Watch our latest webinar to hear from Bigfoot Capital Founder Brian Parks, SaaSOptics CEO Tim McCormick and Techstars Partner Ari Newman as they share best practices on raising seed capital and getting to a series A round. Hear tips on how to find and target the right investors and what to expect from negotiations and due diligence. We discuss:
- How seed and Series A investment criteria differ
- What early stage capital providers are looking for
- How to deploy seed capital into your business to maximize runway
Length: 45-60 minutes
To follow along with the webinar presentation, you can view the presentation deck here.
Marissa Martin: 00:02:38
Okay. So we're going to get started. Thank you for joining us today. We're going to be talking about building a roadmap for early stage SaaS growth. We've got our guests here today. I'm going to start with Tim McCormick, our CEO at SaaSOptics. He is going to be our host and moderator. Tim has 30 years of experience in building, launching and growing successful enterprise software businesses. He's experienced in leading multiple B2B software companies from startup through acquisition. He's seen acquisition of JouleX, when it was bought by Cisco in 2013 for 107 million and he was a member of the founding management team and Vice President of Marketing for Internet Security Systems, where he grew the company from 5 million to over 400 million.
He saw the company through a successful IPO when ISS was acquired by IBM for 1.9 billion. Tim, thank you for being here. I know our attendees today are excited to hear from you, Brian and Ari, on building a roadmap for early stage SaaS growth. If this is like our webinar last week, then we're going to have some really great questions come through.
Tim McCormick: 00:03:52
Great. Thanks, Marissa. Thanks, everyone for joining today. I just wanted to give you a quick little overview with of what SaaSOptics is all about. We were born and raised and bred serving the needs of early stage emerging and growth SaaS and subscription based businesses. Exclusively, we have a modern financial platform for early stage and growth subscription businesses and really focusing on three major pain areas of these businesses.
The first is really automating the order to cash to renewal process for these businesses as well as providing automated revenue recognition and deferred revenue calculations in an automated fashion. Then, as a byproduct of those two major processes, we automatically calculate all the essential SaaS metrics and analytics that are required through all the different stages of growth, and investors will obviously concentrate on the various seed and series A and B rounds, and we'll discuss some of those more important metrics and analytics as we go through today.
I'd like to introduce Brian Parks. Brian is the Founder and Managing Partner of Bigfoot Capital and Brian has launched three companies of his own over the past eight years, two of which have been venture backed up to series A stage and prior to that, Brian was an investment banker, facilitating growth stage acquisitions totaling more than a half a billion dollars in enterprise value. Brian's also an alum of Techstars' 2012 program with Brandfolder. Brian, why don't you give a quick little overview of Bigfoot Capital?
Brian Parks: 00:05:55
Sure. Thanks. I'm excited to be here today with everyone. We started Bigfoot really to provide an alternative form of capital to what we refer to stage-two SaaS companies. It's not a well known moniker, but generally speaking, these are companies that have achieved initial revenue traction and are really in a position to accelerate their customer acquisition, go to market.
The problem these companies generally face is they're sitting in a gap in the capital market. They may or may not be a fit for institutional venture capital yet. They may not be ready for the next round of equity financing, or they may not be on that path at all. Maybe they're bootstrapping and have no interest in venture capital. They're generally constrained in their ability to grow and really execute on their plan. Our whole goal is to come in, partner with them, provide capital and help them get up the growth curve, so they're either in a self sustainable position going forward or they become a viable candidate for venture capital.
Tim McCormick: 00:06:56
Excellent, great. Thank you, Brian. We also have with us today, Ari Newman. Ari is a partner of Techstars on the ventures team and has been a VC for about five years and has more than a decade of experience as an entrepreneur. He serves on several boards, including GreatHorn, Hello, RescueTime as well as Rocky Mountain Venture Capital Association.
Ari is an alum of Techstars' first class in 2007 with Filtrbox, which was acquired by Jive Software in 2010. Ari, why won't you give a quick overview of Techstars?
Ari Newman: 00:07:36
Sure. Thanks, Tim, and great to be with you all today. Pleasure and looking forward to the conversation. Techstars is a worldwide network that helps entrepreneurs succeed and we invest in early stage companies in all sectors and we're active all over the planet with our three month accelerator program as well as Startup Weekend events. We run over 30 accelerators on a global basis right now in countries like the UK, France, Germany, across the US and a number of other locations. You may have heard of some of our companies, Techstars alumni like SendGrid, Digital Ocean, ClassPass, PillPack or Plated, and Techstars companies that total almost 1,400 now have raised about 5 billion in capital during their lifetimes. Thanks.
Tim McCormick: 00:08:43
Super. Thanks, Ari. Today, we'll be covering a number of different topics and focusing on kind of the phase of seed capital through series A funding, zeroing in on what the investment criteria, how it differs from seed to series A funding, what early stage capital providers are looking for, and then really, what are the different ways companies deploy their seed capital and where does it make sense given the phase of your business and then we'll open it up to a Q&A. Actually, the Q&A will be open really, as of right now. If you have any interesting questions you want to ask, we'll reserve about 15, 20 minutes at the end that we'll go through some of your questions and try to answer those as best we can.
