The Rise of Non “VC compatible” SaaS Companies
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His post gives the VC point of view about what path might be right for you.
I wanted to provide a founder’s perspective on that topic. Thanks Clement for inspiring me here :-)
As a startup, we’ve tried to raise money several times. To be precise, we went through the process 7 times in 8 years.
The very first time was in 2009. From friends & family, we raised about $325,000. Three years later, we got a $270,000 infusion from a small seed fund in Paris. Between these two small rounds, we operated a radical pivot that got Agorapulse started in 2012.
After that, we struggled to get out of the early stage startup hustle. We tried to raise money from traditional VCs 4 times. We applied to a Silicon Valley startup incubator. For this trip back to the rodeo, we were above $1M ARR and had pretty decent SaaS metrics.
This post is about what I’ve learned during that process.
It’s not about raising money from friends & family, business angels, or seed funds. It’s about “normal” VCs, the ones that traditionally invest in series A and more than $1M.
I hope it can help you make an educated choice as to whether or not you should raise VC money.
Raising VC money is at best a means to an end
Conventional wisdom has us look companies that have raised a significant amount of money as successful ones. I did — for quite some time.
But when I noticed that a LOT of these companies eventually didn’t make it, I realized that raising funds was not a sign of success. Their “win” was just the sign of their ability to convince VCs they had a credible Big Dream. See more on that below.
If the type of business you want to build cannot be built without raising a significant amount of capital, do it. If it does not, focus on building a good product, finding product market fit and getting early traction. That’s the only goal worth pursuing.
Raising capital should not be the be all and end all measure of your success.
Raise money “because you can” = worst reason ever
I’ve heard this one so many times I’ve lost count. Raise money NOT simply because you can. Raise it because you have to or because you know how to use it to grow your business AND you can.
If the only reason you can think of when trying to justify your current fund raising efforts is that “you can,” you’re in for some serious disappointment.
Read the next 9 reasons not to raise money and decide for yourself which ones resonate and which ones don’t.
1. You value your freedom and independence more than you value becoming rich (or big, or changing the world, or…)
When we were fighting for survival, we never really asked ourselves this question. We valued surviving and getting out of the “high risk” zone of losing money.
Personally, I was more driven by the fear of failing and the need of doing anything not to fail.
If that required raising money, so be it.
But when the business started to be profitable and kept growing steadily, I didn’t take the time to look at what I really wanted.
Now that I was out of that awful tunnel of doubt and fear of failing, what did I really want moving forward?
Was it to get a ton of money at all cost? To build a very large company with hundreds of people all over the world? To become famous thanks to my enormous success?
All these would probably require stepping up my game. I’d have to get big money in and big name VCs on board.
That also means that I would lose some freedom.
You lose freedom because you invite a new partner in your company and a pretty powerful one. A demanding one too!
Now that you’ve sold them that you can be the next Uber (because that’s what you told them you’d be), they want you to do anything you can to get there. And as your chances to be the next Uber are very thin, you’ll have a pretty big weight on your shoulders. A weight you’re not going to get rid of easily.
Makes me think of the chorus of this Beatles song.
Chances are, actually, that this weight will get rid of you if if it appears that you can’t keep your promise.
If a unicorn success is what you really want deep inside, go for it. Just know the risk and price you’re willing to take on for your big dreams.
If you’re not ready to pay that price and you cannot imagine for a minute losing your independence and your freedom, do NOT raise VC money.
Today I know that I value my freedom and independence more than I value a truckload of money. I really do. Money has never made me happy. Living the life I want to live makes me happy.
My dream life doesn’t require unicorn money.
I may get a lot of money along the way, but it’s not what’s driving me. I made my choice, at least for now.
2. You seek advice and guidance more than you seek money
Once you get to early traction in a self funded startup, that point becomes crucial. Basically, you get money flowing in, you’re usually operating at a profit. As you’ve been growing mostly through organic channels, you don’t yet have any “levers” to pull to kick that growth up (read more on this important topic below).
So money may not be your biggest motivation to get a VC on board.
As most startup founders who are not VC backed, you’re probably fantasizing a lot about the “smart money” promise.
What is “smart” money in our wildest entrepreneurs dreams? I summarize it this way:
- access to a network of awesome people who will take you to the next level
- access to sound advice that will help you make the best decisions (and avoid the worst)
- access to a pool of great applicants for your most challenging positions (CTO, COO, CMO, CFO, etc.)
- access to partners, or even clients, you would never have had access to without a warm intro
Basically, everything money can’t buy but a great network of very smart and influential people can.
Let me cut right through the crap: this is VERY rare.
VCs who would qualify under that “smart money” definition are a literal diamond in a haystack. They are almost all Silicon Valley based and chances are they are not interested in your business at all.
Does that mean that most VCs are useless when it comes to providing the “soft” benefits of smart money?
No, of course not. But they will eventually provide very little of that and the ultimate risk for you is to end up being disappointed by the choice you’ve made if your motivation was mostly driven by that (rather than the money they will provide you with).
3. You operate (or plan to operate) in a crowded space
This a very important point that I learned the hard way.
