A number of SaaS entrepreneurs ask me what will it take for their startup to get funded. I was able to make a checklist of what I think are the important attributes at each revenue stage of a SaaS startup.
The key attributes are:
1. Team
It all starts with the team. But how does an investor figure out if it is the right team? In SaaS, there has been a preference by investors to invest in teams with experience in the industry of the product. These teams tend to have deeper insights into the user needs that need to be built into the product. And also understand the market better so have better go-to-market motion. And, more importantly, understanding of what trends are going to be important in the next 5-10 years help define the company’s strategy so it can stay ahead of the competition.
2. Market size
What size of a market is good enough for a VC funded SaaS startup? Well, if you want to go IPO – just look at some of the recent IPOs – anywhere from $100M to $400M annual revenues – ARRs are even higher. And investors who are investing in these IPOs want the company to grow 3-5x from here – so basically after IPO, you should be able to get to$300M-$2B of revenues! So we are talking about really large market sizes – $1B+ of revenue pool to just get investors excited. I think it’s ok if the revenue pool is small today – say $300M but growing fast 30-50% so that it can become very large in the next decade when your company is growing. E.g. let’s say you pick the “Sales automation for mid-market customers” market – that market needs to be $300M+ in revenue pool growing at 50% annually.
3. Market positioning
If there is one product – then there are always competing products. The key to winning a market is customers should think of you as something different. Either you define a new market altogether or find your niche in the existing market –which you can dominate. E.g. if you product solves “sales automation for mid-market customers” – then how is your product fundamentally different from other competitors – this needs to be based on a fundamental product insight like“deep integrations with other products”, “customizable workflows” or “leveraging AI”. It is very difficult to change market positioning over time – you should spend a lot of time at the start of your company on this.
4. Product-Market-Fit
So you have decided your market and your market positioning – which would translate into your product, pricing, and goto-market strategy. When all these three click just right, you get to product-market-fit. You can see sales accelerating, customers retaining more and more and you being able to charge higher prices from customers without losing them.
5. Moat
At $1-5M ARR, you will start seeing a lot of competition. Or you are probably trying to take down someone bigger than your company. This is where moats come in – what kind of moats you have – technology, product, brand, network effects? Find a moat that gives you at least 3-4 quarters of breathing room, till you build your next moat.
6. Growth
As SaaS companies start raising larger cheques, investors start looking at the growth profile of the company. Is it growing 50% YoY or 300% YoY – the higher the growth the better the chances of getting funded and higher the valuations. But, you can’t solve for sustainable growth without having points 1 to 5 sorted.
7. Efficiency
And finally, you are now at a place where you should worry about efficiency. If you are not efficient you will have to raise tons of capital to keep on growing – which will only dilute you the founder. There are some interesting metrics out there e.g. Shopify has an efficiency of 6x – i.e. for every $1 they spend on burn they are able to generate $6 of new customer revenues. In my experience most companies till they hit $2M ARR normally see <1x efficiency, and start getting to >1x efficiency post $5M ARR.
Hope this helps.
You can reach out to me at @prayanks or on my LinkedIn or email me at prayank(at)accel(dot)com