This is kind of an add on to our series we're calling Summer of SaaS and last week, we had our series A investor Fulcrum Equity Partners join me and we had a an event focused on what the key KPIs are for SaaS businesses and best practices from that perspective, and we had a really good discussion. We discussed growth and performance metrics, momentum and velocity metrics around sales and marketing as well as customer success metrics and we'll be weaving some of that content throughout the discussion today as we move forward to discuss seed and series A investments. I'd really like to thank some some of the folks that are submitting questions early. Jennifer Larson from High Digital Minds, Stephen Spiegel from crewHu and Matthew Zitting from Busy Busy. These are helpful, we'll be including these in our Q&A and among all the others that we get real time through the Q&A feature.
Tim McCormick: 00:10:57
Now let's really step into the discussion here. I want to start by asking the audience with a poll question of are you preparing to raise seed capital in the next six months, just kind of answering that yes or no so we can get a feel for the phase which our audience is in today. Then as we as we get those polling questions in, we're going to flip it over to Brian and he's going to start discussing having you know when to raise seed capital.
Brian Parks: 00:11:41
Yeah, thanks. I'm not sure my answer here is totally specifically scoped to seed to be honest, but I think it all starts with asking yourself a couple of questions, the first one of which is can I, which really comes down to timing and are you able to actually go to market, be a viable candidate to bring in investor capital. That really is a common theme across anytime you're going to market for capital.
Basically, the market dictates if and when you can, you can bring their money into your business, right? I think at the seed stage, more and more from what I see, I think early stage investors have kind of taken the lens of upmarket investors. The expectations have increased, you're no longer going out. Most people aren't at least on a pitch deck on kind of an idea that's extremely rare. You're really needing to have achieved some things in your business with products, with initial market traction, customer traction, those sorts of things.
I encourage people always to get out and have conversations and really test the market. It's kind of the investor discovery stage where you need to take the signal from the market and then really decide if it's a go or no go. If you don't listen to that signal and you try to go to market, it's generally going to be simply a waste of time.
Tim McCormick: 00:13:07
Great. We have the answers. You're going to display those?
Brian Parks: 00:13:12
Tim McCormick: 00:13:15
Wow, perfect. Well, good. Well, hopefully the other half is raising a series A. It will be really good, good.
Brian Parks: 00:13:24
There you go.
Tim McCormick: 00:13:26
Moving on, Brian, how do you know when to raise seed capital?
Brian Parks: 00:13:32
Yeah, so I'm not sure anyone can really read this and it's not necessarily meant to be here such that you can, but it's really to convey the point that there's a lot of information and data that's been put out there more recently in the past few years by VCs, by other capital providers, by founders that have gone out and raised capital. That really provides some good guideposts for founders to go out and do some research and be able to bucket themselves to some degree. Now these are by no means hard and fast amongst investors. Everyone's a little bit different but the point is to go out and do research and see where you may fall.
Tim McCormick: 00:14:13
Brian Parks: 00:14:16
I figured that given our hosts are based in Georgia, I think Jeff Foxworthy is from Georgia, not exactly sure but this is my Jeff Foxworthy and you might not be ready to raise seed capital if, you know you can read it right here on the slide. You're kind of pre product pre customer, if you are in that position and you're not a founder that's had substantial prior success in returning capital with returns to investors, it's going to be really challenging and it's also I think, worth pointing out that the expectation from external capital providers, so you've probably been pretty scrappy to date getting your business to market and getting some traction on your own means, whatever that may be, if it's friends and family or credit cards, if you've been able to put some money into the company or if you just started generating revenue day one and funded it that way. Those are the kind of the expectations I think.
Tim McCormick: 00:15:16
Yeah, Jeff lives around the corner from here and I often see him at the grocery store so you're dead on.
Ari Newman: 00:15:26
Before we jump to the next slide, just to pile on around when you're ready to raise the capital. I think it's important to remind everyone listening that what we're talking about is not the pre seed or sort of formation capital. There's a lot of businesses that we cannot get get to even day one without some outside capital. Again, whether it's friends and family, credit cards, or what have you, there's a difference between the formation capital and seed. One of the things that's going on in the market is two, three, five years ago, if you talk about seed or what have you and that just meant sort of the first one or two tranches of cash that helped you build the business, that's not being called pre-seed or sometimes friends and family and people are throwing around all these different terms.
I think, in Brian's mind, seed capital is kind of the new series A and pre seed has really sort of become what seed used to be. Don't let the nomenclature confuse you. I think what we're talking about here is when is it time to go out to professional investors and bring money into the business and there are businesses that simply can't get off the ground. They have a huge amount of tech to build or infrastructure to buy or if you're an IoT company with a SaaS component, you've got a long gestation cycle, so keep those in mind. You know, and I think another way to think about it that maybe could be a little stark or rough to hear is just because you quit your job and started a company does not mean that you're entitled to outside capital.
Ari Newman: 00:17:23
The entrepreneurial journey is hard but I think a lot of entrepreneurs fall into the trap of believing that just because they started a business means that their business is entitled to be funded, and it's simply not true. You're out there in a super competitive market, and you have to earn the right to attain that funding. I think where Brian's going here is where do you have to be so that you're in the right zone to be more attractive to the market than everyone else.
