheless, giving your potential first investors some basic idea about how the product will look and feel is an invaluable plus. If you are not familiar with clickable mock-ups you may decide to get some external help. Experts will spend a day with you to define the key functional blocks of your product. You will be surprised how rapidly they will assemble (almost)a first (alpha) version of your product. That’s what creates the highest confidence in whatever you plan to sell in the future.
No founding team is complete, but make sure you teamed up with the right people with good social and business skills. Ideally the expertise to (a) build an R&D team and a product and (b) to assemble a winning Sales team and close customers should be within the founding team. Lonesome fighters are not really appreciated in the investors camp. If you don’t have the right co-founder yet, communicate clearly what your plans are to get a, maybe late joining, complimentary co-founder on board.
Friends and members of your family wont expect any reliable key performance indicators yet. It will certainly not hurt to educate them about the business model, i.e. Software as a Service, and the related key performance indicators which future investors will want to see in order to get excited about your venture.
In most cases you will receive money from a F&F round and people would expect equity in return. Based on valuation and amount raised typical F&F rounds which I have seen range from 100 – 120k Euro, resulting in a dilution of 8-10%.
Pre-money valuation: 0.8m – 1.2m | amount raised: 100k – 120k € | dilution from round: 8% – 10% | share class: common stock | likely key terms: 1x non-participating LP | not relevant yet: Drag Along, Anti-Dilution-Protection, board seat, bylaws
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You paid a high (equity) price for the ~100k Euro/Pounds. The more important it will be that you use this first money wisely. Decide early what you want to, or better, have to achieve in order to raise a successful follow on round, the seed funding. Within the run rate of this funding you must manage to develop a first product. It may yet be in a prototype, alpha or beta stage, but it should be presentable to potential early adopters. In parallel you should use some funds to test a few lead generation methods in order to provide some facts when it comes to building demand for your product/service. There is no need yet to ramp lead generation, but you should be able to show Seed investors how you would use the Seed funding to ramp the business.
For early orientation: To find the right path towards a successful Seed Funding, please check chapter KPI Prerequisites of a Seed Funding below.
Sometimes I receive well prepare 1 – 2 page summaries, also called teasers. To be very honest, this document is not really helpful. Either an investor gets interested from the first couple of pages of your presentation (see below) than he wants to dive a bit deeper immediately. If he is not that excited, he will stop reading, no matter if its a teaser or a full presentation. Safe your time and energy and skip this document.
This time around you will have to spend quite some time to squeeze your entire business into one single presentation. Try to be crisp and to the point, make meaningful statements about where you want to be with your business in 3 – 5 years (Vision) and what you want your company wants to do for a certain target group (Mission). Don’t forget, the first 3 – 4 pages may decide if you get a positive first response or not. Highlight the problem, describe how you solve it. Don’t forget the competitors section and a P&L for the next 2 – 3 years.
Like for the F&F funding it remains helpful to underpin your story with some, considered neutral, analyst reports about your product/service segment (e.g. CRM, WCM, BI, ERP), the target market size and the key players in that market. It is most effective to extract and present a summary of the findings and insights from the top tier group of analysts and market researchers. Your potential investors have access to such material, no need to overwhelm them with Megabytes of documentation.
“Its demo time.” Your potential investors will very soon want to receive a product demo from you. Ideally you can show the demo with live data (maybe trial stage) from one of your customers. Since by now your company already has subscription revenues from some customers, the demo shows a working, live, hosted product, used by customers!
By now you should be able to present experienced managers for the key areas, which may not be sufficiently covered by the founding team, i.e. R&D and Sales. In that stage you are not yet expected to present a entirely complete team.
Already in a Seed round most investors, regardless if angel investor, institutional investor or public fund, would want to see some initial feedback from the market. Therefore you need to be ready to demonstrate some KPI-based proof, that your business eventually can “get legs”. The KPI Radar below provides you with the minimum (red) and good (green) numbers of those KPIs relevant for this early funding.
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▪ TOTAL MRR can still be a small number, but even small numbers will increase investors’ believe in the market validity of your offering. At that stage is probably less about the amount but more about the number of paying (trial) customers you could win as early adopters prior to this funding.
▪ MRR GROWTH is a very desirable parameter to show, however it requires some months of business traction to show meaningful data. 100+% growth rates in the first two to three months is nothing really spectacular. Data become meaningful as soon as you can show a trend over – at least – 4 – 5 months. Still very early, but it shows investors, that the first subscribers were not mavericks.
