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Discounting In SaaS Sales: 9 Do’s & Don’ts

SaaS discounting is the practice of offering a lower price or rate to a particular customer in order to close the deal. It’s a sales strategy that most companies use from time to time. The benefits of SaaS discounting are clear: up your win rate, shorten sales cycles, keep a customer happy, etc. But the downsides can begin to outweigh the benefits if the practice is left unchecked: a discount-happy startup can build a reputation in the market as a “wounded animal” that is easy to haggle down, and in some cases degrade buyers’ perception of the value of the product. Moreover, SaaS discounting can provide sales teams with an “easy out” in closing a deal, which not only masks weak points in the sales process or product-market fit, but also robs your team of the ability to hone a crucial skill: learning when to let an opportunity die.

At Bowery Capital, we work closely with our founders on sales strategy from Day One, and pricing plays a big part. Every single one of our companies has put some flavor of a discounting strategy to work pre-Series A. In writing this post, I drew on that experience as well as insights we’ve gleaned from friends in the SaaS sales world over the years (for example, check out this episode of the Bowery Capital Startup Sales Podcast on discounting with Bob Lempke of Chartio). We hope you’ll enjoy the result: the 9 do’s and don’ts of SaaS discounting.

  1. Do Keep In Mind That Everyone Wants A Discount

If your sales process is high-touch enough to involve a conversation between a customer and a rep (e.g. not completely self-serve), push-back on price will be a constant. Especially when you are a younger startup and the target knows that, it’s in their interest to see how far you’re willing to go to win a customer. Expect to hear it from targets of all sizes: “we’re so small & resource-constrained” and “we’re huge, we’ll be one of your biggest customers & this total contract as is will be too big of a number for me to push through.” The “prime directive” of SaaS discounting is that everyone wants it, but if you’re giving it to everyone, you’re leaving money on the table and probably poisoning your market.

  1. Don’t Give In To Discounts Requested For The Wrong Reasons

Develop an understanding of what comprises a bad SaaS discounting request and a valid one you’ll consider. Here are a few examples (though keep in mind they’ll vary based on your business and ACV):

Bad reasons to discount: Competitor pricing is higher, customer has need & budget but won’t pay, customer wants new modules / features for free, customer is unwilling to commit to anything in return for a discount (e.g. testimonials, a discount timeline, periodic product feedback), true need or product fit is unclear, your offering contains heavy services-based elements that are not cost-scalable.

Good reasons to discount: Potential customer is facing a legitimate (hopefully near-term) issue with price point (e.g. seasonality of their internal budget process, customer can only handle a lesser number of seats than normally required but is growing or expects to expand), customer is extremely large and is requesting a reasonable per-seat discount due to total deal size.

  1. Do Know When To Walk Away & Be Willing To Do So

You should expect to lose some opportunities on price. As the adage goes, you aren’t negotiating if you aren’t willing to walk away. In our podcast last week, Bob highlights an important point: customers on discounts are often your biggest problem accounts. They are probably more likely to require ongoing customer success resources, and will be more difficult when it comes around to renewal time. Take this into consideration before you commit to a loose SaaS discounting policy, which could very well result in churn (or the need to fire customers) down the road.

  1. Don’t Let Your Salespeople Fly Blind: Pressure-Test Your Pricing Model

If you have sufficient historical sales data, you can run a few basic analyses to determine where discounts are most commonly occurring. This may give you a sense for where your product “feels expensive” to potential customers, and might draw out some areas of deadweight loss (i.e. money that you left on the table due to unnecessary discounting). At Bowery Capital’s first annual CFO Summit, Fred Shilmover, the CEO of InsightSquared, gave an excellent tactical chat on various analyses he undertook to ensure that discounts were approached in a way that maximized value for both customers and the Company. Without going into specific detail on their approach, you might try out a similar quantitative exercise of your own:

