As a CFO to many companies since the early 2000s, the SaaS funding process is something I’ve seen countless times; I’ve lived through both feast and famine (2008, anyone?).
The mistakes founders make are, unfortunately, fairly predictable, and in today's tighter capital environment, founders need to avoid mistakes and stand out over their capital competition.
Fortunately, there’s a solution: execute on the blueprint below and you’ll move your business towards the top of the stack, making it easier to get funded. As a bonus, these things are all operationally and strategically aligned and will help you build a better business.
I’ve outlined the five broad areas that I believe founders need to focus on if they want to stand out in today's capital environment:
- Traction and market validation
- Deep market understanding
- A professional, adaptive process
- ELI5 deck
- Common mistakes
1. Traction is King
It’s commonly understood that the goal of investors is to make >10X returns by finding unicorns that will make up for the rest of their poorer-performing investments.
The first thing we need to do is pause and unpack exactly what that means for us, as founders and business leaders, if we consider the world from an investor’s perspective.
If you’re an investor, you’re probably picking unicorns using some combination of:
- The current and emerging niches where a company can carve outsized market share as an early mover (AI in 2023, crypto/blockchain in 2022, etc.).
- An internal belief meter: do I believe the founders can execute? There is a massive bias towards second-time founders, as investors assume successful exit = causation.
- Market research. Is the market big enough, do the target customers want and need it, and will they pay (enough) for it?
- And a final, incredibly important aspect. How can I prove the above factors are true and indicate I have a unicorn? Through traction.
When you boil it down, it’s quite simple: investors want to derisk their investment and the best way to do it is by evaluating an opportunity based on its reasonable indicators of future success, aka, traction. Intriguing ideas are numerous and good ideas are plentiful, but ideas successfully passing from concepts to execution are exceedingly uncommon (ever heard of the story of Icarus?).
I see founders make two fundamental mistakes with traction:
- Lack of product-market fit indicators, and
- Ignoring weak traction metrics.
Mistake 1: Lack of Product-Market Fit Indicators
Pre-seed, Seed and even Series A stage companies need to give SaaS funding sources confidence that the market will a) pay for their product in large enough quantities and b) the cost of customer acquisition (CAC) is low enough. If these things are both present, the investor can feel confident in the company to generate positive lifetime value and, hopefully, have good enough unit economics to earn that coveted >10X return on an exit.
Diving into this, let's acknowledge that, for whatever reason(s), you believe or know that this is an attractive opportunity. You also have to recognize that investors are working to avoid placing money on losers and hunting for outsized winners.
Their job is to avoid risk and opportunity costs in order to double down on winners. From this lens, your goal is to construct a data-supported case to show that you’re tracking towards becoming a Series B, scalable company with clear product-market fit. The key way to do this is understanding, and being able to demonstrate, momentum & velocity.
Rather than getting stuck in the loop of “we don’t have enough information about this” or “this specific investor needs to see at least X customers before they’ll talk to us”, you’ll be well served to side-step specific requests and focus more generally on forward progression.
Investor conversations usually span months, not days, and if you focus documenting the relative momentum and progression on customer acquisition, activation, retention, and churn, you’ll be able to show the improvement and adaptation of your strategies over the course of your conversation with investors. At the very least, you can backcast on how things have improved in the most recent months.
Finally, I see so many founders falling into the trap of trying to do scalable things too early. The first thing to unlock is proof of a large Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) for your business.
SaaS funding knows go-to-market playbooks exist and can be implemented in later growth stages. What they are looking to de-risk early is product-market fit. Optimization is a stage two task.
Mistake 2: Ignoring Weak Traction Indicators
Secondly, we believe in our own propaganda and overlook our weak traction indicators. Burying your head in the sand will only help you feel better artificially, as investors are smart and will uncover the truth (and the time you’re wasting). Spending six months trying to raise capital with poor traction costs you months of time when you could have been making your performance better.
In fact, there are two problems here. Willfully ignoring poor metrics thinking “It will get better as we grow” and then not actually knowing what “good” should be!
Starting with the latter, there are some great resources out there to consider:
- Bessemer Venture Partner’s Scaling to $100M
- Meritech’s SaaS Benchmarking 2.0 (focuses on post-IPO companies)
- Kyle Poyar’s Growth Unhinged newsletter (unpaid)
- CJ Gustafson’s Mostly Metrics newsletter (paid and unpaid)
But before you get too deep, some advice. I wouldn’t get wrapped up in trying to measure 50 metrics; trust your gut, pick a few metrics that you feel matter now, and start measuring them ASAP. It doesn’t matter if they are perfect or complete, just that you start measuring them and working to improve them.