Brian Parks: 00:17:55
Great. Thanks, Ari. Yeah, that's that's exactly right. Two things just to piggyback on that, Ari mentioned that we're not really talking about pre seed here, we're talking about seed, post seed, whatever you want to call it, that leads to potentially an A. Really what's happened is seed is fractured into these pre seed, post, and it's really expanded in terms of how long it takes to get up to an A. The expectations have risen, and so what we see is companies spending longer amounts of times in whatever we want to call this seed stage. The last thing here I wanted to point on, second question is, should I, so you've determined hopefully, can I and then should I. You know, no one's forcing you to take this capital. It's really your decision, your founding team's decision at the end of the day. I think it's worth noticing that it's a great resource potentially to really fuel growth. It's not an absolute necessity and it does to an extent change the game in terms of what you're doing and maybe what you've been doing before bringing this kind of capital into your company. You can see the questions here, and it's really, you know, those are the internal conversations strategically to determine where you want to take your business. I got there.
Ari Newman: 00:19:18
Great. All right, so let's shift gears a little bit and talk about product market fit, a term that everyone knows it's thrown around. People talk about it all the time. It's different for every business. Tim, I'm curious, like when you guys were building SaaSOptics, how did you think about product market fit and love to hear also a little bit about what it was like for you to go out and raise money while you were still establishing and improving your product market fit and how you sort of thought about the moving parts there.
Tim McCormick: 00:20:00
Yeah, yeah, great. It's interesting, you know, our seed round was kind of a little backwards from typical use we see of seed capital. More often than not, you're using seed capital to help find your way through product market fit phase. We had I guess an advance on that where SaaSOptics, our founders originally took a bootstrapped approach to our product market fit phase and during the first five years running the business in a bootstrap fashion, they thought you could only focus on customer acquisition.
They were doing SEO and we had a good flow of inbound leads and just focus on successfully selling and implementing those customers and building the customer base and since our primary focus is on early stage emerging and growth, SaaS and subscription businesses exclusively, these early years we obtained valuable customer feedback and we use that feedback to incrementally improve our product with each of our monthly releases.
That frequent monthly process continues today. We still focus on these monthly product releases to improve the product and create competitive advantage. Through this phase, we acquired over 170 customers that had very similar pains and use cases, so we're able to prove that we had a viable product and a valuable product and solve some of the major financial operations problems that these emerging and growth SaaS businesses were experiencing.
After that five year journey of really proving out the product in 2016, our issue wasn't necessarily we needed to find our product fit. We thought we did a pretty good job with that but to that date, we hadn't spent $1 on marketing or sales, so we set out to raise a small seed round to begin to invest in marketing awareness, lead generation and begin to grow the sales team.
This meant new things to us like hiring and onboarding and training and new processes and understanding how our KPIs were changing as we started to scale up. From the very basics of ARR, you know, average contract value and the average contract value growth to really understanding the sales and marketing velocity metrics around lead gen, MQLs, SQLs, conversion rates and win rates, we really were, I guess, less equipped on the sales and marketing side and to put all the foundation of the metrics in place there, but we were very, very rich since we were users of SaaSOptics early. We had been tracking all of our fundamental financial metrics since our inception.
When it came to raising our seed round, we had years of operating experience, not only the right metrics the investors wanted, but growth rates and trends around those metrics. I really can't emphasize enough the importance of collecting these metrics as early as possible, and if you, as I said before, if you automate your order to cash and renewal process early, the byproduct is the automatic calculation of all these metrics alerts, should be the byproduct of this process. What's different about us is we have completely optimized our product for the early stage in emerging and growth B2B SaaS businesses. We've optimized the pricing and implementation for these early stage and growth businesses and making it both affordable fast to implement so you can focus on the business and growing and retaining your customers and then at the end, should you need to go through a due diligence process with certain investors, you are prepared and you're financially mature and have command of your numbers.
After the seed round, we are on to our series A this past January was really all about continuing to scale up sales and marketing. That's kind of been our journey.
Ari Newman: 00:24:23
Got it, super, super interesting and not that uncommon but your approach was that the founders had the resources to bootstrap, building essentially the MVP and getting it into the market. From there on out, you were data and metrics driven, making improvements to both the the product and looking at what was working. By the time you got to seed raising outside capital, there was already a lot of data supporting that the product was solving problems in the market and sticky.
Tim McCormick: 00:24:55
Yeah, exactly. Exactly right.
Moving on, are we going to pop a polling question? We already did that one. That's the preparing to raise seed capital, 50-50. Okay, and then we're really going to discuss the metrics we need for early stage versus series A and what the differences are. We outlined a lot of these in the webinar playbook that we issued last week of SaaS KPI playbook expands on these metrics but really the difference. I mentioned kind of collecting these metrics as early as possible so you can develop an operating history to see the trends and growth rates over time but you have to really the basics to begin with your MRR or ARR, monthly figures tracking those, looking at the growth rates and then looking at average contract value is important early on and really beginning to develop some sort of metrics around your sales and marketing figures. Although if you're in that product market phase, that's probably a bit premature but you can begin to collect all of these metrics early and it shouldn't be any kind of huge operational change to collect the metrics you need for series A and beyond.
You'll be adding things like churn, monthly churn and retention reporting to that and then ultimately, you'll be moving into things like customer lifetime value and being able to be in a position to start segmenting that data to see how different market segments are performing or how the product is working versus other products you may have in your portfolio, but really just beginning to track all of the revenue transactions of your business as early as possible, you'll be equipped to start producing any of those metrics that will be needed as you move through your seed stage and into your series A. You'll have the transactions to develop all of those those metrics.
Brian or Ari, how do you guys think about approaching, how do you think about approaching investors still figuring out these core metrics of the business?
