Fundraising – It's all about preparation

There are times when it’s easier to bounce back from rejection and times when it’s not. That’s okay. That’s completely normal. Fundraising requires a lot of effort and is mentally taxing – from managing preparations to dealing with uncertainties of the company’s future. 

There are many reasons for a rejection to happen, such as: 

• You don’t have the right product/market fit
• You are approaching the wrong investors
• You don’t know how to communicate with investors
• You don’t deliver what you promised

But the most common reason? 

You're inadequately prepared, you don’t know your ASK, and you don’t know when to raise. 

It takes dozens of hours of intense work to prepare for fundraising before even getting started. That’s on top of having to keep other parts of the business running. 

Here an ideal checklist of things you should have: 

1. A short but informative pitch deck; 
2. The ASK, meaning you should know exactly how much you want to raise to reach your goals;
3. Risk assessment and sensitivity analysis to assess the level of risks involved;
4. Market and competition assessment; 
5. A financial model including Profit & Loss (P&L) and KPIs with forecasts and cashflow forecasting
6. A pretty good idea of how much your company is worth when you’re planning to raise funds

It’s challenging to convince an investor to give you money if you don’t know exactly how much and when you want to raise and if the investors don’t know enough about your company and competition. 

Ask yourself: Would you invest in a business, an idea, or even make a large purchase without knowing what you’re getting yourself into? 

Chances are, the answer is no. It’s no different for your investors. The more they know, the better your chances are in closing that fundraising round. 

Let’s start with an ASK. What is an ASK? 

I wish I could tell you that it’s a nifty acronym for something fancy. But it’s not. It is what it is – a verb, an action, the action of asking. 

A fundraising ASK is an actual question inviting a person or company to take a specific concrete step on your behalf. It starts with a question, followed by an invitation to action, and has a specific target to meet.

For example, would you be willing to invest $2.5 million into my company? 

Question: Would you be willing…
Invitation/action: to invest
Specific target: $2.5 million

This way of asking is more straightforward and practical than saying, ‘Would you be willing to invest?’ or ‘I really hope you’d consider investing in my company.’ 

As scary as it is to ask for money, you must be able to ask for what you want and need directly. 

While it doesn’t always generate positive results, making an ask is the penultimate act of opening doors for your business. It also shows your drive as a founder and your competence as an entrepreneur. Unfortunately, investors don’t have time nor interest to attend to wishy-washy requests. 

What are investors looking for? 

Investors typically look for your professionalism, long-term approach, and intention to build a great company. But what excites them more are your numbers – numbers don’t lie. 

Many startup founders struggle with preparing for points #2, #5, and #6 in the above checklist due to the lack of financial knowledge. When your investors are combing through your financial model and business valuation report, they are looking for: 

1. A clear plan about your cash burn rate and staff costs;
2. A clear hiring plan, which key people to hire and when;
3. A clear sales staff plan if you’re a B2B business.
4. A clear Go-To-Market Strategy

In short, they are looking for assurance on an inevitable return of investment. 

Rely on KPIs and financial analytics to provide assurance

Valuation is a critical number to get right to manage everyone’s expectations and to close a funding round. The five key metrics that typically go into a SaaS valuation are: 

• Monthly Recurring Revenue (MRR) 

The total monthly amount of your subscriptions

• Annual Recurring Revenue (ARR)

The total predictable revenue subscriptions per calendar year. Multiply your average MRR by 12 to calculate your ARR. 

• Growth rate

Your growth rate is the most critical metric in your valuation. It’s the main thing investors will be looking for in your Series A or B funding. 

• Net Revenue Retention (NRR) rate

Net revenue retention, also known as net renewal rate, is used as a quality and upselling indicator of your product. This metric shows how revenue would change if there are no new customers. For example, suppose the revenue you gain from customers returning or upgrading is enough to cover the loss from customers canceling or downgrading without any new sales. In that case, it means that you have a product that is good enough to sell itself.

• Gross margin

The money left after the cost of sales is taken out. Typically, SaaS company gross margins vary dramatically between 60% to over 90%. 

These make up the foundation of building a good ask. You’ll know: 

• How to utilize financial analytics in understanding how much your company is worth
• How to use financial forecasting and KPIs to make an ask
• The exact amount to ask for and when (it’s all about timing too!)

Here’s how you make an ask

Tip: your investors are investing in the ‘How’ of your business. 

Most founders know the ‘Why’ and ‘What’ of their vision, but not the ‘How.’ When an investor invests, they invest in the latter. They want to know how you’ll use the money to mitigate the situation and turn it into a scalable business. They want profits.

If you’re fundraising for the Seed round

Seed round SaaS companies are in the early stage and have no solid, proven record. Therefore, your valuation during this stage is merely a perception of the value the company might create in the future. They don’t identify the actual value of the company because nothing has been created yet. 