▪ At the time when you raise a Seed round, your potential investors should understand how hard it is to win the first handful of enterprise class subscribers. No matter how tolerant your potential Seed investors may be, you need to make sure that the SALES CYCLE isn’t longer than 1 – 2 months, i.e. it doesn’t take longer until you collect a signed subscription agreement which generates month over month revenues from this particular customer.
First an foremost you should explain your investors that you are not in a “zero touch” on boarding business. You are selling to small and mid size enterprises which demand some professional sales process before they decide for a new software or service. To a large extent it is also in your own hands if you can win customers within the “SaaS market standard” sales cycles. Don’t run after the large and complex accounts as first customers. Try to find 5 – 10 well qualified leads and start to measure then. A too small pipeline of only 1 or 2 prospects causes you and your team to try too hard and stick too long to slow moving prospects. With half a dozen prospects you will be able to choose those prospects which are most likely to sign an agreement with the acceptable Sales Cycle time.
▪ At the stage you are right now, you are most likely not able to show any EXPANSION MRR and you hopefully don’t have to show any MRR CHURN yet.
▪ It is never too early to demonstrate your capability to increase your pipeline of qualified leads month over month. It is probably a bit too early to talk about a meaningful LEAD VELOCITY when you raise your Seed round. Nevertheless I recommend you to show this KPI and use examples to explain your lead generation and qualification process – now and post funding. Be aware that potential investors will not only look at what you have achieved so far but even more at the realistic chances to achieve much more in the foreseeable future. Without enough leads, it is difficult to present a convincing MRR growth story.
The more precise the data ranges are, the more they imply that there is no “life” outside those benchmarks. That’s not the case, not everything can be measured by the same yardstick. This is particularly true with SaaS businesses. Instead of trying to find the root cause for possible KPI deviations, contact me and lets discuss this individually. Keep in mind: Exceptions prove the rule!
Usually the lead investor(s) in a Seed round are institutional investors with professionally structured fund vehicles from which they invest. For such funds the investment amount needs to be above a certain threshold. At that stage SaaS startup companies are well advised to not be too greedy and raise enough funds to safely reach the required KPI basis for a successful Pre-A or Series-A Funding round. Most of the SaaS companies in my portfolio have raised between 500k and 800k €/£ in a Seed round. Most investors – in particular public funds – would want the proceeds to finance the business for at least 15 – 18 months. In principal this makes sense since no investors wants to see founders and management get distracted by another fundraising process after a short period of time.
Pre-money valuation: 2m – 3m | amount raised: 500k – 800k € | dilution from round: 20% – 25% | share class: preferred stock | usual key terms: 1x Participating Preferred LP, Drag Along, Anti-Dilution-Protection, board seat, bylaws
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In most cases that I have seen the Seed funding is predominantly to start building a lead generation and sales engine. While the product may require some adjustments here and there and missing features might need to be added, the lion share of the available funds need to be used for hiring a sales team and one or two experts exclusively focusing on lead gen relevant online marketing. Check chapter KPI Prerequisites of a Pre Series A Funding below, to see the KPIs you need to achieve for a successful Pre Series A funding.
For early orientation: To find the right path towards a successful Pre Series A Funding, please check chapter KPI Prerequisites of a Pre Series A Funding below.
In addition to the advise I gave in the Seed Funding section above, I want to highlight a few points which now become a crucial part of your company presentation: Instead of showing only the current status of your business, you are now expected to show the velocity. This means you should use charts instead of snap shot numbers. Those KPI charts (hopefully) show a solid months over months progress. Be reminded that a demonstrable consistency in the development of your KPIs is more important than a nice actual number of the current month!
This is probably the first time you need to show a comprehensive business (execution) model. Ideally this plan is based on a common spreadsheet software which you can easily share with potential investors. There are a number of fantastic templates available online. All of them can help you to quickly build a SaaS business execution model. Just be careful what template you chose. First think, then choose! Some models are more geared towards volume business mainly triggered by site visits, registrations and consecutively paying subscribers. Some other models reflect a more enterprise type sale where qualified leads come from outbound calls, e-books and eventually even from targeted events. Needless to mention that only one of the described models can fit your business. Both models are equally attractive for investors but can have very different KPI benchmarks. While sales cycles (CAC) for more sales intensive enterprise class services are longer , CLV may be higher, churn lower.