Secondly, addressing the “scale will solve it” issue. As founders, we all have strong reality distortion fields; for example, co-workers, family, and trusted advisors can be asking us why we are doing X, how we don’t see the risk, are we sure a high-paying job isn’t better, etc. The distortion field serves us well in deciding to start or join a new business and gives us strength when we want to quit. However, it's the last thing we need when it’s time to critically look at our business in order to keep it healthy and growing.
Few, if any, of us would choose to amputate an arm but if we were a doctor operating on a patient in a hospital (and the procedure would save the patient's life), we’d do it without hesitation.
Too often, I’ve seen founders who know the latest SaaS benchmarks spouting advice off to others (they have the knowledge), whilst being completely blind or defensive on their own poor performance (blaming a host of external factors or justifications that “things are turning around with this cohort” – with no data to back that up).
And the problem is compounded by our reality distortion fields in action. We seek out people who confirm our opinion and ignore (or even vilify) the people who are trying to speak up and tell us we are off track (early angels, advisors, mentors, the finance team, etc).
The TL;DR on Traction:
- Know good (and great) benchmarks for your stage of business and measure them on a regular cadence.
- Actively recognize that you need to turn off your reality distortion field when looking at your metrics.
2. Deep Market Understanding
It's actually quite fascinating how many founders only have a superficial understanding of their external landscape and existing competitors. Similar to the reality distortion field, I see so many founders that build up their “understanding” of their competitors based on the most basic of facts and a fragile pillar of assumptions.
If you want to stand out to investors, you should be prepared to have a deep conversation with them about the direct and indirect competitors and an educated understanding of your ICP: what their pain points are and why they buy.
Developing this understanding is not an easy task. Market research is rarely well-structured and your competitors aren’t exactly about to roll out the red carpet and tell you all you need to know. It's a highly qualitative research environment, the starting point is nebulous, and the deliverable unclear. But just like the 10,000 hours of competency, if you have that deep market understanding, your ability to navigate your company will be substantially easier. Investors will be much more excited to invest if they know you have your “10,000 hours”.
But how do you get started when it is so complicated and nebulous?
There are countless resources explaining how to do this, yet so many founders fail to get this information because it's difficult. The issue isn’t having a lack of things to do but rather, problems with execution and completion.
My answer to this is my single favorite question I ask to founders I work with, who have difficult or seemingly impossible goals – my “billion dollar question”.
The thought experiment goes like this: “If you needed others to believe that you have your 10,000 hours of competency 30 days from now, could you do it?”. Most people say no.
My follow on question to those founders is “What if I told you there’s a billion dollars in a chest and I can give you the key that unlocks it, provided you can hold a 2-hour meeting with a panel of VCs and get the majority of them to vote that they believe you have 10,000 hours of competency?”
As long as I’ve framed the question in a theoretically achievable way, no founder has ever said they couldn’t do it.
Too many founders give up early on a task that, while difficult to be sure, is certainly achievable.
3. Run A Professional, Adaptive Raise Process
I don’t know what it is about raising capital, but often founders approach it as a “side of the desk task” despite the fact that most founders will acknowledge that raising capital is a “full-time job”.
Treating the raise with less strategic intent leaves a lot on the table compared to your competition.
You are going to have hundreds of conversations. Follow this playbook:
1. Treat Initial Outreach like Lead Generation
A/B test subject lines and content. Hook them from the very start. Keep it brief.
Think about outreach as Tinder for business: the goal is to get the swipe right and have that first date; info-dumping upfront is a guaranteed way to get rejected.
2. Don’t Oversell
In your initial meeting, don’t oversell your business. Remember, the only goal is to get the next meeting - or, to carry on with the analogy, get that next date.
3. Listen Carefully
Listen carefully to objections and feedback. Nothing shuts down a conversation faster than feeling ignored; after all, if you ignore what the other person is telling you, you’re guaranteed to forfeit a second date.
4. Ask for Additional Feedback
When you get rejected, always ask for feedback and seek to deeply understand why. Did they fail to see your business because of how it was presented or because they got it and didn’t like it?
This isn’t an opportunity to try to recover the sale, but a learning point to adapt your pitch for the next meetings or revise the kind of investor you’re talking to. If they tell you that your mohawk isn’t for them, you have two options: get a haircut or find someone that is into the mohawk.
5. Find Out if it’s a Soft or Hard No
A rejection today isn’t necessarily the end; often you’re simply “too early” for an investor. Ask if you can send them quarterly updates - if they say yes, there’s a chance of converting them in the future. If they say no, respect it and move on: they just aren’t that into you.
6. Keep the Coals Warm
Always follow up as promised. Create a “nurture” stage in your pipeline so that you have warm leads for the future. There’s no clean analogy for this one… general rule of thumb: don’t give dating prospects quarterly updates.