Brian Parks: 00:27:51
Sure. Well, before I answer that question, I think I think it's important to note that the metrics listed here are all the standard, as you said revenues centric SaaS KPIs, but without also understanding the nature of the product and looking for the leading indicators of product engagement at seed stage, I think it's important to look at that also. As an investor, if a company isn't tracking the leading indicators of product engagement, and it's only looking at the sort of generic things, that actually tells me a lot about how they think or what they may or may not be looking at.
A great example would be if you're a customer or client success SaaS product, and you're doing annual deals, the churn data and cohort analysis data isn't going to become super interesting until way down the line when you're starting to get into renewal cycles. You're probably going to be out raising prior to having a data become meaningful, so then you have to look at leading indicators, not lagging indicators, things like utilization, engagement, number of seats per account, like the things that show whether the customer that's paying you for your product are really using it and continuing to use it on an ongoing basis.
The combination of those things together paints a much more comprehensive picture. To answer the second question, when you're talking to investors, I don't think investors have an expectation that at seed stage that the metrics are going to be the thing that either does or does not get the deal done, or get you excited. It really comes down to is the company solving a hard problem in a huge market and does it look like the market is interested in the product. It's okay if you track some of the wrong metrics. It's okay if you track too many of them but what I want to see is these are the ones that matter to the company and this is the one, these are the ones that we're going to tie ourselves to the mast around because we think it's what's important right now. That informs the thinking of the company and also where the objectives and focus is as well.
Tim McCormick: 00:30:09
Yep, totally agree. There's a big difference between looking and tracking at the metrics but they may not be as meaningful early on to the seed round, but certainly you want to mast the operating history so that you can see how they perform over time. They become meaningful and you have some basis to really start looking at them. Perhaps for your series A round, you actually have an operating history and I've actually been calculating it all along but not really worrying about that and using it to make business decisions.
Ari Newman: 00:30:53
Yeah, the one thing I would really caution against is it's okay if you swap a metric in or out. It's okay if you change some of the things that you're looking at but if things that are close to zero on the needle or aren't moving, you don't track early and then you end up tracking vanity metrics that over time become less relevant, it's impossible for the investor to connect the dots. If you've got, if you're tracking a vanity metric like number of signups or GNV or top of funnel and you're not tracking the stuff that's at the bottom of the funnel or conversion rate or closed one because it's early and you only start looking at that later, I can't connect the dots between the funnel performance or how many people are kicking tires versus really buying the product and if you have something like website visitors or number of events registered in your software, if you have a vanity metric that says hey, people are using it but it has no direct correlation back to sales revenue or deals closed, again it doesn't help connect the lines, connect the lines between the dots.
Don't be afraid to build a dashboard and to track things that are even ugly at first. This allows you to focus on them and then it really gets everyone in the organization clear on what's going to matter around building a meaningful product that customers love. Because at the end of the day, if you're going to go down, if you're in on this journey already, it's about building a product that the market wants and will pay you for and will continue to pay you for over time and investors can see through the smoke screens and the vanity metrics very quickly. I'd much rather see the cold hard truth about a product early and be able to help you with it than to have to spend weeks and weeks digging through to realize that the stuff that's exciting or the vanity metrics and stuff that matters isn't being tracked.
Tim McCormick: 00:33:05
Yeah. Good point. Brian, what's your perspective on this?
Brian Parks: 00:33:10
Yeah. Our lens is a little bit different. I say we're an alternative form of capital, so we're a credit provider. We're coming in pretty early to companies and providing really kind of medium term type capital, call it a few, three to five years. That capital is returned to us with some return. It's a different lens than venture capital, equity capital providers put on it. Frankly, we're a little bit less concerned that you're in an enormous market. That's not as important to us. We're really looking to fund companies that they may be an enormous market at some point, they may become a massive company, but it's just fine for us, for our own investors of the company if they, you know, maybe sell the company for $25 million, right? $50 million, it doesn't need to be a billion.
That said, generally, the companies that we're funding have been around in market probably, you know, at least 12 months up to five years, kind of even SaaSOptics story. A lot of these companies have been in market, have a lot of customers and have again, that initial revenue, what we call a stage 2, anywhere from $1 million to $5 million in revenue. With that comes a lot of data, right? I don't think our capital frankly doesn't make sense for those companies that don't have that data. It's too risky to put our type of capital on a business that early on. It just doesn't make sense. We're super metrics focused, sales and marketing metrics, product engagement metrics, all of that.
Brian Parks: 00:34:46
A lot, I echo a lot of the stuff that Ari said. It's okay if your metrics aren't fully fleshed out, if they're half baked. We recognize this. We hope you recognize this, but we hope that you're learning and gaining increasing amounts of focus on the metrics that matter.
Tim McCormick: 00:35:05
Excellent. Well, what we do know about in the current market conditions is that it's more competitive than ever for investors, and this competition has forced investors to kind of move down market to find viable businesses earlier in the growth cycle. If you're one of these companies, you'll want to differentiate your business, financial authority, efficiency, command of your metrics can only instill confidence in your potential investors.
Remember that 60% of the market really never reaches the series A investment so you don't want to be one of them and you want to have command of your business and be much more mature than the next company that investors are looking at. Ari, what are some other attributes that you look at to kind of build your confidence in an investment opportunity? What gets you excited when you're looking at some of these companies?