Pull together a basic scatterplot of deals won with price-per-seat and number of seats as the axes (you’ll also want to add a second line series with your list or internal rate card pricing). You’ll probably see that the curve fits the general shape of y=x^(-1), reflecting your volume discount (with spikes at your tier break points if you have then). You can do the same but swap out price-per-seat with ACV-per-account to get further perspective on how tiering or “bucket” pricing is affecting discounts. Let’s take an example: you analyze your 2nd and 3rd pricing buckets: $1k / month from 20-50 seats, and $2.5k / month from 50-100 seats. If you find no discounts at the 50-60 seat range just after the break point, you may be under-pricing; alternatively, if you that deals around 100 seats close at highly variable price points, you may want to consider capping transparent pricing at 75 seats and lumping higher-seat deals into your “Call For Pricing” enterprise tier.

  1. Do Understand Your “Levers” Outside Of Price In Terms Of Cost & Value

Dollars aren’t your only lever when it comes to discounts and winning deals. Many SaaS offerings scale up the number of modules, add-ons, or value-added services with tiers or price points. They can give you some flexibility in being creative with discounts and may allow you to protect revenues by offering premium features a client wouldn’t otherwise have access to. Keep in mind, however, that providing these value-added features have an internal cost as well. It’s therefore important to map each of these features out against internal ongoing cost (another smart analysis that Fred at InsightSquared undertook). You should also develop a sense for which add-on features are valuable to which customer types. This will help you to make proper use of non-dollar deal levers; they can be just as much a part of the SaaS discounting negotiation as price point.

  1. Do Build SaaS Discounting Into Your Internal Rate Card

Sometimes you’ll need to negotiate specific discounts on an account-by-account basis. But even if your pricing is non-disclosed, you should have an internal rate card that reflects some volume-based discounting, which is a standard expectation in most SaaS pricing models. Your salespeople should know what your “list price” is for various numbers of seats. A good start is the charting exercise outlined in #4 above. Even though you may or may not share this information with your potential customers, this will help you ensure that your discounts don’t deviate too heavily from your price-per-seat based on where that customer is in terms of number of seats. It helps ensure a consistency and fairness in volume discounting as you (hopefully) address increasingly high-ACV deals. Keep in mind that heads of sales do talk to one another, so a loose approach early on can arm later potential clients with info that might hurt your negotiating position.

  1. Don’t Give Anything Away For Free: Ask For Something In Return

SaaS discounting should be a quid pro quo exercise. If a potential customer asks for a lower price because they are facing a budget issue but they truly have need for your product, they should be willing to give something in return. Even if you’re a young startup, you should protect the perception that your offering is valuable; so even beta customers should be willing to provide a testimonial, case study and/or periodic product feedback. Your ask may also be something as simple as an indication of their commitment, such as time from key stakeholders. The importance of the quid pro quo isn’t necessarily just about what you get in return; it’s equally valuable in creating an equitable customer-vendor relationship and ensuring that the issue is really one of budget and not one of questionable product-market fit. Customers that are willing to work with you and meet even small asks are more likely to be better clients long-term.

  1. Do Structure Contracts To Protect Upside (Or At Least Message Accordingly)

Remember that discounts should only be given for good reason (see #2 above). You have (hopefully) set pricing that aligns with your product’s value in the market, and if that value is realized in a particular account, they should be paying full price. Therefore, approach the conversation of discount timelines upfront. You may want to build some sort of limit (by time or seat) into the contract itself. Even if you don’t lock in a reversion to full price upfront, you want to avoid catching a customer off-guard when it comes time for renewal. Of course, truly big deal opportunities sometimes may require that you enter into some sort of discounted trial that doesn’t have defined limits. But set a future time that you mutually agree upon to re-initiate the conversation. Most importantly, frame it around value created for that customer. If, by the time of that future conversation, the value you both hoped for has not been realized but you still feel the account fits your Ideal Customer Profile, consider extending it and dedicating more customer success resources. Alternatively, if the customer is not willing to revert to full pricing and their “fit” has become unclear (in terms of either budget or need) you should have a framework in place that forces you to consider “firing” that customer.

