Two ways to grow your SaaS business

PhotoSpin Money & Finance 2 ? 2001 PhotoSpin www.photospin.comSaaS is a pretty simple business: You pay to acquire a customer on day one. Over time as you invoice that customer you recover your acquisition cost. From then on, the longer you keep that customer the more profitable they are. As the years go on and you keep more and more customers that you have already paid for, your business as a whole becomes profitable. Simple, right?

Tomasz Tunguz from Redpoint recently asked whether SaaS startups are less profitable these days. According to his data (below), no matter whether you sell to small companies or enterprise, over time the profitability of SaaS companies converges around a similar median.

cash_flow_by_acv

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The importance of optionality

MatrixBluePillRedPillIt seems like there is no end to the supply of venture capital these days. Funding rounds are getting larger. The time between funding rounds is getting shorter. For the most part this is all good. As a general rule, my advice to founders and CEOs is: raise what you can, when you can. And now is definitely  a time when companies can raise.

But…it’s important to be mindful of the path that you go down by raising more and more capital. In today’s land of plenty it can be tempting to double down before your company is truly ready. That can lead to issues if you don’t live up the expectations that come with all that money.

CBinsights recently reported a huge increase in the number of companies that have raised $3M *before* their Series A. As you can spreseriesa1ee, this trend is not specific to 2014. It’s been steadily rising for the past 3 years.  There’s a similar trend for companies that raise $6M before series A. Read More

Unicorns vs Undercorns: Making sense of the venture climate

Once upon a time, fundraising was a long, arduous task. CEOs and their management teams would diligently prepare for a process that could take 6 months and more from start to finish. In a sure sign of the times, the time it takes to raise capital these days is getting shorter and shorter. In some cases companies are getting funding commitments *before* they even begin a fundraising process.

This mythical scenario is known as the ‘preemptive round’. This is when an investor swoops in and offers to fund you before you decide to run a roadshow. There are many examples of this being played out these days. Payments startup Stripe (full disclosure: They are a FreshBooks partner) raised $80M back in January. 11 months later they announced a $ 70M round at a massive uptick in valuation.

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The role of a Seed Stage VC

Seed stage VCs come in all shapes and sizes. Some, like 500 Startups, write small cheques into a large number of companies. Others, like Mantella Venture Partners make a small number of investments but get heavily involved in each of them (not sure if this is still true, but Mantella used to have all its portfolio companies in its office. That’s hands on involvement…).

Now, the best entrepreneurs can choose who to raise money from. As a result, they look for things beyond money in choosing who to partner with. Usually they’re looking for some differentiated access (network), differentiated expertise, or both. Knowing this, the best seed VCs will specialize in a few areas in order to stand out.

When I was a VC I only did SaaS and e-commerce. Both of those businesses are heavily data and metrics-driven, and hence lend themselves well to what I know how to do (I did have one location-based zombie game sneak into my portfolio. But again, that’s heavily data-driven). Matt Golden of Golden Venture Partners is 100% mobile-focused. That gives him an edge over more generalized investors.

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