How much can you raise: $1.5 million to $6 million

The capital raised will be used to fuel things such as market research and product development. You typically already have a good idea or a product with a lot of potential. But you still don’t have much MRR yet. Investments at this stage are based on future promises that you’re capable of building a successful business. 

Key measurements: 

Since you don’t have a track record to show yet, your investors will be mainly looking at your: 

• Company traction;
• Team expertise;
• Prototype or MVP quality;
• Market opportunity - Total available market (TAM), market share, market value, international expansion.

1. Rapidly growing user base - the number of customers using your product
2. MRR - the total monthly amount of your subscription revenue
3. Growth rate - the growth percentage of your MRR or number of users

Let’s take a look at some examples: 

Your growth rate is the primary metric that matters in this round. If you don’t have MRR yet, your investors will be relying on your month-on-month user growth to determine your potential. But if you already have paying customers to show for, then you are really onto something. 

The formula for calculating your growth rate is: 

[(Value from current month - value from previous month)/value from previous month] x 100% = growth rate

For example: To calculate the growth rate of your MRR, you need to know: 

• Total MRR for last month = $14,000
• Total MRR for this month = $15,500

Therefore, your MRR growth rate is: 

[(15,500-14,000)/14,000)] x 100% = 10.7%

According to Paul Graham, co-founder of seed capital firm Y Combinator, a good growth rate is 5-7% a week. If you hit 10% a week, then it means you’re doing exceptionally well. 

From here on, your investors will be looking for your next steps: 

If your net new MRR is growing at 10% on a month-to-month basis, it could be coming from new customers, expansion, or reactivation. Tracking these three different layers of MRR helps you understand which part of your operation is doing well and which needs improvement. It also lets you know where your revenue or loss is coming from. To do that, we need to calculate your net new MRR. 

If your sales and marketing strategy worked or there was a shift in market trends, then it may be time to hire more personnel to accommodate the increasing demand. 

Your investors will be looking for: a clear hiring and growth plan, with a special focus on customer acquisition costs, and Go-To-Market Strategy.

However, if you’re only growing at 1% a week, then it’s a sign you haven’t yet figured out what you’re doing. But that’s okay. It doesn’t mean that you won’t be able to close this fundraising round. 

Let’s say you’re only growing at 1% a week, and your net MRR is contracting by 2% every month, it means that your downgrade or churn rate is very high. The reason(s) may be: 

• Your product is not the right fit
• Your customers aren’t satisfied or aren’t receiving enough onboarding and support
• You’re attracting the wrong customers
• Your customers aren’t achieving their desired outcomes
• Your customers don’t see value in your product
• There are better options in the market
• Your product is too expensive

Then it may be time to innovate, revise your pricing model or start shifting your focus to customer success. 

Your investors will be looking for: A clear plan about your cash burn rate, staff costs, and hiring plan. 

Your ideal target investors: 

• Angel investors
• Seed VC funds
• Accelerators

If you’re fundraising for Series A round

Series A round SaaS companies have developed a track record with an established user base and other key performance metrics. Therefore, your valuation during this stage is a projection of the company’s potential to be a profitable business in the future. 

How much can you raise: $5 million to $20 million

By now, you could be generating an MRR of at least $50,000 - $100,000. You know you have a great product, a solid customer base, and you’re ready to scale. The capital raised will be used to grow the team and fuel product development. 

Key measurements: 

In this stage, investors are not just looking for great ideas. They are looking for proven ideas that can be turned into a successful business. So while profitability doesn’t matter as much yet, the decision to invest becomes more quantitative and metrics-driven. 

Metrics that matter are: 

1. Annual recurring revenue (ARR)
2. Growth rate
3. Net retention revenue (NRR)
4. Customer Acquisition Costs (CAC)
5. Customer Lifetime Value (LTV)

Let’s take a look at some examples: 

The data for your CAC and LTV may not be 100% stable yet, but they will begin to play a role in the valuation of your business in this round. That is why we will focus on your ARR, growth rate, and NRR. 

The formula to estimate a SaaS company’s valuation, based on its annual growth rate is: 

Multiplier x Annual Recurring Revenue x Annual Growth Percentage x Net Retention Revenue rate = Valuation

Say, if your key metrics are as such: 

ARR = $1,200,000
Annual Growth rate = 250% 
Net revenue retention rate = 130%

We’ll assume that you have a market sentiment multiplier of 10, your calculations will look like this: 

10 x $1,200,000 x 2.5 x 1.3 = $39,000,000

This means that your company is worth $39,000,000. 