So far you may have focused on hiring the right people to cover mission critical roles such as R&D, Sales and Marketing. With 1.5 – 2m fresh money at your bank account, handling 40k – 80k MRR from 20 – 40 customers, with 10 – 20 FTE on the payroll, you need to show a credible, reasonably experienced, Director/Head of Finance either “on board” or at least “ready to join”.
The below KPI Radar provides you with some ballpark figures for a few KPIs. Those may not be the same ones you have been reading about in numerous posts and blogs. Indeed, there are many KPI celebrity lists available and all differ a bit from each other. Look at the publishing date and you will see that the top ten list changes over time. En vogue KPIs are Negative Churn, Quick Ratio etc. They all have reached investor’s attention by now and you have to be prepared. By the way, “en vogue” doesn’t need too mean that those KPIs are the best ones to measure the value and judge the quality of your business.
Don’t squeeze your business into a corset of prominent KPIs. Explain, why one specific KPI may not work that well to assess your business. Introduce a different view, if needed. That does not mean you can ignore the classics such as TOTAL MRR, MRR GROWTH, CHURN, CAC, CLV etc.
One example which I particularly like: “Negative Churn” means that you win more MRR from your existing customers than you loose from churned/lost customers. Conclusion: Every month, more money comes in, without much sales effort. This is nice! This is a valid consideration once a company has reached a rather solid number of customers. But what does this tell us in early stages of a business? You are loosing customers and you are concentrating your risk (risk clustering) on less customers with larger tickets. In early stages of your business you want to show the opposite, i.e. diversification, revenues from many customers.
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▪ By now, TOTAL MRR needs to be in a certain ballpark to gain interest from institutional investors. You are raising a Pre Series A round to further leverage the investments you made in lead generation and sales. Your annual recurring revenue run rate is not yet hitting the top tier funds’ Series A bar of 1.2m – 1.5m. You are about to get there within the next 9 – 12 months. Your current Total MRR has developed nicely to 40k – 80k (experience from my SaaS portfolio) and the 1.2m – 1.5m run rate is in sight.
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▪ You can now show relevant MRR GROWTH data. By the time you raise this Pre A round you are generating subscription revenues for at least 9 – 12 months. With yet low absolute revenue numbers you should be able to quadruple your annual revenues, which translates into a 12% month over month MRR Growth (assuming Churn still negligible). At 10% you grow threefold. Below that you collect negative points. On the other end, I have seen SaaS startups growing above 20% month over month, which is a nine-fold annual increase. Achievable, taking into consideration that MRR at beginning of the period was probably at 10k – 15k and has increased to 100k+ within a year. The table illustrates your Total MRR performance at a certain MRR Growth rate, assuming your MRR at the beginning of the 12 months period (~ after closing your Seed Funding round) was about 15k. With MRR Growth rates between 12% – 16% you hit the required Total MRR of 40k – 80k for a successful Pre Series A funding.
▪ At this time around, you should already be able to show decreasing SALES CYCLE times. While investors in Seed Funding rounds are quite tolerant when it comes to sales cycles, in this Pre A round you need to show that you have undertaken effective measures across your business (R&D, Marketing, Sales) to reduce the sales cycle to less than 8 weeks.
› increase the quality of your leads with frequently updated, high quality, targeted online content (e.g. eBooks, sponsored articles and surveys)
› invest in tools like targeted demos and videos to automate parts of the sales process and increase sales efficiency
› as a new kid on the block you need to create customer comfort. Develop case studies and references.
▪ EXPANSION MRR is still not a significant contributor to your MRR but you should be able to show a few up selling successes within your customer base. More importantly, you should have a convincing strategy for generating future Expansion MRR in place. Listen to your customers, undertake surveys, create a powerful customer feedback platform (CRM) and provide incentives to help you expand the product.
▪ Once you hit the 40k- 50k MRR rate with a growth target of 12%+, the LEAD VELOCITY RATE (LVR) becomes a very powerful and accurate parameter to check if you are on track reaching your MRR goals. With the funds you collected from the Seed round you probably could not yet fully explore the potential of your lead generation strategy. Coming from a rather small basis of leads you should be able to increase your MRR pipeline by 20% (or more) at that stage. For some reason you may have been able to generated a quite solid pipeline already at the very early stage. In that case a current Lead Velocity of 10% can be acceptable for this Pre A funding round. Try hard to not get below that number, otherwise potential investors may get worried about your future ability to execute the presented business growth.
