In a recent webinar hosted by TIMIA Capital and our partner Diadem Capital, an early and growth stage fundraising accelerator, we hosted two SaaS CEOs with extensive experience raising capital to fund their growth journeys.
Mark Godley, CEO at LeadGenius and Carsten Frien CEO & Founder at Roq.ad joined us to share important lessons they learned raising debt and equity in a tough economic environment. Mark joined LeadGenius as CEO after its Series B round in 2017 and raised debt from TIMIA to help the company get back on its growth trajectory and Carsten recently raised a successful A round in May 2022 for Roq.ad, his seventh startup.
Things to Remember When Raising Debt or Equity
1. The VC fundraising process always takes time
The VC fundraising process is rarely fast but in the current macroeconomic environment, it may take even longer. According to Stephanie Rieben, CEO, Founder, and Managing Partner at Diadem Capital, fundraising that may have taken three to six months in the past is taking six to nine months today.
Roq.ad raised Series A funding of $7 million USD from DNX Ventures, OCA Ventures, and Aperiam Ventures in June 2022. It took the company approximately seven months to close the round from the first contact with the lead investor to the time when the cash arrived in the bank account.
Carsten advises other startups to, “Plan ahead, estimate the time the fundraising process will take, and then double it to get an accurate timeline in today’s climate!”
Raising debt is a little quicker, once you have your metrics and any other data required for due diligence at hand to keep the process moving. Mark raised $2.5 million USD in non-dilutive growth capital from TIMIA. It was a much simpler process than applying for bank debt and Mark appreciated the streamlined experience. “With TIMIA, the process was lightyears ahead of everyone else. I knew I found my people in TIMIA,” said Mark.
2. Cast a wide net for potential investors
When raising venture capital, Carsten recommends reaching out to a wide range of investors over a short timeframe to gain maximum exposure. The goal is to form the strongest syndicate of participants that fit your ideal VC profile in your equity raise.
“In my experience, it’s not unusual to have 50 or even 150 investors on the list. Fundraising is an incredibly time-consuming process. It needs to be really well orchestrated and founders need to have all their data and other due diligence requirements in order to keep things moving along,” said Carsten.
When it comes to debt, there are many different types of alternative financing for startups so choose wisely. Some short-term loans have amortized interest rates in the range of 41.5 and 51.4%.
3. Ensure product-market fit
To be in the best position to fundraise, ensure you have the data to prove you have achieved product-market fit.
Mark describes LeadGenius’ story as, “A cautionary tale for seed or series A-stage companies that are still trying to find product-market fit.”
Before Mark joined LeadGenius as CEO, the founders had raised Series A and B rounds for a total of approximately $15 million USD. The company thought it had product-market fit and was following the typical SaaS playbook of ramping up sales and marketing until growth rates double and triple.
But the growth didn’t happen quite so fast so Mark was brought in to help diagnose the issues. Because the company had already raised so much capital and growth was not going as planned, Mark chose non-dilutive capital to avoid an over-dilutive down round that would have been really harsh on prior investors.
“The good news was that LeadGenius had stable revenue, impressive logos, and good retention metrics—all of which set us up perfectly for our conversations with debt finance providers,” said Mark.
4. Get your metrics in order
“Regardless of what stage you are at, if you don’t have your finances in order or you don’t know your metrics, don’t try to raise any kind of cash because you’re gonna get your behind handed to you,” said Mark. “If there are skeletons in the closet, address them upfront—because they’ll find them eventually and it will derail your process.”
According to Diadem Capital, investors look closely at the following metrics when considering an investment:
- LTV to CAC ratio
- Growth rate
- Gross margins
- Customer concentration
Founders often get turned down for funding due to customer concentration. You can have $2 or 3 million in revenue, but if it’s coming from just three clients, investors will be concerned about the risk. Read more about revenue and growth metrics investors care about.
Diadem also recommends that founders have 12 to 18 months of data showing 3x growth in annual recurring revenue (ARR) to be in the best position for VC funding.
5. Don’t fixate on valuation
Current Series A valuation multiple ranges are shifting as the market continues to be volatile.
“We’re a long way from the 50x ARR valuation multiples we were seeing in B2B SaaS a year ago. Today we’re seeing multiples of 5x or 6x ARR. Only companies with 3x year-over-year revenue growth are achieving 10x ARR valuation multiples” said Stephanie.
Instead of getting hung up on valuation, think about what the VC can offer:
- Who is the best strategic partner that will have channel partnerships to help us grow?
- Who has portfolio companies that could have synergies with us?
- Who has a better network to help us grow or fundraise later?
Carsten recommends founders set fair valuation expectations with current stakeholders. “When raising venture capital earlier in my career, I thought valuation equated to success, but that’s not the truth,” he said. “With Roq.ad, we agreed on a fair valuation and aligned expectations between existing shareholders, new shareholders, and the leadership team.”
This was a huge advantage to Roq.ad later in the fundraising process. As the process reached its seventh month, the stock markets were beginning to tumble. However, due to Roq.ad’s fair valuation expectations, investors didn’t try to negotiate any last minute valuation reductions, despite what was happening in the markets.
6. Take enough funding to last through a downturn
Both Mark and Carsten recommend raising enough money to provide a comfortable runway.
“Cash is king—raise sooner than you think you need it, and more than you think you need,” advised Mark.
According to Diadem, in the past, VCs expected a fundraise to last 12 to 18 months. Today, they want it to last 24 months. “Revise your budget and revisit your pitch deck to ensure you have enough money to last for two years,” said Stephanie.