  1. Do Stay Open & Creative: SaaS Discounting Is Part Of The Negotiation

As discussed above, you should put in the work to understand what kind of SaaS discounting strategy works for you. You should also ensure that your sales team understands the rationale and knows how to stick to the party line. But at the end of the day, especially as you consider higher-ACV deals, every deal has its own idiosyncrasies, and many SaaS discounting situations will come down to a judgment call. Be willing to work with your customers and don’t hesitate to get creative to win deals, within reason. No matter how scalable your business model, it’s still Software-as-a-Service; no pricing policy can substitute for a company culture that prioritizes value creation for its customers.

Four Ways to Position Yourself in a VC Pitch

This article is co-authored with Sanjay Gandhi, President at Oxford Valuation Partners.

Part 1: What’s Your Entrepreneurial Story?

As we outlined in our last blog post, fundraising is a sales activity. You’re showing a product to a pipeline of target “customers” – in this case, a group of VCs. And a key component of selling is how you position the product with the customer.

In a VC pitch, what then is your product? No, it’s NOT just your company. It’s also you, your co-founders, and your team. is crucial for Seed/Series A pitches, and especially for YOU as the founder. Positioning happens at the intersection of you, your team, and the business. You need to weave all of these into a compelling story.

That’s the simple secret of those teams who raise $15M pre-revenue Seed rounds. They’re experts at positioning their pitch.

As a VC, one sees many common positioning themes emerge – some more compelling than others. Here are some of the most investable ways of positioning yourself with VCs:

A graph of some of the most investable ways of positioning yourself with VCs

 

Let’s look at these four positioning archetypes in more detail:

The Rogue

  • Heard saying: “I don’t care that you can’t sell ads on Pokemon Go. I think we can crack it.”
  • Founder traits to emphasize: willingness to experiment, your “lean” mindset
  • KPIs to pitch: fast deployment cycles, rich product roadmap

Being inexperienced as a founder isn’t a bad thing in a pitch. In fact, with the right positioning, lack of experience can be a huge asset. That’s the essence of the Rogue; she has no idea what she can’t do.

It’s counterintuitive, but the Rogue must emphasize that naiveté. The Rogue is someone who will do everything the status quo already “knows” is bad—fearlessly, relentlessly, and unapologetically.

Sure, the Rogue will do a lot of stupid things that don’t work. But the things that work: that’s the very definition of innovation.

To take this positioning in a pitch, you need to share your great ideas as specifically as possible and your strong conviction to execute them. It’s good if these ideas are a little bit different; being perceived as a copycat/fast-follower kills this positioning. Finally, show high energy and exuberance for your business.

The Insider

  • Heard saying: “I encountered this problem every. single. day. as an insurance broker.”
  • Founder traits to emphasize: your adjacency to the problem, industry knowledge
  • KPIs to pitch: large total addressable market, >10x product value delivery

The Insider has stumbled into a problem with his industry, and is now leaving her job to build the solution. You are the target customer for this business, so you’re the best-placed to build the solution.

This positioning is (unusually) more about the sector/opportunity than the entrepreneur herself. As the Insider, you must emphasize the size of the problem, drawing credibility from your insider knowledge. It’s essential to start your pitch with the problem/solution pair—sometimes even starting with a short “day in the life of a…” story.

For your own personal positioning, you need to show two things:

  1. Passion for the problem: This is where the “problem keeping you awake at nights” story really resonates.
  2. Adjacency: You understand the problem better than anyone because you are the target customer of this business.

The Iconoclast

  • Heard saying: “This product will change the way people think about brushing their teeth…forever.”
  • Founder traits to emphasize: big picture focus, vision, confidence
  • KPIs to pitch: product engagement data—dwell times, feature usage, conversion rates                                   

The Iconoclast has a preternatural understanding of the human psyche. She understands what the people want better than the people do. Henry Ford was the original iconoclast.