Ari Newman: 00:36:09
Sure. I mean there's a lot to unpack there. Just to frame it further, I think the most recent metric I heard was that there was 2,500 active early stage VCs in the United States. Obviously, not all of them are SaaS and B2B, but you know, it seems like that's a large number of funds out there but the reality is when you start to hone in on sector focus stage, GL, domain, there's an insane amount of competition for this capital. As I mentioned earlier, if you sort of take the framework that you're not entitled to the capital, that it's about finding the right fit and relationship and really earning it because it makes sense to put money into the business, what that does is it puts a lot of the onus on the entrepreneur to do their homework and to understand like where you should be looking for capital at the right stage.
As Brian was saying, by the way, I totally agree with, there's a lot of ways to build a business, there's a lot of ways to make money and there's a lot of ways to generate life changing wealth for people and creating meaningful products. Going down the venture capital road is not the only way and going from seed to A to B to acquisition is not the only path.
That path is available to very few companies and there are a lot of other ways to build a business and it takes a long time. The cliche is every company you've heard of is an overnight success, a decade in the making. During that decade, who do you want to work with? Finding an investor that is like minded, that has domain expertise that believes in the journey that you're on and also has patient capital, if you're going to be a sort of slower building company, if you're going to take your time to find product market fit, and to really nail your product, going to an investor that wants to see you triple revenue year over year and get from 10 million to 100 million in three years, otherwise, they're going to be disappointed maybe not be the fit.
They may not be aligned with you strategically on how you want to build the business. I'm a big believer in finding ways to build relationships and playing the long game versus taking your deck and spraying it out there and trying to find an investor pool. Oftentimes we talk about asking for advice or taking people out for coffee and sort of running this like drip campaign of engagement over time until you can use the inception strategy and get the light bulb to go on for the investor themselves that they want to be more involved in your company.
I think that's really important, getting warm introductions to people, building relationships, asking for feedback, showing great responsiveness. These are all way more effective ways to build, to drive engagement than just sending someone a pitch deck and asking for a meeting so you can get in front of them and see if they want to invest. Do that build up work because it is a relationship. You're going to need to work with them through good times and bad and the weaker the relationship, the more adversarial that can become when things get tough, so the alignment's super super important.
The other thing I would be remiss if I don't mention is I think, especially for first time entrepreneurs that are out fundraising, where the whole system seems daunting and somewhat opaque, the advice I would give you all is embrace hearing no. Try to get to no as fast as you can, and it might seem counterintuitive, but if you are afraid to hear no or you dance around the hard questions because you don't want to hear a no, because somebody else told you the objective is always to get the next meeting. While that's true, you always want to get the next meeting but you also want to get to a no because your time is super, super valuable.
If someone's not a yes or they're not an F yes, they're very well probably a no, they're just not telling you they're a no yet. I know as an entrepreneur, I've spent a lot of time with investors that were never going to get there because I didn't want to hear or they wouldn't just give me the no.
Remember how valuable your time is, and that your hit rate is going to be extremely low. A good, a great example of that, I remember reading an article that the Robinhood founder had to go pitch something like I can't remember the number so I'm going to make it up but it was striking. It was like 100 or 150 VCs before Andreessen Horowitz said yes and look where the business is today. The faster you get to no, the faster you can move on to the next opportunity.
Tim McCormick: 00:41:09
That's great advice. Ari. Well, good. Brian, what about you? What gets you excited when you're looking at these companies and making an investment?
Brian Parks: 00:41:22
What gets us excited? Yes. I think we said it on our website, right? We like products, we're software guys ourselves and enjoy products and interesting products that solve problems. For us specifically, that means, solving a problem for another business that's probably a small business and maybe even a verticalized solution. Those are the types of companies we tend to like and think that are a good fit for our capital and what we really like beyond product, this is going to be super obvious, great businesses, right?
A lot of what we can tell is a great business frankly, shakes out of the metrics again, right, shakes out of the founder, shakes out of their vision and knowledge of the market, the domain expertise and ultimately the results and the indicators from the business. It's all of that that gets us excited.
Back to finding the right investor, I don't know if I have much to add there frankly, beyond what Ari already said, I love the analogy of the drip campaign. I think one thing and look, I've heard a lot of those as well, both raising money for companies I've been involved with for and raising money for Bigfoot Capital frankly. I can't stress enough kind of how arduous a process it is, how much you need to really just commit to it and for lack of a better way to put it, manhandle it. You need to run a targeted yet fairly broad process because you're going to have a low conversion from it at the end of the day. Much of the same questions Ari asked, I think I asked here.
The one point I want to make that I don't think I've really put on slide necessarily, maybe it's on another slide and I just jumped ahead. Let me save that actually, but recognizing you're really persona building as a founder to a degree for investors. I'm different than Ari. Ari's different from the next investor. We're all similar in the sense that we're putting money to work generally for other people and looking to support companies but we're all different terms of our theses, our objectives, our interests, our expertise, our ability to actually help, so you really need to do the work to assess that out and get to people that can help you now and by help you now, it means in the near term, actually writing you a check or even helping you in the form of saying no, not me but here's some other folks that actually are really into what you're doing.
That's basically pretty much what I have to say about it. I'd written blog posts, it's on Bigfoot up on our website on our blog about the SaaS capital continuum and it really just touches on a lot of this stuff across it from being a bootstrapper all the way up to an ITO and kind of the stages of capital along that progression.