Just a quick outlook. Once you hit an ARR of 1m – 1.5m, a 10%-12% LVR is in the ballpark. With that you should be able to grow your business by healthy 150%-200% year over year. LVRs usually go down to 6%-8% once you enter the maturing phase with an annual recurring revenue run rate of 4m – 6m.
The more precise the data ranges are, the more they imply that there is no “life” outside those benchmarks. That’s not the case, not everything can be measured by the same yardstick. This is particularly true with SaaS businesses. Instead of trying to find the root cause for possible KPI deviations, contact me and lets discuss this individually. Keep in mind: Exceptions prove the rule!
Your KPI trends look very good but they are just not yet “au piont” for the valuation you need to achieve to raise a dilution friendly larger Series A funding. You have three options now:
1 raise some additional money from your existing investors, either through a new equity round or a convertible note.
2 talk to some medium size funds who have their sweet spot investment amount at ranges from 1.5 – 2.5m € and raise a Pre Series A round at an attractive valuation for both parties.
3 try to raise a Series A funding round of 5 – 8m fresh money and hope one of the top tier larger funds will offer you a valuation which would prevent you from an unacceptably high dilution.
Option three is probably not a very realistic scenario. 1 and 2 are much more realistic and make more sense in my opinion.
The purpose of Pre A funding rounds is to give your company another 6 – 12 months additional runway for reaching the required KPIs. Instead of slowing down your investment in KPI development and saving money (and being penny wise and pound foolish) you raise another 1.5 – 2.5m €/£ in a Pre Series A round before you march out for the larger Series A funding round.
Pre-money valuation: 6m – 10m | amount raised: 1.5m – 2.5m € | dilution from round: 15% – 20% | share class: preferred stock | usual key terms: 1x Participating Preferred LP, Drag Along, Anti-Dilution-Protection, board seat, bylaws
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In addition to the obvious investments in lead generation and Sales, you should dedicate funds to
› develop new product modules, extensions and add-ons, which will drive your Expansion Revenue. A KPI which will become very relevant as part of your Series A and Series B funding rounds.
› map out and test a consistent future internationalization strategy, which will be one of the key drivers and motivators to raise 4m – 7m in a subsequent Series A funding round.
› initiate channel partnerships, to demonstrate your ability to execute an aggressive growth plan post Series A funding.
For early orientation: To find the right path towards a successful Series A Funding, please check chapter KPI Prerequisites of a Series A Funding below.
All the points made in the previous funding sections, in particular Pre Series A above are fully valid for this Series A funding presentation too. However I want to highlight a few new topics which you should address in your company presentation. While the Seed and Pre A presentations tried to best describe the core business and the ability to execute the presented business plan (sales execution), the Series A investors expect some discussion about “the bigger picture”, whatever this may be for your particular SaaS company. I many cases such “on top” strategies have to do with exponential growth of reach and usage of your SaaS product. The good news is that almost every SaaS company can indeed find a suitable product expansion strategy which supports some hyper growth scenario. Most of the time such scenarios have to do with network effects which enable information and content sharing between the subscribed Enterprises.
Example1 : Riskmethods, Supply Chain Risk Management, has recently introduced its unique Supplier Network which allows customers to benefit from, no longer proprietary, supplier information already available in the supplier network. Needless to mention that this drives demand on the suppliers’ side to be part of the network.
Example 2: e-Recruiting company Softgarden, has recently opened its applicant network, where Softgarden’s Enterprise customers can support the re-use of job application oversupply and in return benefit from thousands of highly relevant and current (“hot”) applications from other Enterprises’ applicant searches.
After all it is about offering more than just a piece of software as a (cloud) service. Enterprise clients are more demanding by now. “big data dumps” are no longer sufficient.They expect SaaS to provide impact analyses followed by recommendations and eventually early steps towards automated actions. Think about that when you assemble your Series A presentation.
Since you already presented a conclusive business plan to your investors of the previous financing round, you should use that plan as the basis for any updated plan, which you will show to your potential Series A investors. No matter if you need to correct your previous plan up- or downwards, you should start with the plan against which you executed for the last 12 to 18 months. There is nothing wrong with adjustments and corrections as long as you provide full transparency about the development of your company since the last funding (Pre Series A). While you could come up with your own, thoroughly compiled assumptions (e.g. sales cycle, deals per month per head, CLV, churn), this time around you should be able to attach a lot of “supporting comments” to those Excel cells which carry the key assumptions for your “next 18 – 24 months business outlook”.