Every time we tried to raise money (or apply to an incubator, like 500 Startups), we were rejected mainly for that very reason. Our space, social media management, is pretty crowded. Or at least it seems like it.
I would argue that if you eliminate enterprise vendors (we’re not competing against them) or those who still at the MVP stage (there are a ton of them starting and dying every year), it’s not that crowded.
But that doesn’t matter. If it appears crowded, no matter how much effort you’ll put into trying to convince VCs it’s not, it won’t work.
There are examples of very successful SaaS startups that have incredible success in crowded spaces with existing leaders that have raised a ton of money:
Some of them, like Groove, even prefer to be in a crowded space as it’s the sign of a big, healthy market.
Should you choose a competitive market or an untapped one?
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But the truth is, VCs don’t like that. The only thing they see is that there are already well funded, bigger companies in your market and they have a hard time seeing how on earth you can make it against them.
What it will take to grow a successful business in a crowded market is not something you can explain on Day One. It’s mostly an iterative process to find the right niche, positioning and product market fit.
VCs want to see a playbook they can “buy” and sell to their board. There’s no playbook for being successful in a crowded market.
Just accept that and don’t waste your time trying to convince VCs. Your odds are way too low.
4. What turns you on is to build a sound, profitable business
First of all, it’s a great (and very important) question to ask yourself: do you want to build a sound and profitable business or do you want to play lottery and win hundreds of millions if it works?
VCs are only interested by businesses that shoot for the moon.
They are not interested about making a profit. They are interested in intergalactic growth. That kind of growth inevitably comes at the cost of profitability.
Consider the two approaches:
- Shoot for the moon: This approach is risky and stressful. You need to be able to operate in a fast paced environment with little chance to actually make it. As a consequence, you need to be deeply driven by the (potential) very high return in the end.
- Shoot for profitability. This is more “slow and steady” growth. It’s less risky as you favor profit against growth at all cost, and, as you control your own growth, it’s also less stressful. Finally, your chances to make a decent living and becoming reasonably wealthy are much higher. But eventually, you have much less chances to make it (very) big. There are outliers, like Mailchimp or Atlassian, but they are an exception to the rule.
Are you excited by leading an IPO or getting a $200+ million exit?
Or are you excited by paying yourself $10k a month and getting $500k in dividends every year for the next 10 years and / or get a $30 to 60 million exit?
Both paths can (and should) be considered as successful ones, but they correspond to two very different mindsets. They also require different types of sacrifices and come with different levels of risk.
You just need to be clear about what turns you on.
I’ve met both types of founders in my life. No one is better than the other. I just know I feel better with the profitable path.
5. You don’t have BIG dreams from Day One
That’s a biggie for VCs. They are not interested by founders who don’t want to go BIG and can convince them that they can make it BIG.
I’m not that kind of entrepreneur, and most startup founders I’ve met are more like me: they are ambitious but they are not idealistic. They don’t see themselves being worth 1 billion. Instead, they see themselves moving up to the next step, whatever that is, and when they get there, they then go to the next step, and so on.
It doesn’t mean that they have no vision. To the contrary: their vision is to be successful one step at a time.
I can’t tell you if our business will ever be worth 1 billion. It may. But I can’t sell that dream to anyone. It feels wrong.
That’s the main reason I’ve always had trouble creating those investor pitch decks where you describe insane growth out of nowhere and promise on world domination when all you have is a couple hundred clients.
Still, that’s what you need to do to get VC money, and you’d better be damn sure about your promise when they will question it.
It’s story telling, and my ability to sell unrealistic dreams is not very high.
But when you look at a VC’s portfolio, you see very few market dominators. Instead you’ll see so-so companies you’ve never heard of and that never delivered on the dream they initially sold to their investors.
And they weren’t better entrepreneurs with a better product on a better market. They were just better Big Dream storytellers.
I love telling stories, but I can’t tell story I’m not sure I believe in. If you feel the same, don’t even bother trying to convince VCs of a pipe dream that rings hollow to you.
6. You don’t REALLY need the money to keep going
While we were in the process of raising VC money last year, I did my job: I reached out to a dozen of VC-backed companies to chat with them about the many questions we had:
- What was your main motivation for raising VC money?
- Beyond getting more cash in the bank, what were the other benefits?
- Is having a VC a big plus for the day-to-day?
- Do you benefit from having a Board of Directors?
- Would you do go through the process of seeking capital again?
While the answers I got varied from one founder to another, there’s one answer that was always very consistent: the BIG plus of having a VC on board is the cash in the bank.
They followed that up with: “Don’t raise VC money if you don’t really need the money.”
When chatting with startup founders, they all advised not to raise VC money if that money was not absolutely necessary for us to grow.
The main motivation for them to give us this advice was:
- The only guaranteed benefit from a VC is the money they give you. You may or may not get other benefits, so don’t take them into account.
- Having a VC on board is a burden (board meetings, loss of control, loss of equity, more processes and less freedom). That burden only makes sense or is bearable if the cash is necessary. If the cash is not necessary, it may sound too big of a downside for too little of an upside.
