5 Keys to Successfully Raising Series B and Later Rounds for SaaS Companies
Much has already been written regarding raising capital that talks about the need to start a process early, getting your pitch right, and that you should talk to a wide spectrum of investors.
Whilst all true, what isn’t as well covered are the specifics of what you need to do to improve your chances of securing capital at the best valuation for your company. If you have been able to demonstrate strong growth, scale, and can show good levels of customer retention and other key KPIs, the chances are you will be able to get meetings with investors; but how do you progress things beyond an initial conversation to get a signed term sheet at an attractive price?
In our experience of having advised on many high value fundraisings, including leading the process on a recent Series B fundraise into Intigriti, as well as securing investment into Phrasee, there are five key areas that teams need to focus on to increase the chances of closing their investment round.
- 3-Year Forecast Financial Model
As you start to raise anything above €10m or Series B onwards, it will be essential to have a three-year financial model that has been built bottom-up, and is assumptions led.
Investors will want to understand how you think about the opportunity in your market and a forecast model is essential for this. Investors will be keen to see that you have a handle on the unit economics of the business as you look to achieve scale.
As an example, and very relevant in the current market, a key question will be around ARR growth to cash burn. The sweet spot for investors for high-growth businesses is a burn-rate to ARR growth rate of 1.0x (i.e. €1m of cash burn in the year to €1m of incremental ARR delivered).
As you progress conversations with investors, the financial model will be one of the tools that will facilitate conversations around scale potential, use of funds, and cash efficiency. If done correctly, the financial model can help build the credibility of the team.
- ARR Databook
The ARR databook shows, by individual customer, the build-up of recurring revenue over a period (usually the last three years) on a month-by-month basis. This is one of the first pieces of information investors will want to see and it is important for them to be able to understand how ARR has built up historically.
The ARR databook cuts the ARR in many ways and is used to clarify information such as the geographical presence and vertical in which your customers operate, as well as help answer questions around what has driven growth (i.e. new business or upsell).
Key SaaS metrics such as Average Contract Value (ACV), Gross Revenue Retention (GRR) and Net Revenue Retention (NRR) should be explicitly calculated – these are critical indicators of momentum and important benchmark KPIs.
The ARR databook is relatively straightforward to construct and it is important to get one done early. In the initial stages of the process, it is fine to share this anonymised.
- Pipeline
Being able to talk confidently about your pipeline is vital and will be another area that investors will spend time on during their conversations with you.
The pipeline gives investors confidence around how you could achieve near to medium-term growth and this visibility will help them to build conviction. As such, it is essential to start being rigorous now with how you build and collect data on your pipeline, so it’s readily available, detailed, and of high quality.
Many scaling businesses won’t have a record of the pipeline on a monthly basis. It is good practice to start developing this by taking a snapshot from your CRM at the end of every month.
You must be able to demonstrate that you can grow the overall pipe whilst also progressing opportunities through the stages and winning a proportion of those opportunities. To that end, having data that allows you to see the conversion rate through various stages of the pipeline is crucial.
- Differentiation
Businesses that get funded by the best venture capital funds are those that can clearly articulate their differentiation.
Perhaps the differentiation is how you disrupt the traditional way of doing things in your market. Or it could be differentiation in the product features or business model.
Whatever the case, innovation that is tangible and can be articulated that sets your business apart from the competition will get investors to spend more time with you. Important here is to be specific about what the differentiation in your business is, and to be able to articulate this clearly.
- Hire a CFO
As you begin the journey of a fundraise, and especially from Series B and into later funding rounds, having a good CFO will make the process immeasurably easier, and they will hold a pivotal role.
The CFO will be responsible for building the 3-year financial model mentioned earlier and will be on top of the KPIs to be able to explain and discuss with investors.
During due diligence, there will be a concerted focus on the preparation and interpretation of the financial information. Having a CFO in place who can take on this burden and give comfort on the integrity of the numbers and produce detailed reports and information adds credibility and provides comfort.
Preparation is key for a fundraise, but this process can be demanding, especially if you have multiple investors trying to appraise the business concurrently at a time when you have to continue to show month-on-month growth. A CFO (along with your advisor) can be helpful here providing leverage in the process.
If you are a scaling SaaS business in Europe and are considering raising your next round, get in touch with us to see how we can help.