I see much more confident and happy investor faces when they come out of deep dive business plan sessions where most of the key assumptions are accompanied by comments like, “…derived from last 12 months customer wins” or “… concluded after 6 weeks A/B testing” or “… based on feedback from a customer survey”. In a nutshell: Its time to become very realistic with your assumptions.
Investors expect your product to be rather mature by now. For the first time you will be raising significant funds of which the lion share will be used to expand your headcount globally, predominantly in sales and customer support. While it sounds like an easy task to grow a company from 15 – 20 employees to a 60+ organization, this is a very serious endeavor. Don’t forget, there is not a lot of time for “training on the job”, your hires should understand what they need to deliver and they should have the skills to succeed. It is tempting to trust on your, or your co-founders, network to fill any open positions, but it wont happen. For this fundraising presentation you should provide your potential investors with a detailed professional hiring strategy, which may include external recruiting support or an in-house HR person to drive and manage the multiple, simultaneous hirings.
The below KPI Radar provides you with ballpark figures for a few KPIs. Those may not be the same ones you have been reading about in numerous posts and blogs. Indeed, there are many KPI celebrity lists available and all differ a bit from each other. Look at the publishing date and you will see that the top ten list changes over time. En vogue KPIs are Negative Churn, Quick Ratio etc. They all have reached investor’s attention by now and you have to be prepared. By the way, “en vogue” doesn’t need too mean that those KPIs are the best ones to measure the value and judge the quality of your business.
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▪ Top tier Venture Capital funds keep telling me and my portfolio entrepreneurs that they would like to see an annual MRR (AMRR) of 1.2m – 1.5m. Below that amount it is difficult to excite top investors getting involved, hence your MRR should be 100k or more. In addition a longer sight into the future development of your contracted MRR (CMRR) will play an increasingly important role in your MRR discussions with investors. Your company is now stable and mature enough to negotiate longer term subscription agreements ranging from 12 to 36, sometimes even 48 months. For some investors a 1m AMRR with and average subscription duration of 24 months might after all be more convincing than a 1.5m AMRR with a duration of only 12 months. SaaS savvy investors would probably have a more specific view on that. They will look at your churn rate and most likely are much less interested in the duration of your subscription agreements. It is clear why.
▪ At MRRs of 100k+ you start to enter a more steady-state business execution. Things get more stable but also slightly less aggressive than in the early stages of your business. While you could probably present 15%+ month over month MRR growth rates, this is (most likely) no longer feasible and it is no longer expected. With a month over month MRR GROWTH of 9%, you hit the bar of most top tier VCs here and abroad. The more the better but keep in mind that MRR growth is not all what counts for SaaS savvy investors. High growth with high churn makes no sense either. By now you are (you have to be) quite experienced SaaS executives/managers and you have learned that thorough lead sourcing and lead qualification can have a great impact on the quality of your future customers, which has a direct impact on your (low) churn. What this means: New MRR not at any price. If the price is lower quality, less loyal customers, you better think twice if this makes sense for you. You A round investors will look at your churn and discount your MRR growth accordingly.
▪ “What a mess” you may think. The last KPI radars showed demand for decreasing SALES CYCLE and now, the Series A radar suggests more tolerant sales cycles of up to 8 weeks and maybe even more. I have experienced this phenomena in a number of Series A and Series B findings. Let me explain why.
Quick digression: Some time ago my business friend and SaaS fellow Christoph Janz and I were in a board meeting with an interesting discussions about the most suitable prospect profile fitting our maturing sales strategy. To increase the efficiency of our discussions we introduced some terminology describing small, medium and large customers with rabbits, deer and elephants.
Now back too the topic: During the journey from a company with a minimum viable product (MVP) and 1 or 2 pilot customers to a maturing 100k+ MRR business with 100+ customers your company has most likely dealt with elephants in very early stages to get market relevant feedback to sharpen your product. Next phase probably was all about hunting the deer and rabbits and ignore the elephants to quickly increase the number of customers and MRR with a rapid pace, i.e. short sales cycles. This has worked quite well so far and it will continue to work well for some time, but now there is also increasing interest from “elephants” and by now your company can afford to dedicate some resources to larger customers with 10k+ ARPA (average -monthly- revenue per account). Needless to mention that such customers need some more attention and sales cycles are longer than the used cycles when hunting deer or rabbits. Series A investors acknowledge your expanded sales strategy and therefore tolerate the higher average sales cycles.