Tim McCormick: 00:44:13
Great, great. Thank you, Brian. Okay, just a reminder for everyone start submitting some Q&A, some questions in the Q&A window. We'll start answering those towards the end.
The next question that we'll focus on is, is there a roadmap that you can follow and what would you include in it? Brian, why don't you kind of start with that?
Brian Parks: 00:44:42
I'll try to be quick here and then we want to get to Q&A This is the point I was about to make and then realized I was getting ahead of myself. The first thing in that roadmap is build your business, I think. One, it's going to put you in a lot better position to go out and actually bring external capital in. Nothing really speaks for the most part like traction. I think to the extent you're able to go as far as you're on your own dollar and hustle as you can, focus on the business. It's going to put you in a much better position when you go to market and honestly, it's a lot more fun and rewarding than going around asking for money.
Start there and as you're doing that, yes, build a plan. Have a plan. That plan should inform when you actually go to market for capital, what type of capital that is, how much of it and of course, if you get to a point where folks are interested, they're going to want to see that plan. I encourage you to invest some time into it in the early days, but don't spend an inordinate amount of time on it early on at the expense of working on the business.
Once you've got some traction, you got your plan in place, you've got a capital strategy, go out and test the market. We touched on this earlier. Go test the market and see where things stand and do that discovery. Then the last point is if you're internally aligned to go out and pursue that path, this is when you go into sales mode, run your process and hopefully go close on some money.
Ari Newman: 00:46:14
Yeah, excellent. You know if we jump back to the product market fit slide, and you guys don't need to go all the way back there, it's okay, but if you were all in the session, remember that product market fit slide, I think it's really important to keep in mind building a SaaS business or any business for that matter is about phases. When you're in sort of the phase one or you're building product and you're figuring out product market fit, you might need to raise multiple rounds of capital during that phase and then when you think you've got the right product for the market, it's can I make the things that I'm doing that are brute force repeatable and institutionalize them and then when those things start to work and you're creating a little efficiency, it's can I turn the people into departments or functions into people into departments to get to true scale?
Those are sort of the three major phases. As Brian was saying, you build this roadmap and you got to figure out like, am I at the front end of the beginning of phase one in my roadmap, where I'm just figuring out what I'm going to build, or am I in the middle of phase two and I really need some scale up capital because it's working, but we're really, really inefficient and we could, we can be making way more money if we were more efficient.
That brings me into executing the roadmap. I think it's great when a company takes a solvable problem and is very laser focused and it's not trying to boil the ocean out of the gate but if you don't tie that back to a bigger vision or something, that is what I would call the at scale win, then it's easy for investors to not spend the time with you to understand where you want to take it and be dismissive that it's niche and small.
It's great to solve a very narrow and deep problem if you're solving it for a huge market but if you're solving a narrow and deep problem for a small market, and you're in a low price point, you're in a SaaS no person zone there.
I always look for focus and precision, but is the company solving a problem that's going to be widely accessible? Are we going to be able to attract enough customers at the logical price points? That's pretty important. As we said before, the exact metrics maybe are not the critical thing, but it's the milestones and the progress along the continuum during the phase. At seed phase, you're really an investor, whether it's pre product or early product, you're still really investing in the people and their ability to execute against the set of challenges in a given market.
I look to see is the team executing? Are they moving quickly? Are they collecting data, solving problems and tracking their progress? Even if you're making mistakes and course correcting, it's the pattern recognition around execution against milestones and movement that are really important. When companies iterate quickly, learn from the data, collect the data and are consistent and can make informed decisions, then what I start to see is execution against the roadmap, and if the end goal is we want to be the leader at XYZ and XYZ is huge, even if the revenue is small or zero in the early days, if the execution and the consistency are there, you can see that the company is on the right trajectory.
That for me as an investor speaks volumes about what it's going to be like to work with a company over the long haul. Yet on the other front, if you ask a company a question, what metrics are you tracking or send me your dashboard, and it takes a week, usually a bad sign. If I ask you what your KPIs are, and you ask me, what KPIs should I be tracking? Probably a bad sign. If you send me the KPIs and I disagree that they're the right ones, great. Now we're having a conversation about what's critical for the business.
Tim McCormick: 00:50:27
Thanks, Ari. All right. This is the final question before we get into the Q&A. Now we want to focus on the next round of investment after seed and discuss what are some of the key differences in the roadmaps for getting series A round of funding so I will kick it over to Brian and then Ari to kind of give us their their view point on the series A versus seed. Brian?
Brian Parks: 00:51:05
Yeah, I may punt to Ari here given that he does a lot of plays at the series A stage so Ari, if you want to take this and I can pop right in as appropriate.
Ari Newman: 00:51:15
Sure, you know, I think every entrepreneur I talk to is looking for like a magic decoder ring of what it means to be ready for series A or what the expectations are. I think Christoph from Point Nine's Napkin is great. I think putting his stake in the ground like this is helpful. Certainly, it would be easy to say hey, you're ready for series A if you're over $1 million in revenue and you're growing it two to three x a year. The truth is that it's a bit more nuanced, right? Certainly if you are, and in today's market, we have seen plenty of series As, $5 million to $10 million series As get done with far less in terms of revenue. When investors get excited about an opportunity and they realize that the company after they achieve its next set of milestones is going to be a really exciting business others are going to look at, like sometimes investors get conviction early.
