You’re the CEO of a SaaS business that’s been running for two years. You still feel like a “young” company but not necessarily a startup. Essentially, you’re a micro-biz with the ability to scale. How do you clinch that elusive venture capital deal?
Venture capital is a type of private equity financing that is offered to businesses – typically startups or companies that have been in the game for a couple of years. Venture capital usually comes from investment banks, well-off investors, or a different type of financial institution.
According to the National Venture Capital Association (NVCA), in 2015 almost $60 billion USD was invested in the U.S. alone. Out of the 4,380 deals that closed, more than 1,400 businesses received venture capital for the very first time.
Why would a business seek to obtain a venture capital deal?
The main benefit of being on the receiving end of venture capital is that this injection of cash helps accelerate growth and can give a business the much-needed financing it needs to achieve its goals. Venture capital also brings a wealth of expert knowledge and experience from its investors or banking institution.
An example of a business that flourished after obtaining venture capital is Snapchat. In April 2012, the photo sharing company was valued at $4.25 million USD and in the December of that year, the San-Francisco business raised $8 million USD from Benchmark Capital. Today Snapchat is valued at between $18 and 20 billion USD and is predicted to grow to 217 million users globally in 2017.
A potential downside to venture capital is that investors often look to obtain a share of your business. Small business operators may find themselves experiencing a lack of control. In a worst case scenario, if you hand over more than 50% to VC’s, you could even inadvertently end up showing yourself the door.
What’s the difference between an angel investor and venture capital?
An angel investor is a person with high net-worth who invests their own money into a business and usually looks to invest in startups that are actively seeking fundraising. Typically, an angel investor will expect a return of approximately ten times their initial investment over a certain time period, for example five years. In 2015, the median investment size was $850,000 USD, according to the Angel Resource Institute.
Venture capital firms on the other hand have a much higher investment total. The NVCA states that “the average first-time deal in the fourth quarter (of 2015) was $6.8 million”. While money isn’t everything, it’s easy to see why business owners set their sights on a venture capital investment.
What will a venture capital company want to see?
Investors will be analysing and interpreting potentially thousands of companies a year and will assess which ones will give them the best return. They’re looking for that unicorn; the one that is unique compared to every other business out there. The way that VC’s assess a business? Its ability to grow.
These key metrics, when measured and presented correctly, will show potential VC’s that your business has growth potential.
Churn is inexplicably linked to a business’s ability to scale, therefore any good venture capital company will instantly be wanting to know your churn rate. You’ll need to not only know your customer churn but have a firm hand on revenue churn and be able to explain your figures in correlation to other key business metrics.
MRR and MRR Growth Rate
VC’s will ask about your business’s revenue and in-particular MRR if you’re a SaaS company. MRR is not only indicative of how much money a business makes, MRR growth rate – the percentage increase of net MRR on a month by month basis – is a key indicator of how quickly your SaaS business is growing.
CLV and product stickiness
A product that is ‘sticky’ has customers coming back time and time again. They simply love your business and can’t easily leave because of their emotional ties. If a customer sticks once they have joined a SaaS business, they immediately become valuable and will provide a huge platform for future growth. Furthermore, if your product is sticky, customers are likely to churn less – meaning more room for growth and expansion.
VC’s will look at the stickiness of your product and measure your CLV as key indicators of a business’s ability to grow.
Number of customers
Venture capitalists will want to know how many customers are on your books. This simple, straight-forward metric is a starting point for growth. If the number of customers your business has grows month on month this will indicate profitability in the future.
It’s worth noting that VC’s will also look closely at your economies of scale. They’re want to ensure that your overheads aren’t growing at the same rate as your revenue, therefore leaving your business without a sustainable profit.
The bottom line when it comes to obtaining venture capital funding is that business owners need to show that their company has the ability to grow and scale. By having key metrics – churn, MRR, CLV – to hand, operators will be putting their best foot forward when it comes to raising capital.
Originally published on the now defunct Control blog.