As the Iconoclast, your personal positioning needs to reflect that. The important elements to project are confidence and vision. Be prepared to be articulate your vision explicitly. Paint a picture in the minds of investors. Elon Musk is a master at this. A person gets excited just reading his product vision statements.

Finally, validate your vision with examples from your previous successes. The Iconoclast has a wealth of consumer understanding to draw upon, and is usually a serial entrepreneur, all-star product manager, or both.

That’s why in this archetype, the product is more important than the business. Try not to get stuck in execution details. Focus on how you’re going to change the world…again.

The Pro

  • Heard saying: “I know a great head of sales from my last SaaS business. Let me make a phone call.”
  • Founder traits to emphasize: Breadth of experience, large support network
  • KPIs to pitch: Revenue growth, profitability, and exit valuation of PREVIOUS companies

The Pro has done it all before. She’s more than just a former Insider who’s had a successful exit. The Pro has worked across multiple sectors and functions, and is often a “Professional CEO.”

As such, the Pro conveys steadiness and confidence in all situations and a breadth of knowledge across functions and business types. As the Pro, be prepared to tie in your current business with examples and stories from your previous roles.

You’re really the opposite of the Rogue; you’re investable because you will waste no time screwing around. You know what works, and you’re doing it later today.

The actual business doesn’t matter that much in the Pro’s pitch. If she can sufficiently sell herself, her own confidence in the business model is all that’s needed.

So why these axes, and where do I fit in?

You may wonder why we’ve chosen these particular axes. It’s true the startup landscape can be split thousands of different ways. There are other valid splits and archetypes. We’ve just selected these two because consumer/enterprise and founder experience are two early points that VCs will take under consideration in your pitch. VCs use heuristics such as these when evaluating opportunities.

Founders may ask themselves if they’re a new or experienced founder. The easy rule of thumb: if you don’t know, you’re inexperienced. Beyond that, if you’ve raised several VC rounds or had an exit, you’re likely experienced.

Don’t forget though, that this isn’t a continuum. Insiders don’t necessarily “graduate” to Pros. These are discrete positionings applied to four independent stories, so triangulate yourself against the archetype rather than the labels.

Part 2: The Three Universal Truths of Positioning

The Three Universal Truths of Positioning

Finally, let’s take a step back for perspective. Don’t forget that there are certain elements that common to ALL positioning stories, regardless of your archetype:

  • Focused: One problem, one business. Investors are allergic to feature creep, so your positioning should succinctly affirm your commitment to doing just one thing well.
  • Story-oriented: Storytelling is a lost art and investors react to a great one. Tell a value-driven story that illustrates you and your business.
  • Cash-ready: The most compelling pitches show that everything is in place, and all that’s needed is capital. Your assumptions are confirmed, your team is in place, and once you pour cash into the tank, the machine will magically and effortlessly take off into the stratosphere.

And above all else, be credible. Only position yourself as one of these archetypes if you think you actually fit it. This list is not exhaustive so if these don’t fit, think of a more appropriate archetype that does. Find the combination of traits that have led you to be successful thus far, and lay out your own best messaging, narrative, and positioning in advance of your pitch.

For more information contact Sanjay Gandhi at sgandhi@oxfordvp.com. Look for more funding advice by visiting the knowledge section of the Oxford Valuation Partners website.

 

4 Things Holding Women Back From Leadership Roles, And How To Overcome Them | PowerToFly

PowerToFly was launched by Milena Berry and Katharine Zaleski in 2014 to connect Fortune 500 companies and fast growing startups with women who are looking to work for companies that value gender diversity and inclusion. PowerToFly is building the platform to propel diversity recruiting and hiring. The company’s optimized search and sourcing tools, targeted job promotions, and high visibility employer branding services reduce the time to hire hard to reach talent pools of underrepresented female engineers at a centralized and lower cost. Through the platform, companies gain full access to actively and passively build a pipeline of vetted women in tech.

For more information, visit https://www.powertofly.com/.

