Fundraising never really stops. That was the central theme of a recent webinar about preparing for a capital raise. Raising capital is an ongoing process that needs to be implemented continuously, whether you’re at a pre-seed stage or have your IPO in sight.
Executives from SaaS Capital, PlusPoint Consulting, and Maxio discussed the best practices to prepare for a funding event. They shared their experiences and insights into the importance of good data hygiene, how it impacts forecasting and funding, and using industry benchmarks to determine valuation.
All Steak, No Sizzle
The key to pitching to potential investors is to present your story and back it up with data. “A successful pitch is all steak and no sizzle,” said Rob Belcher, Managing Director, SaaS Capital.
“It’s a big red flag when someone goes into pitch mode. There’s a big difference between being energetic and enthusiastic about your business and selling the pitch. It must be as concrete, and data-focused as possible.”
Data should center on the two areas investors want to know about: financial and growth metrics. You should be able to rattle off the key metrics serving as the foundation of your business:
Existing ARR
New ARR
Growth Rates
Gross Churn
Net Churn
Renewal Rates
CAC (Cost to Acquire a Customer)
LTV (Lifetime Value of a Customer)
And many more
When speaking with an investor, you’re going to be asked to provide details behind each of these numbers. You should be prepared to talk about the key drivers, explaining why the numbers are what they are.
Numbers on their own don’t have much significance, but when shared in comparison—pulled from historic records and presented to showcase trends over time—they tell your underlying story. As you evolve, your data should showcase where you are at each stage of funding. Not only should you understand your data, but your audience will understand it as well. Make your pitch clear, especially when it comes to your ask. State how much money you’re requesting and for what purpose. Share what’s on the horizon for your next milestone, market, or product.
Metrics Matter in the Investor Pitch Deck
Validate your story with your growth metrics. Craft a narrative around those metrics and use them to reinforce your main message points. If there are issues with your metrics, show accountability to investors by clearly identifying the problem and how you plan to address it on your own or with the funding.
Don’t try to hide sub-optimal numbers. Kari Minton, CEO, PlusPoint Consulting, advised, “If the numbers aren’t great, then be able to tell the story of how you’re going to change it.”
Track your metrics early on and analyze the trends. These are the metrics that investors care about:
Product/market fit
Cash burn and runway, number of customers, new and total ARR.
Repeatable sales process
Pipeline metrics, close rates, churn and retention rates, CAC, LTV/CAC, cash projections, ACV per customer.
Scaling the business
market vs. sales leads, quota achievement by rep, customer renewal rates, ARR growth, expansion, contraction and churn, magic number.
How to Raise Capital for a Startup with the Right Financial Model
Use your finances to tell the past, present, and future story of your business.
Minton shared, “You need to ensure that the story your numbers are telling align with your narrative. If you are telling a story of sales going up and your financials don’t show that, then there’s a disconnect there, and that’s going to unsettle potential investors.”
Investors are looking to see if the trends make sense, if you are spending in the right areas, and if your projected results align with industry standards. Here’s what investors want to see from your financials:
Trended monthly financials
At a minimum, include the trends from the current year and the prior year.
SaaS growth metrics for the same period as financials
These metrics show the maturity of your business as it starts gaining traction. Break out recurring versus non-recurring revenue by channel and services from licensing revenue and COGS.
GAAP is preferable to cash accounting
A lot of companies start out doing cash accounting, but GAAP makes it easier to project cash needs and burn rate. Be prepared to answer questions about why you’re using your chosen system.
Trended revenue by customers
These financials give investors a better idea of who your customers are. Share details by sales channel and by recurring and non-recurring revenue.
Forecasting
Include detailed monthly projections for the current and next fiscal years plus high-level projections for up to three subsequent years.
Use Accounting Best Practices
Investors are primarily looking for recurring, predictable revenue. Your goal with accounting is to free up your finance team to spend more time on generating analysis and insights from the revenue numbers so that you can in turn show them to investors.
To build a solid financial foundation, it’s imperative to establish rigor from the start when setting up your accounting team and systems. You need reliable accounting practices that back your information needs and reporting requirements.
Implement systems that standardize customer contracts and make them easily findable in your file structure. Understand the key SaaS revenue terms, such as the difference between bookings and revenue, and structure your customer data capture to align. Ensure your cap table is current. Conduct an accounting close each month to easily provide historical financial statements on demand.
Raise Capital by Benchmarking Data to Determine Valuation
Belcher expressed the importance of valuation when raising capital. “Valuation is what your company is worth. And when you go to fundraise, you should have a pretty good idea of what you’re worth before you negotiate.”
By benchmarking your data, you’ll develop a better understanding of your company’s valuation and how it stacks up against your peers.
SaaS Capital conducts an annual survey of over 1,500 private B2B SaaS companies with the goal to help these small, private companies better understand how their performance compares to that of their peers in the industry. The most important metric tracked is revenue growth because it’s the single largest determinant of a company’s valuation multiple.
SaaS company growth rates slowed from 40% in 2019 to 29.6% in 2020. Thirteen percent of companies were flat or shrank, versus only two percent in 2019. Venture capital-backed companies continue to show higher growth than bootstrapped companies, but the gap narrowed considerably in 2020, driven by far larger decreases in growth from equity-backed companies than their bootstrapped peers.