The Most Investible B2B SaaS Startups
Part 1: What the most investible early-stage B2B SaaS businesses look like
WHAT I WISH I KNEW… A blog of learnings from spending time as a Venture Capital Investor in the Australian startup ecosystem.
If I was a founder of a Pre-Seed or Seed stage startup, I’d want to know my prospects of raising Venture Capital (VC). I’m hoping by sharing what I know, readers are better able to understand what a ‘venture-scale’ business looks like vs. a ‘founder-scale’ business that might have to be bootstrapped to profitability.
One of the hottest categories in Australia is B2B SaaS — an overwhelming majority of Australia’s most successful tech companies fall into this category for a number of reasons, the largest one perhaps being the category’s ability to more easily overcome the natural disadvantages of starting a rapidly scaling tech business in Australia (such as our geographic isolation and relatively small population).
Each year, a VC investor will see hundreds of founders, if not thousands, seeking to build the next generation of tech unicorns. The truth is, some businesses standout a lot more than others (which can lead to hotly contested funding rounds) while the vast majority of founders spend months speaking to investors with little to show for their efforts.
So, what makes a B2B SaaS business highly desirable for VC investors? VC investors tend to use an investment checklist to critically evaluate exciting opportunities. Here is my simplified framework of what’s going on within the mind of a VC investor when they’re assessing your business:
The problem is, at the earliest stages when metrics aren’t yet proven, assessing the potential of these variables is often highly subjective — but there are a number of popular indicators that can be a strong positive signal to VC investors.
Here are some of the more powerful indicators:
But rules are made to be broken and ‘non-consensus’ business models are constantly challenging the status quo. You could argue that this is where true VC ‘alpha’ is made, but being non-consensus has its challenges, including finding investor support.
At the earliest stages, assessments can be highly subjective — metrics are the most objective measure a VC investor has to identify if founders are on to something. If you don’t have metrics, you’re relying on what can be a highly subjective (high variance) investment assessment process. SaaS company metrics are highly benchmarked, so achieving kick-ass metrics adds a level of objectivity that shows the substance behind your vision and can broaden your appeal amongst investors.
If pre-revenue, try to acquire signups / users / any other proxy for the number (or profile) of customers for whom you might be able to switch-on revenue. Use this as validation of your thesis.
Oh, and founder(s) matter too, probably the most. Ever wonder how second-time founders that have previously had a successful exit raise ridiculous funding rounds in a couple of weeks with not much more than an idea (even if the thesis has weak validation)? Yeah, me too.
If you’re a first-time founder, VC investors are usually looking for how your past experience may have given you a unique insight into the problem you’re trying to solve. Ideally, you can convince them that you’re part of a small subset of people that are best positioned to solve the problem you’re tackling (which boosts your credibility and is a form of competitive moat). After this, founder assessment quickly becomes very subjective. In Australia, some VC investors screen by founder profile, most don’t.
Most importantly of all, don’t forget to solve a problem that actually matters. Make sure your solution is valuable to people. Don’t be these folks:
More to come… Part 2 to explore the what VC investors look for from Series A onwards (typically more metric driven)