The reason that things like ARR and growth rate are interesting for investors is it answers a lot of questions upfront. One is, are there enough people paying you for your product so that you're actually, you actually have real product market fit, you didn't just successfully sell a couple of licenses to your old friends and ex colleagues. If you have sustained growth rate more than a year, year over year and it's meaningful, what that also says is you can ship product and retain customers. It wasn't a fluke. You didn't spend a half a million dollars to acquire them and then they all churn. Then certainly, the attributes like the efficiency of the sales machine or what the go to market strategy is, and whether the price point makes sense given the size of the total market are all pretty important. When you're thinking about series A, if you're going to go to institutional investors, it's important to understand venture economics as well. We don't have time to get into that here but take the time to go read the venture deals book and take the time to talk to VCs about how venture economics work, because in order to qualify as an interesting series A opportunity, there's certain criteria that need to be met beyond just the core metrics like CAC, LTV or ARR.
I think the more you understand who you're selling to, and what you're selling to them, the faster the fundraising process can go.
Brian Parks: 00:53:57
Yep, all I have to say is that last point's extremely important, trying to get into the habit of the investor. Earlier I said, we're all similar, but we're all different, and so understanding those differences among folks and what their ultimate objectives are, and what they're trying to achieve is extremely important.
Ari Newman: 00:54:16
Not everything has to be totally groundbreaking, right? If you look at Namely, great example, the Namely, no offense to anyone that's involved in the company, but super successful business, household name in the tech and SaaS world, but the UI is not all that exciting. It's not a revolutionary product. It's simply better and easier to use for HR employees than the legacy HR stuff that was out there. It was not a generation ahead. It was a UI design cycle ahead, and rather than having a bunch of silos, the data was integrated. That was enough for them to get onto a trajectory where they were tripling revenue year over year, and when you have a huge market like HR and you have something that's showing that because it's easier, better, or even if it's incremental is resonating in the market, the fundraising process is pretty straightforward because you've got a huge market to go sell against and you've got a growth rate that says, if this thing continues growing this way, we can generate venture level returns.
You could have a company like Namely that was growing much more slowly but could still generate amazing returns for its investors but wouldn't then qualify for that growth capital that you see happening on the coasts at this point.
Brian Parks: 00:55:39
Yep. And that's, right here it says 3x year every year at series A. Growing 3x year over year is very rare, and that's part of what we believe and what Ari just mentioned, like there's a lot of companies out there that maybe grow 30% year over year, 50% year over year, maybe 3x over three years, and this can still be really good businesses that can get different forms of capital but aren't a great fit for venture.
Tim McCormick: 00:56:07
Great guys. Great discussion. All right, we want to move on a couple last polling questions. First is what percentage of the folks attending have a single source of truth for SaaS metrics? Yes or no, that may be a spreadsheet but I think we're talking about you have a systematic way and a database if you will, actually producing calculate these on an ongoing basis. Secondly, just raise your hand if you'd like a more specific overview of SaaSOptics at some point in the future.
Ari Newman: 00:56:54
We have a bunch of Q&A questions. Let's make this like a rapid fire around here.
Tim McCormick: 00:56:57
Yes, we do, so okay, first one, I think Ari, I'll comment on this and I think you can chime in too. What are the typical churn rates for new startups? I think, that's going to depend, I think upon who you're selling to enterprise or kind of small and medium business. What would be the target churn rate for top performers? I guess again, I think that's going to depend and then what is a reasonable retail customer acquisition cost? I think those figures do vary greatly. It's usually a ratio of your customer lifetime value, at least three up to 10 plus is typically the range you know, we see ratios of customer acquisition cost to CLV. Do you have any more to comment?
Ari Newman: 00:57:49
Yeah, I think the churn rates in the early days if you're somewhere around 10%, 12% annually, while you're still sort of building the machine that's okay. Something that is starting to scale, I would want to see trending down towards 5% churn annually. One of the things to be careful about is if you're doing a lot of experimentation with different channels or you've got a freemium product, maybe separate out those users from your core product but if you've got a B2B SaaS product that requires SDRs and inside sales and you're churning more than a couple of points a year like 10 to 15 points a year, you're simply wasting your resources replacing existing revenue. You've got a leaky bucket to go fix.
Ari Newman: 00:58:39
If a company's at seed stage and I look at it and it's 10%, I need to understand it and if you're series A, you better be trending down toward lower numbers, anywhere 4% to 8% annually so that when I'm not investing in is a lot of the resources going to fixing a leaky bucket, I want to see that the bucket's already working.
Tim McCormick: 00:59:05
Yeah, great. What about, so next question from Patrick, what is the best practice for calculating gross churn for a business with a lot of metered and usage revenue? It seems like contraction throws it off. Got any thoughts there? Ari?
Ari Newman: 00:59:22
I think that's a hard one for me to answer because I want to understand the product more like if it's, you know, if you're a CDN and you're a reverse proxy and its utility based versus, I just need to understand the business but you know, Patrick, what I would say is take a crack at what feels like the right way to reflect whether you are retaining customers that you already closed because they need or want to continue using the product or that they're leaving because your utility to them has expired. That's really what matters.
Tim McCormick: 00:59:59
Yeah. I would only add add to that, that you could also parse the data, looking at maybe certain types of market segments to see if a particular market segment contracts more often than expands, and you could do some comparisons there. Then quite possibly, another theory could be if you're contracting, maybe the fundamental pricing structure you need to look at so that you can flip it, so that your expansion, you're expanding rather than contraction, contracting truly, you know what's happening there.