Screen Shot 2016-08-26 at 2.17.52 PM

According to Tom Schoenfelder, Ph.D., and SVP of Research and Development at Caliper, a company that specializes in data-driven talent management, research shows that women are more likely to be transformational leaders. “Good leaders across the board are transformational,” he says. “Transformational leaders are really good at winning the hearts and minds of people. They get their followers to feel how their role fits a larger strategy or fits into something that’s larger than themselves.” +Read more

Square 1 Bank Announces Credit Facility to Revionics

Square 1 Bank, a division of Pacific Western Bank, today announced that it has provided a credit facility to new client Revionics, a leading profit optimization company. Proceeds from the facility will provide working capital to expand Revionics’ strategic growth initiatives.

Headquartered in Austin, Texas, Revionics enables retailers worldwide to achieve faster time to value and ROI with its responsive merchandising solutions using predictive analytics model and demand-based optimization solutions. The company’s end-to-end solutions include Price Suite, Promotion Suite, Markdown Suite, Competitive Insights and Macro Space Optimization. Revionics works with some of the world’s most profitable retailers in ecommerce, grocery, hardlines and softlines to improve margins and top-line sales, drive bottom-line results and create a better value proposition for their customers.

“As we continue our track record of aggressive revenue growth and expand our global footprint into strategic markets, Square 1’s credit facility provides us with the flexibility to continue our strategic investments in our solution portfolio and business initiatives,” said Brian Hansen, Revionics’ chief financial officer. “We are pleased to partner with Square 1 to support Revionics’ continued commitment to delivering unparalleled value and competitive differentiation for our customers.”

Steven DiPasquale, senior vice president in Square 1’s technology banking practice, added, “Revionics’ unique approach to the market and its customers – bringing analytics, machine-learning science, proven solutions and domain expertise – is driving a powerful ROI for retailers. We are proud to partner with their team of innovative technology and retail experts who are dedicated to delivering measurable financial outcomes with their leading solutions and services.”

About Revionics

Revionics is a global leader in profit optimization services and solutions. Our unparalleled analytics and science serve as the backbone of omni-channel retailing to help performance-driven retailers execute profitable pricing, promotion, markdown, and space decisions with predictable business outcomes. The result: achieve speed to value and ROI, improve margins, drive top-line sales and respond faster with precision.

Revionics’ SaaS-based model integrates analytics, technology and services to deliver an unmatched advantage for retailers – Competitive Insights, Price Suite, Promotion Suite, Markdown Suite, and Space and Assortment Suite – all from a predictive platform to drive long-term growth.

Trusted by some of the most profitable retail brands, Revionics optimizes more than 62,000 retail sites across 18+ million products, and more than 2.6+ billion item/store combinations are modeled weekly. Learn more at www.revionics.com.

About Square 1 Bank

Square 1 Bank is a division of Pacific Western Bank, a Los Angeles-based commercial bank with over $21 billion in assets. A full service financial services partner to entrepreneurs and their investors, Square 1 provides clients flexible resources and attentive service to help their companies grow. Square 1 offers a broad range of venture debt, treasury and cash management solutions through offices in top innovation centers: Atlanta, Austin, the Bay Area, Boston, Chicago, Denver, Durham, Los Angeles, Minneapolis, New York, San Diego, Seattle and Washington, DC. Pacific Western Bank is a wholly-owned subsidiary of PacWest Bancorp (NASDAQ:PACW). For more information, visit www.square1bank.com.

Media Contact:
Square 1 Bank, a division of Pacific Western Bank
Dee McDougal
919.597.7479
dmcdougal@square1bank.com

Square 1 Bank Announces Credit Facility to ShopRunner

Square 1 Bank, a division of Pacific Western Bank, today announced that it has provided a multi-year credit facility to new client ShopRunner, a membership-based online shopping service. Proceeds from the facility will support general operations as the company continues to expand its member and retail partner bases.

