Advice From A Veteran SaaS Investor

By Abby Sorensen, Editor

I recently talked to an investor who has spent more than 20 years investing in and working with early-stage SaaS companies. This VC has made more than 50 investments in software companies, has more than $250 million under management, and has a cumulative market cap well into the double-digit billions. Here are a few takeaways from our call that can help any software company looking to raise money and scale.

Investors Are Actively Seeking Partnerships Too

It’s not easy for software companies to find the right fit in potential investors, and that’s also true for investors seeking companies to invest in. Each partner at this VC firm is tasked with sourcing new investment opportunities. Accelerators have some of the highest quality deal flow, which is why this particular VC spends time mentoring software companies in these programs. That said, warm leads are still the best leads. This shouldn’t be news to any software executives reading this, but it bears repeating. In addition to accelerators, this VC relies most heavily on referrals from other companies in its portfolio, lawyers, and trusted people in its network. If you aren’t well-connected, don’t anticipate a response from cold calling investors or mailing in a slide deck, regardless of how fantastic your software and business model are.

A Brand Name VC Isn’t Always Your Best Option

While it’s true that investors tend to follow the lead of other investors, it’s important for SaaS companies to choose their partners wisely. For example, this VC limits the number of board seats each of its partners can have. According to the VC, “There is a real problem in Silicon Valley with larger funds who don’t want to hire more partners. Companies might get a brand name VC, only to then find out the partner will sit on 20 other boards.” This VC gave the analogy of finding a prom date. If a brand-name investor is your first choice but decides not to fund your company, you shouldn’t give up and skip the dance. There are plenty of other tier-two and tier-three partners who might be even better fits.

Commonality Is Key

This is true for both investors and your customers. When choosing investors, SaaS companies should look for partners who have worked with companies similar to your size, stage, product price point, and go-to-market strategy. In turn, the VC wants to see this from a customer base. In order to really determine the validity of an early-stage SaaS company’s product-market fit, this VC looks for similar cohorts of customers who are buying the product for the same reason and using the product in the same way. If your software requires extensive customizations to attract and retain early customers, this is a warning sign to investors that your software solution isn’t scalable.

Make New Mistakes

This VC told me, “My goal is to help SaaS companies make new mistakes, not to have them repeat the mistakes past companies have made.” By now, there are plenty of playbooks and case studies that explain why SaaS companies fail. This wasn’t true 15, or even 10, years ago when SaaS was still catching on. Lots of software companies have struggled with fundraising or with developing a channel strategy or with hiring the right people for its executive team. But these are things plenty of other companies have gotten wrong as well, and entrepreneurs have plenty to learn from. If you’re struggling with something, pick up the phone and call a peer or a mentor to help you figure it out. This investor sees SaaS companies make mistakes for one of two key reasons, or rather they have two basic “failure modes.” Either their team dynamics prevent them from scaling, or the company scales prematurely. If hiring and/or culture is bad, that’s a recipe for failure. And if your SaaS company raises money and spends wildly on sales and marketing without product-market fit, that’s also a time bomb.

Know Your Metrics, And Know Those Metrics Will Change

Pre-Series A companies should aim for $1-3 million ARR, be growing 20 percent per month, and have less than two percent churn. SaaS companies going from a Series A to a Series B should focus on metrics pertaining to sales and marketing efficiency, such as payback period and to CAC. If your LTV to CAC ratio is less than 3:1, then investors won’t think your business is sustainable. This VC’s opinion is that there are so many templates and downloadable spreadsheets available, so there is no excuse to not understand SaaS metrics (even if you’re an early-stage SaaS company that can’t afford a CFO yet). If SaaS entrepreneurs can’t figure out their own books, then that’s a warning sign they won’t be a smart investment. The VC compared metrics to an ante in a poker game – if you don’t know your metrics, you don’t get a seat at the table for the game.