▪ Now is the time when you can nicely illustrate your EXPANSION MRR development with a customer cohort chart. You already presented your Pre A investors a convincing strategy to generate nice expansion revenues in the future. Whatever plan you have presented 1 to 1.5 years ago should now clearly proof the concept. I have seen expansion MRR rates from 2% – 8%. But that is not all. Your generated Expansion MRR should come from a diverse group of existing customers. Only then you provide proof that the future of Expansion MRR can even look brighter in the future.
I use the following rule of thumb which seems to resonate well with Seeries A and B investors: A 20% minimum Expansion MRR from at least 10 – 15% of your existing customers in the period of subscription month 12 – 24 is a healthy start. In other words, 10 – 15 out of your 100 paying enterprise customers have increased their monthly subscription by 20% (or more) after 12 – 24 months.
▪ In regards to proper reporting and forecasting your LEAD VELOCITY RATE (LVR) there is not much to add to the comments I made in the Pre A funding section. In general I experience that rates around 10% are quite reasonably well received. Admittedly, there are a large number of B2B SaaS startups out there which LVRs of 15% and more.
If your last three months average LVR is 10% or slightly less, you should invite your key marketing and sales people in a brainstorming session and work out a few additional measures and strategies to increase your future three months average LVR to a 10 – 12% rate. There are lead generation experts out there. You may want to consider inviting one of them into your brainstorming session.
The more precise the data ranges are, the more they imply that there is no “life” outside those benchmarks. That’s not the case, not everything can be measured by the same yardstick. This is particularly true with SaaS businesses. Instead of trying to find the root cause for possible KPI deviations, contact me and lets discuss this individually. Keep in mind: Exceptions prove the rule!
The above KPI radar feels like taken out of your company’s monthly reporting. You used the 1.5 – 3m Pre Series A funding to “map out and test a consistent future internationalization strategy” (see Use Of Funds in the Pre Series A section above). Now you should have enough proof that funding of an aggressive business expansion into another core market region (US or Asia) has a high chance of success, hence the risk of loosing the invested capital has become much lower than in any of the previous funding rounds.
Founder’s believe to successfully conquered the one of the top economic markets with an investment of 1 – 2m € exists for decades. The truth however is, that such markets are usually harder to crack due to local competition from incumbent players and very well funded startups. Plan at least 3 – 4m € for your first meaningful expansion to the United States or to Asia (whatever your strategy suggests). If you have additional “homework” to do, you should another 1 – 3m € which gets you to the suggested 4 – 7m € Series A funding amount. The big danger is to raise too little money to build a “maturing company”. Only maturing companies can raise additional funds of 15m – 25m € to develop a market leadership position which makes your company ready for an IPO or a very attractive trade sale. All Series A investors understand the stage that you are in and acknowledge the slightly lower risk for a total failure, hence they are willing to discuss appropriate (attractive for both parties) valuations. Most of the SaaS companies in my portfolio have raised between 4 – 7m € in a Series A round.
Pre-money valuation: 10m – 18m | amount raised: 4m – 7m € | dilution from round: 25% – 30% | share class: preferred stock | usual key terms: 1x Participating Preferred LP, Drag Along, Anti-Dilution-Protection, board seat, bylaws
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Your Series A investors have provided substantial funds for your company to boost its business in its home market and (at least) in one additional core economic region (US, Asia). Needless to mention that you and your company are expected to dedicate a large part of the Series A investment to your expansion strategy. This includes
› hiring of experienced (have done it before) managers to execute your channel partnership strategy (first) in your home region in order to support the continuation of aggressive ARR growth for the next years
› hiring of executive managers in your 2nd key market
› permanent traction and improvement of your company’s NPS (Net Promoter Score)
› providing open APIs and provision of a wide range of third party integration “connectors” and modules
For early orientation: To find the right path towards a successful Series B Funding, please check chapter KPI Prerequisites of a Series B Funding below.