In the end, I see founders constantly make mistakes on the adaptive side of things. If you listen and remove your reality distortion field again, there are significant learnings you'll gain over the course of your investment process. Far too many founders have a script for their call, want to barrel through their deck in the precise order, are terrible at iterating based on feedback, and aren't able to have a conversation about their business.
4. Give Your Deck the ELI5 (Explain it like I’m Five) Treatment
I can’t think of a better way to approach decks than the Reddit ELI5 concept (with a twist). Building a deck is highly iterative and ultimately, what you want to say doesn’t really matter; it's what your investor needs to hear that matters.
What I mean by this is: both parties know what’s going on. You have a start-up and want money. They are an investor and have money. If you’ve done your research and landed a meeting, you’re broadly the type of company they want to invest in.
You’re looking to get the next meeting & keep the conversation going. But, despite the things going for you, you need to recognize that your investor has a pile of biases or distortion fields as well. They’ve seen other businesses and founders and all those color their opening perspective on your business.
But here’s the twist.
Investors have personas - they’re not all the same 5-year-old. An angel will perhaps need more handholding in certain areas based on a lack of domain knowledge in your space, whereas funds and syndicates have their own, alternative biases.
Solving this and coming out on top of the stack requires you to drop the goal of telling them what you think they need to hear about your business and shift to figuring out what they actually need to hear. Is your business one where investors will struggle with the market size, the willingness of the companies to buy, switching costs, revenue model, technical viability of the dev effort, etc.? Address those problems like they’re 5 (and remember, traction is king for this).
Your ratio of emails to initial meetings will go up when you’ve taken the time to ensure you have a deck that truly meets the criteria of ELI5 - take a look at all of the top unicorns’ pitch decks; most are super simple. You’ll never be able to get an investor to understand every detail in a deck; when you get the meeting, you get your opportunity to discuss your business.
Psychology tells us that once someone has decided they like something, they have to work cognitively harder to unlike it, so they continue to like things and overlook small areas of dissonance. Therefore, if you’re successful in your ELI5 strategy, you’ll be able to get further in a process (and thus, to funding) if you work hard to nail the initial outreach and earn some cognitive points to skim over small rough patches.
Secondly, I’ve been pushing hard on the reality distortion field concept, but, yes, this is another place where it's not going to help you. Building your deck requires you to find a large number of less experienced people (parents, grandparents) and ask them to read your deck, then explain your business and strategy to you in their own words. You’ll be surprised what doesn’t land or what assumptions they make.
Once you feel you’ve got a passable ELI5 deck using less experienced peoples’ feedback, move to level 2: start to bring in other founders and advisors and repeat the exercise. The order here is key: start with no context people, then move closer in. I find that fellow founders and advisors are too close to you (and start-ups in general). They will overlook or assume things because they are entrepreneurial or know your business.
When pitching to investors, you want to nail every major objection, question, and concern pre-emptively in your pitch. The best way to surface those variables is to start with people who are less knowledgeable. The more experienced people will pay dividends in polishing the message, but their own distortion fields will fill in existing blanks, causing you to miss the opportunity to nail it with your investors.
With this said, if you’re starting from nothing and struggling, seeding your deck build with experienced feedback is still a good idea; however, the refinement process should be in this order.
The TL;DR on ELI5:
- Recognize that your investors have personas and have specific things they need to hear; it’s NOT about what you want to say.
- Get feedback on your deck from less experienced people first, then more experienced people.
5. Avoid Making These Common Mistakes
As we wrap up, it's worth noting that there are a number of things that will deep-six you in the eyes of your investor.
Don’t ask for an NDA.
By now you should have read these articles (here and here) and understand why. If you have true IP, keep that out of the deck and include it in later due diligence. Asking makes you look uninformed. Investors expect that you’ll have taken the time to read how to talk to them before you approach.
Targeting the Wrong Investors
Wrong area or wrong stage of companies. This will impact you indirectly. The investment community is small and, while it might not seem bad to have wasted time on an outreach or call with an investor, they talk and there is a risk that you’ll become known for that lack of awareness and comprehension. There’s an article here on The CFO Club that has some information on investment targets of interest for active SaaS investors.
Selling to an investor when they aren’t interested = bad idea. Similarly to the point above, acknowledging when there isn’t a fit and moving on is going to keep your reputation intact.
At the end of the day, being comfortable with a no is going to help you much more than doggedly trying to convince someone whose job it is to not do deals they don’t like to consider you. You’re better off switching gears and asking for recommendations of other funds or people that could be interested, especially if you’ve had a great conversation but the business isn’t a fit with their thesis.
That’s a Wrap
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