What do growth investors look for?
A few weeks ago, I joined the SaaStock panel discussion on what growth investors are looking for when it comes to later stage funding. Alongside colleagues from Battery Ventures, Notion Capital and Draper Esprit, the panel raised a few key points on the main drivers of a high-quality growth round — some points that I felt should be shared. Here are the key ones:
- How to know you’re growth-round ready
Clearly, investors are looking through a different lens for Series B and C rounds compared to earlier stage venture investment, but what are the signals for growth round readiness? An undeniable indication is product-market fit. At this stage in a startup’s lifecycle, there has to be a clear sign that product-market fit exists. The next stage of the journey is all about expansion and experimentation, across geographies market segments or otherwise. VCs are looking for a shift in demand from push to pull. This means your startup is not evangelising and creating a market, but there’s a pull demand for your product. This “pull” includes customers who have a strong connection to your product and feel a real problem has been solved for them — they couldn’t live without it! This type of pull is a key differentiator between earlier and later stage funding.
2) Getting the foundations in place to scale
Another important factor VC’s consider is how ready the founding team or executive team are to scale the business. The support system around the founding team is important when going for scale because growing a business involves a lot of tough decisions. An area that founders can find particularly challenging is hiring. For example, you might need to recruit more seasoned employees, which means staying open minded to the changing landscape and finding your place in the evolving company matrix. This may also mean parting ways with loyal early employees, which can be painful and requires decisiveness to execute. We spend a lot of time ensuring the team is prepared for transformational hires and that there is a roadmap in place to fill potential gaps effectively. Structure and transparency in current processes is also a testament for hiring maturity.
3) Building a global winner — the proof points
You may have a fantastic vision and heaps of ambition but at this stage we want to know what the market opportunity is. How big can the company really get? We want to see evidence that you’ve achieved product-market fit and that both your team and company can scale. Key milestones vary from business to business, but some of the key things we’ll look at include:
- Scale and momentum — MRR and YoY growth rates
- Product-market fit — gross and net churn, engagement metrics
- Sales and marketing efficiency — payback periods and magic ratio
Growth round investment is a nuanced process and understanding the fundamentals will help you find the right investor when the time is right for your startup to scale-up!
