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November 13, 2022

How to Approach SaaS Industry Capital

Capital availability is critical at each stage of a SaaS Business.

Like oxygen, it allows you to function.  Being awash with capital without a strategy for dominating your category or expanding your category can be as scary as not having any capital at all.

Starting out, you need to design each stage of your capital and how many options you have along the way.

In most markets (certainly in Aotearoa New Zealand), we have too much money chasing too few deals. The Venture Capital markets saw the amount of capital triple in the 2020-2022 years.

The level at which Venture Capital is willing to invest has come down from SaaS Businesses needing millions in ARR to Founders at seed stage (with no income and potentially no product).  What was previously the “Friends and Family” round now has VCs queuing up to get in on the deal at the ground floor.  This has corresponded with the rise of Venture Capital firms setting up shop in Aotearoa New Zealand; each making themselves more accessible and attractive.

I think of the VCs as the record labels and SaaS Founders as the artists.  Once you are signed up to a VC your destiny is somewhat set in concrete; certainly from a capital design perspective.  

Why is this?  Because whether the VC terms are favourable / restrictive; you have effectively hitched your future to theirs.  They have a lot of experience and capital for your next round.  Things that you could do pre-VC, you can’t do post-VC.  They are a loud voice at your table.

There is also a lot of group-think that goes with VCs.  One of our SaaS Elevator graduates shopped their SaaS business around the Aotearoa New Zealand VC circuit and got a resounding “no”.  It can be demoralising.  Fortunately we had built a Global Vision document that was so compelling they closed their round over-subscribed at the valuation they were seeking, by going outside the mainstream.

Venture Capitalists and Angel Investors can miss brilliant SaaS Businesses while pouncing on and trying to lead the round for the “stars” they think are the future.

I regard every Venture Capital firm and Angel Investment group as the “mainstream of capital”.  When I advise SaaS Founders, I urge them to not rely on only the mainstream.  By taking this approach, we build a powerful story for the SaaS business’ past, present and future; one which anyone with capital can understand.

You see, if you present a story powerfully that anyone with capital can understand, your potential market for investment is enormous.

If you are attracted to a certain VC firm because it will open doors, then be prepared to live and die by their proclamation (not just on this raise but on every subsequent raise, where you are competing to not be culled from their future investment).  Trying to raise a round when your star VC is not following on, is the equivalent of being dropped by a record label.

Here are some golden rules:
1) Don’t “Pitch”, don’t ever get on stage to present a thumbnail.
2) Minimum 60 Minute Meetings, preferably introduced by someone.
3) Don’t meet until you are completely ready to Raise Capital. 
4) Include mainstream investors (VCs and Angel Investors) as a courtesy.
5) Your Collateral Justifies Your Valuation; Invest time in Making it Pop.

About SaaS Elevator:

SaaS Elevator helps SaaS Founders reach $200m ARR through specialist training & events. Our training is focussed on Strategy, Capital & Revenue.  Selected graduates have access to our network of venture builders (Moonshot Studio Ventures) and capital partners to help them on their journey.

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