From here on, your investors will be looking for your next steps: 

Your next step could potentially be to grow your NRR rate. Retaining customers is vital for a profitable business. A high NRR means that you can expand your revenue through upselling and cross-selling. 

In a SaaS business, having an NRR rate of over 100 percent means that your business has vast growth potential. In addition, it means that your customers are willing to pay more for your product. The definition of what makes up a good NRR rate depends on your business. Typically, 90% is a good NRR rate for small and medium SaaS businesses, while at least 125% is what larger SaaS businesses aim for. 

For example, if you are currently selling your software for $100 per month, your goal is to expand this number from $100 to $200 per month with the existing customers. Then it may be time to revise your pricing model or grow your customer success team. 

Even though your CAC and LTV may not be 100% stable yet, your investors will also be looking at your LTV:CAC ratio. The ideal LTV to CAC ratio is 3:1.

If you’re hitting close to that margin, then it means that you’re ready to scale – investors are more likely to take the leap with you. 

Your investors will be looking for: A clear plan about your cash burn rate and staff costs, a hiring plan, and a clear sales staff plan (if any). 

Your ideal target investors: 

• Series A venture capital firms

One thing to always keep in mind regardless of which funding round you’re in – due diligence. Make sure you keep your due diligence details up to date at all times. That includes your finance, legal and technical contracts, and documentation. It’ll ensure you can start the fundraising process at any time without any delays. 

What do investors see when they look at your metrics?

While it requires a lot of effort from you to prepare for a fundraising round, your investors also put in an equal amount in the decision-making process. Therefore, every fundraising pitch is about creating a win-win situation for all parties involved. 

Tip: Make it as easy as possible for your investors. When an investor combs through your metrics, they are looking for answers to these five key question: 

1. What are their short-term and long-term income from this investment?
2. What is the capital multiplication?
3. When will they receive a return on investment?
4. Is there an exit strategy they can rely on?
5. What stake in equity and other benefits will they receive for this investment?

Your investors are also looking to understand that you have a vision of how to build the business. The following forecasting elements will show investors that your business is worth taking a chance on: 

• Cashflow: You know the risks of the business and know how to mitigate them and react accordingly without running your cash reserves (or their money into the ground).
  
  
• Profit & Loss: You have a long-term vision; your dreams, plans, and goals are backed by facts, not just your thoughts or gut feelings.
  
  
• Sales forecast: You take responsibility for the business and funds raised; you’re serious about building a scalable and profitable business, i.e., you’re not just "trying it out.” Apart from that, you also know how to sell your product and have a proven sales and marketing strategy.
  
  
• Expense management: You know how to manage your cash runway and not waste your investors’ money.
  
  
• Upselling path: You know how to achieve a Net Revenue Retention of +100% and make your existing companies pay more in the future

If you’re able to get all of the above in order, you’re solid. It not only means you have a vision, but it also means you know HOW to get there.

Conclusion: 

Fundraising is often the scariest part for many people. There are so many uncertainties and, in some cases, stage fright. I can’t promise that it gets easier each time, but you will most certainly refine your asking skills over time. 

How you make an ask matters A LOT. Instead of vague requests, try: 

My company is valued at A amount, and I am looking for B amount to do C. Would you be willing to invest X amount of money in my business?

On fundraising – It’s crucial to know your burn rate. Put all your forecasts in one place so that your investors can quickly analyze your metrics. Another reason for that is because you should never look at any metrics in isolation. Then, make a clear plan for staff cost, sales staff, and revenue target based on your burn rate. Three metrics to know by heart: 

1. MRR
2. CAC
3. Growth rate

Remember your investors are investing in your next steps. So, be prepared to answer questions on how to mitigate future challenges. 

On investors – Just because someone is an investor doesn’t mean you should blindly approach them with a pitch. Investors are your business partners, not just someone with money to inject into your business.

Like any other business partners or people you recruit into the team, they need to be the right fit for you because they will be by your side for years. Know who you’re looking for, where to find them, and when to reach out to them. 

The rest boils down to preparation, preparation, preparation. 

1. Make sure you have: 
   

   A short but informative pitch deck;  The ASK, meaning you should know exactly how much you want to raise to reach your goals; Risk assessment and sensitivity analysis to assess the level of risks involved; Market and competition assessment;  A financial model including Profit & Loss (P&L) and KPIs with forecasts and cashflow forecasting A pretty good idea of how much your company is worth when you’re planning to raise funds

2. Know your investors: Who are they, what’s their risk perception, which industry are they in, etc.
3. Connect your interests to theirs.
4. Know what you’re asking for. Be specific.
5. Have a fallback plan for rejection. If Plan A doesn’t work, what’s Plan B, C, D, E…
6. Practice your communication and presentation skills.
7. Keep the energy high, and the conversation interesting. 

Happy Calqulating!