If you don’t really need VC money to keep going, you may find yourself regretting giving up control and freedom for a benefit you may never have
All these conversations made us think twice as hard about our motivations and needs and definitely reconsider pieces of advice like “raise money because you can.” This one really sounded foolish after all these conversations.
7. You have not yet figured out your growth levers (or worse, you’re not sure you have one)
This is a recurring theme among founders, they need more money to “pull that growth lever.”
Don’t fool yourself. Most of your channels are not levers you can pull with more money.
So what’s not a growth lever? Anything that will not scale if you pour more money into it:
- influencer marketing
- word of mouth
- anything organic really…
The only 2 things that will (may?) grow if you pour more money at them are:
- paid marketing (Adwords, Facebook ads, etc.), and
- outbound sales
That’s why VCs love enterprise sales. It’s built on sales teams and, arguably, if you get it right, you can hire more sales people and you’ll grow.
Same goes for paid marketing, if you’ve figured that one out.
As far as I know, everything else is not a “lever” you can pull. It’s organic growth and it takes time. It actually takes more time and hard work than it takes money.
If you can’t come up with evidence that you’ve nailed outbound sales or paid marketing, don’t seek VC money.
8. You’ve grown your business organically so far
In my case, all my channels are organic. I’ve managed to grow them more than 100% per year over the last 3 years, but pouring a truckload of money at them will not triple or quadruple them. They are not “levers.” I cannot “pull” them harder.
I can only keep investing into them in smart and innovative ways and they may keep doubling as I do so.
That means that I have to understand what drives awareness of my brand and keep iterating to increase that.
VCs will never understand that because they don’t understand organic channels.
One of the best assets you can build to succeed is a strong, well-established and respected brand in your market. It’s way more powerful than a team of outbound sales ninjas or a high conversion rate on Adwords.
But it’s impossible to sell a brand building strategy to a VC, they can’t buy it because they can’t understand or touch it.
Don’t blame them — building a great brand is the most difficult thing to do and also the most abstract concept there is. How much does it cost? How long does it take? Who do you need to hire to get it right? You can’t explain that in an investor pitch.
If it can’t be explained in a simple manner (i.e., I’ll invest 100 here and there and I’ll get 200 over the course of 6 months because I’ve done it already, here are the past metrics), VCs won’t be able to trust you, let alone get buy in from their board.
If organic growth is all you have to sell them, no matter how good you’ve been at that, your chances to convince a VC are very thin.
9. You are not 100% sure about how to spend the money raised in an efficient manner
Most people I talked to who wanted to raise money thought they had an idea about how the money would help them grow their business.
But the truth is, in most cases, they had no clue. They had vague ideas, like “I’ll spend more in paid marketing” or “I’ll open an office in XYZ country or region.”
The main reason they had no clue is because they’ve never really succeeded at paid marketing before, or they didn’t really know how XYZ country would respond to their offering, let alone how long it would take them to succeed there.
It was wishful thinking.
The main reason I’m totally convinced it was is because I’ve talked to a dozen of founders who have raised a LOT of money and, in almost every case, they admitted that a good chunk of the round had been wasted as they didn’t really know what they were doing with it.
Some of them even felt that more than 60 to 75% of the round had been wasted on things that had very little to no impact of the growth of their business.
One of them told me “If you raise money, resist the temptation to spend it until you’ve figured out what will really work. Keep it in the bank until then, as hard as this may be for you.”
I’m not saying all fund raised are wasted or that they are useless. The only thing I’m saying is that it’s easy to spend money the wrong way, we do it all the time in our personal lives, don’t we. Our business life is no different: the more money we have, the more we’ll have a tendency to spend.
If we have not figured it out yet, chances are we’ll waste most of it.
For example, before even considering raising money to fuel our paid marketing efforts, I’ve decided to run a full year of paid marketing tests to give us a chance to figure it out before we decide if it’s worth our time and money or not.
May 15 update: I’ve asked a VC friend to give me feedback on this post and she added 2 reasons that are worth mentioning, here they are:
Don’t raise VC money if you play in a “niche market » (let’s say <$300M for your targeted geography)
VCs are supposed to figure out if the market you are playing on is big enough or not to make a meaningful exit. If you raise 10M, at a (let’s say) 30M valuation, the funds will expect to exit at 100M.
Is it possible on a $2B market? Yes, quite easily, especially if the market is consolidating. Is it possible on a 300M market? There’s only a very slight chance.
However many VCs get this wrong and will expect high exits on mid to small sized markets.
Don’t raise VC money if you don’t understand the VC game
Make sure you know what kind of VC you step in:
- Is their fund new or mature (will they be able to follow-up in later rounds)?
- How do they manage their reserves (read: what happens to your company if it’s not in the top 20% of the VC’s portfolio)?
- How much do they expect to deploy “per line” (can be a problem if you think you’re good with raising just a series A of €5M while what the VC really wants is to deploy a total of €40M on successful deals)
… and all of the other constraints weighting on VCs that have a big impact on portfolio companies
Your turn! What are your thoughts on growing a business the VC way or the self-funded way? I’d love to hear your take, even if you disagree with me :-)