All the points made in the previous funding sections, in particular Series A above are fully valid for this Series B funding presentation too. More than in any previous funding rounds the B round investors will want to invest in a fast growing international company. In other words, you need to demonstrate strong KPIs in, at least, one additional geographic region. Its fair to say that most investors would like European companies to show some solid footprint in the United States. What does “solid” mean? For most investors (and buyers) a European company is considered international once at least 40% of total revenues are generated in the US (in some cases Asia).
Since you already presented a conclusive business plan to your investors of the previous financing round, you should use that plan as the basis for any updated plan, which you will show to your potential Series B investors. The main difference compared to your Series A plan is the much more aggressive allocation of funds to your second core market, i.e. USA. Its not unusual that 50 – 60% of the raised funds will be invested in the US market.
The main question usually is: Shall the Series B business plan lead to a provitable, good growing, business, or shall this plan show an even more aggressive growth strategy, further financed with a Series C funding round? My answer would be to aim for a profitable business with the Series B funding and decide 15 – 18 months after the Series B round, if additional 20 – 30m Euro funding would allow you to become a global category leader, worth at least 500m – 1b.
Growing your team by 40 – 50% per year, hitting employee # 100 in one of the next months, is probably one of the key discussions you will have with potential series b investors. You are no longer a true startup company. Instead of attracting a bunch of great people out of your or your investor’s network, you now need a profesional recruiting engine, managed and controlled by a professional – “have done it before” – HR team. Doubling sales or R&D from 4 to 8, from 8 – 16 was all manageable. Growing an A+ saels team from 15 – 30 or 40 is a huge challenge. Your pitch deck should have a few great slides explaining how you plan to manage the team growth challenge. Think about special incentives besides the usual ESOPs and free lunch tables on Friday’s. Establish clear transparent carreer paths in any departyment of your company.
The below KPI Radar provides you with ballpark figures for a few KPIs. Those may not be the same ones you have been reading about in numerous posts and blogs. Indeed, once you reach a certain maturity, the key KPIs change and the spread increases. You may raise a successful Series B round with 200k MRR or with 300k MRR. You may raise a successful round with 0.2% churn or with 1% churn. Later stage investors are quite experienced and innovative when it comes to assessing a company’s chances to continue aggressive growth from 2-3m annual revenues to 10 – 15m. B round iinvestors look much more into the future than any investors you may have presented to so far. They appreciate your historic growth and may like your last 12 months MRR development,but that is not enough to feel good about the future. They will look deeply into your pipeline, your pipeline velocity and the – time shifted – correlation to MRR. If your MRR grows nicely but does not show any logic correlation to your pipeline growth, there might be some growth problems ahead of you. So make sure your pipeline velocity is not just a great number but also corresponds with your 2 – 3 months out (sales cycle) MRRs. Bottom line is: The traditional, well accepted KPI dash board is not sufficient to excite Series B investos. You need to additional, inteligent rationals which underpin the continuation of a speep growth curve with 100%+ YoY growth.
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The more precise the data ranges are, the more they imply that there is no “life” outside those benchmarks. That’s not the case, not everything can be measured by the same yardstick. This is particularly true with SaaS businesses. Instead of trying to find the root cause for possible KPI deviations, contact me and lets discuss this individually. Keep in mind: Exceptions prove the rule!
In a typical Series B financing round additional funds of 10m – 16m € are raised. Usually such amounts come from top tier Venture Capital firms in Europe or in the United States. There might be a few Private Equity firms who are interested in leading or co-leading such a round. However in most of the cases the more classic Venture Capital firms with large pockets ( fund sizes of at least 300m € ) would see their sweet spot at that stage.
Needless to mention the obvious. The new money becomes less “expensive”, dilution stays within reasonable limits.
Pre-money valuation: xxm – xxm | amount raised: 8m – 15m € | dilution from round: xx% – xx% | share class: preferred stock | usual key terms: 1x Participating Preferred LP, Drag Along, Anti-Dilution-Protection, board seat, bylaws
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By now a SaaS company should have reached a stage where it executes rather well in any key areas from product and R&D via marketing & sales to customer satisfaction and oepration. Fresh money at that stage is probably the first money which is true growth money. The company is expected to continue its business as demonstarted over the past 2 – 3 years and maintain its aggressive growth with the additional funds provided. Series B investors do not expect much money to flow into product re-designs, re-built of a sales strategy and sales team etc. This round of funding is all about financing further growth on the basis of a proven SaaS execution model.