Tim McCormick: 01:00:40
Let's see. What else do we have? This is a good one for for you, Ari. I'm a young bootstrapping B2B company with a great customer base Fortune 2000 and up, how significantly does taking money put us on an exit path? Does it matter that we're bootstrapped and does it hamper our exit possibilities?
Ari Newman: 01:01:05
You know, one of the insidious things about startups and venture capital is that the money is always there when you don't need it and it seems to never be available when you're desperate for it. Kudos to you for building a bootstrapped B2B company first of all with great customers. If those customers are sticking, if you can expand those accounts and you can drive revenue at a pace that you guys are comfortable with, it's a whole other conversation about opportunity cost and potential scale in terms of taking capital.
What happens is that once you take outside capital and you've got preferred investors on your cap table and potentially a board, their point of view on what a expected or core or high quality return looks like, if it's aligned with yours, great. Then you've got some resources, you've got dry powder and you can grow faster. I do not believe that being bootstrapped hampers your exit potential. I actually think the less money you've raised and the more control you have increases the flexibility and the number of deals that would be interesting to you.
There is a point where you want to become as serious of business as possible and having professional investors or a strong balance sheet and the ability to be aggressive in the market can increase the opportunities. If you've had no external pricing events, your foreign NA is super low and you need some market validation of the business' value, taking around can help drive some of those events. Eventually if you go public or you're going to become a huge company or you're going to start acquiring, you're going to need balance sheet to create that leverage and for financial stability and that's when taking outside capital makes sense. There's no right or wrong time to do it. Jive Software, which bought Filtrbox, they didn't raise outside capital until they were doing 20 million a year in revenue, and the first round they did was a $20 million round with Sequoia at 100 post.
Tim McCormick: 01:03:16
Yeah, we've just become, I love those stories, Ari. This is the Atlassians, the MailChimps that's actually taking no capital, Qualtrics. There's a whole list of these companies that have gotten to pretty good scale and then taking these large growth rounds, not saying that's common, but it is achievable.
Ari Newman: 01:03:33
The difference is, you got to that point and you sold 12% of the business because you had the leverage versus you sold 20% of the business five different times to get to the same valuation.
Tim McCormick: 01:03:46
Yep, exactly. Yeah. Yeah, good. So Larry asks, what would you consider to be the most important hires in a new SaaS company? Larry, I'm not exactly sure if you're a CEO, founder or both but I would say your first couple hires better be folks that are very different than your skill set. I would be looking to fill things that that are your weaknesses on kind of the growing of your management team but ultimately when you get to pass your seed and then to series A, you have to start rounding out the entire team with relevant domain expertise in each of the different functional areas. Would you add anything to that, Ari?
Ari Newman: 01:04:34
Yeah, I mean I think what we're talking about is exactly right, which is it all depends on who's on the bench already and where you guys are weak. In the early days, it's really all about product. Build the product, onboard the customers and delight the customers. When things start to break like revenue recognition or customer support or back end operations or finance, those are things you go hire to fill in because they're breaking.
It's usually a pretty good sign to me as an investor when the company needs to hire operational support people because they're drowning versus they hired a bunch of operational support people but product development is thin and we're missing features. Focus on the product, focus on delighting customers. I think that's a great guiding principle.
Tim McCormick: 01:05:26
Yeah, and Jennifer asks, what are the best resources to build a targeted list of investors?
Ari Newman: 01:05:36
Great question. Shai Goldman from SVB has published a list of funds under 200 million. It's a Google Sheet. Go look for it, great starting point. Other two resources, obviously Crunchbase and I would subscribe to things like Axios and PE Hub and just start watching to see what kind of early deals are being done and getting talked about and then build your own map. If you have any competitors in your space, go do your homework and look on Crunchbase or other services and see who's funding your competitors and understand whether that's an area of focus for them or if it was a one off.
There are private resources like PitchBook and what have you, but they're incredibly expensive. My advice is befriend a VC that has a license and help them and have them help you out there.
Tim McCormick: 01:06:36
Exactly. Then one last question, we'll put a wrap on it. Florence asks, what's your take on single founder companies and the willingness to invest in them?
Ari Newman: 01:06:49
Another great question. We see a lot of that at Techstars. Single founders are fine. The number one thing that the founder needs to do is set the strategic direction but and then the number two thing is hire amazing people to execute that vision. Number three is probably raising money. If you're a sole founder be awesome at hiring exceptional people to surround you with and if you struggle to hire truly amazing people or people that are even better than yourself, then the risk of being a sole founder amplifies dramatically. Being awesome at attracting other really talented people is core competency for a solo founder.
Tim McCormick: 01:07:37
Excellent. Thanks Ari. Well great, I want to thank everybody for joining and we'll answer as many questions as possible post webinar. We'll also be sharing the recording and our guide to SaaS metrics and KPIs after this event. Brian, Ari, any closing remarks before we wrap it up?
Ari Newman: 01:08:06
No, thanks for having me. It was a pleasure to be part of the conversation.
Brian Parks: 01:08:10
Yep, exactly. I appreciate it, Tim, Marissa and everyone that was online, and Ari as well.
Tim McCormick: 01:08:17
Yeah, we appreciate you guys participating. Thanks a lot, and thanks to the audience for joining and look forward to our follow up. Thanks again. Have a great rest of your day.