We talk about the fundamental challenge of the tech CEO in a venture backed fast growth company as three things: establishing the vision; hiring ever more extraordinary people; and never running out of money.
Venture capital is the fuel of many fast growth companies and raising increasingly large amounts of money, at ever higher valuations, is critical to long term success.
Beth Ayers helps tech companies solve exactly this problem. Beth was SVP Strategy at NVM during an incredibly exciting period of massive growth from 2010 to 2015 where they grew from 32 people in a small office in Basingstoke to 450 people opening in New York, Sydney, San Francisco and Paris. Through that time NVM did five fund raises, from Series A to E, and Beth was involved in every stage. This article is a summary of a recent interview I did with Beth, which you can listen to in full here.
What is the fundamental essence of the fund-raising challenge and how does it change as the company grows?
Think of it as an evolution, each story building on the previous. At the beginning all you have is an idea. You need to show it’s a good idea and that can be proven with a relatively small amount of investment.
Once you have revenue, you’ve proven people want to buy your product. Maybe not at a massive scale, but you know there is something there. You are getting the beginning of PMF and you need money to prove what your go to market is and to move from a founder-led sell to a product that anyone can sell.
One of the interesting parallels I see is that the reasons why a founding CEO can raise seed investment are often the same as why that CEO can sell to the first customers. But as you progress, you need to demonstrate you can remove the CEO from the sales process, and create the fundamentals of a scalable growth strategy. And that’s what the Series A is for.
Then when you move to the growth round, you have the growth metrics in place, you have proven you can sell repeatedly without the CEO, and that while you aren’t a profitable business you are proving the underlying unit economics that will, together with the scalable sales engine, fuel the growth and now you can massively expand.
What stays the same on this journey?
The magnitude of the problem stays the same, the fact there is a massive market and why you will win. That is consistent.
At the seed round, extrapolating massive growth is completely counterproductive. You must focus on the scale of the problem and validate that it is a problem worth solving and customers will pay you for that privilege.
What changes is revenue. Once you start to make money you need to show how you are making money and that you have the potential to do so repeatedly and ultimately on a massive scale. You need to demonstrate your ability to build a pipeline and the associated conversion rates.
At the later stages you need to show how pipeline and revenue are growing and how the conversion rates are improving. You don’t have to kill people with every conversion rate, but you need to show much the same data as you show your board – how many leads you are creating, how many opportunities – volume and value – how many become pipeline, how many become customers. And then how many stay and grow their revenues. That’s the sales and marketing engine.
Next thing that changes, is that you need to show you are on top of the costs. If you are to build an economically viable business then at the growth round you need to demonstrate you have underlying profitability.
Growth investors want to invest companies that are growing efficiently, serving and expanding customers efficiently and have costs under control. They don’t want to have to experiment any more, just invest for growth.
Sometimes people throw too much information and detail at investors in the first meeting. The later stage investor – which is where you want to get to – is looking to validate that you can build a highly productive organisation that has growth on tap and costs under control and can become increasingly capital efficient. And that sometimes gets lost in showing too many metrics.
Remember you are building a SaaS machine.
What SaaS investors in particular are looking for are people who understand that a SaaS business is a machine. Fundamentally every SaaS company is a machine that works in a very similar way. Even if you don’t have all the metrics and perhaps the ones you do have don’t currently look that good, you must show what you are doing and the impact on trends over time, so that even if you don’t have all the evidence today, you can demonstrate you know how your machine works and how you plan to improve it.
SaaS is so much about transactions and transparency that you can see if a company is going well or not when by how every part of the machine interacts and how they affect the business as a whole.
You need to run your business on these metrics
It’s not just for the investors, this data is about how you run the business. You should be using and sharing the data and metrics that you use every day, week and month across the organisation.
Help people to see what matters at each stage and distil the KPIs that really matter.
Founders understandably are very passionate about the problem they solve and the products they are developing. But what may matter to an investor is that you really know how your business model works: land to expand; a highly productive sales function; it might be that you have negative churn without investing in a customer success business; you may be able to demonstrate a unique network effect that allows you to grow efficiently.
Whatever your business model is, in each case you are demonstrating that you can generate the most amount of revenue for the least amount of money. And hold on to as much of that revenue because you have your costs under control.
Remember you are building an annuity businesses with compounding benefits that ultimately will spit out huge amounts of growth and free cash flow. That’s ultimately the story for the later stage, growth investor.
You must focus on both sides of the business – the growth engine and the costs.
At Series A it’s right to focus purely on growth. But as the business matures, you need to be able to demonstrate you have costs under control and you are creating a sustainable and ultimately profitable business, which may be profitable today if you weren’t re-investing for growth.
So what does an ideal deck look like?
Ask yourself a question, “What are you trying to achieve” in this meeting. In essence, all you are trying to do is to create interest for the next meeting. You are not trying to close the deal in the first meeting.
To secure the next meeting, I can be as simple as, “We are solving a big problem, in a big market and people are starting to buy. This is what makes us different. And this is why we will win.” So create a story and deck to tell that and no more.
As you move to the bigger rounds, you need the elements above, but you also need to demonstrate how you are growing, a simple calculation of CAC and Payback which shows “If we put this much money in, we get this much out.”
Then as you get to scale, you just have more data and more history and evidence of why you should be expanding faster.
What really matters is that founders need to think of the fund-raising as a sales process, and when meeting with a VC to understand what they need to do in this meeting to get the next meeting. Simple.
This podcast breaks down the fundraising for venture backed SaaS companies into seed, venture and growth rounds, detailing what changes and what stays the same.
Think of your business as a SaaS machine and give investors the information they need.
Demonstrate that you can generate the most amount of revenue for the least amount of money.
Highlight importance of growth efficiency, cost control and unit economics.