Founded in 2010 by e-commerce entrepreneur Michael Rubin, ShopRunner offers exclusive benefits—like free two-day shipping, free return shipping, “express” check-out and member-only deals—to high-value consumers. The platform helps e-commerce retailers and brands compete with large online retailers like Amazon as consumer demands continue to raise the bar for the online shopping experience. ShopRunner is led by Sam Yagan, former chief executive officer and current vice-chairman of The Match Group, and backed by Alibaba Group, Kynetic and American Express.

“We were seeking a commercial banking partner with a track record of supporting high growth technology companies and an entrepreneurial mindset,” said Scott Simmons, chief operating officer and chief financial officer of ShopRunner. “Square 1 has developed a strong understanding of our business and been highly responsive to our needs.”

Ron Kundich, managing director in Square 1’s technology practice, added, “ShopRunner has built a unique platform with a proven track record of successfully connecting top retailers with online shoppers. The company has a strong pedigree and is poised for significant growth. We are pleased to welcome the ShopRunner team to the Square 1 family and look forward to supporting their efforts for years to come.”

About ShopRunner

ShopRunner is the best way to save time and money while shopping online for the stuff you love. Its unique membership experience makes it easy for members to get everything from designer jeans to digital cameras. ShopRunner connects top retailers and brands to the best online shoppers. ShopRunner’s exclusive member benefits and highly targeted, data-driven marketing help retail partners acquire high value customers while increasing existing customers’ purchase frequency and spend. The company continues to experience tremendous growth, with over 3.5M members and 150 retail sites in its network, including leading brands like Neiman Marcus, Saks Fifth Avenue, Ralph Lauren, Tory Burch, Kate Spade, American Eagle, Under Armour, Brooks Brothers, Eddie Bauer, Staples, Newegg, 1-800 Flowers and many more. For more information, visit www.shoprunner.com.

About Square 1 Bank

Square 1 Bank is a division of Pacific Western Bank, a Los Angeles-based commercial bank with over $21 billion in assets. A full service financial services partner to entrepreneurs and their investors, Square 1 provides clients flexible resources and attentive service to help their companies grow. Square 1 offers a broad range of venture debt, treasury and cash management solutions through offices in top innovation centers: Atlanta, Austin, the Bay Area, Boston, Chicago, Denver, Durham, Los Angeles, Minneapolis, New York, San Diego, Seattle and Washington, DC. Pacific Western Bank is a wholly-owned subsidiary of PacWest Bancorp (NASDAQ:PACW).  For more information, visit www.square1bank.com.

Media Contact
Square 1 Bank, a division of Pacific Western Bank
Dee McDougal
919.597.7479
dmcdougal@square1bank.com

The New and Improved (and Permanent) R&D Tax Credit

Research and Development is a critical component of most early-stage technology companies. It can also be a significant cost center in the beginning days of your startup. To help facilitate continued innovation and development, the Economic Recovery Tax Act of 1981 created what is essentially known as the R&D Tax Credit. The credit allows a dollar-for-dollar reduction of taxes for any qualified R&D expenditures. Examples of qualified expenses are costs associated with testing, design, compatibility, functionality and production.

One catch with the R&D Tax Credit was that it was continually renewed, but with an expiration date. Between 1981 and 2015, the R&D Tax Credit was renewed by Congress almost twenty times. As of 2015, it has now been made permanent, with a few updates to the law as a result:

  • It enhances the credit for eligible small businesses ($50 million or less in revenue).
  • Beginning in 2016, qualifying small businesses can now take the credit against alternative minimum tax.
  • It allows very small businesses (under $5 million revenue) to claim a credit up to $250,000 against some payroll taxes.

That last point is great news for startups – particularly those that are not currently profitable (and therefore do not have to pay corporate taxes). If your company is paying payroll taxes for your employees, you can now offset some of those payroll taxes with the new enhanced R&D Credit.

The other two points could also mean big things for your business. It’s important to speak with your tax professional, or contact our tax team at EGFS, to discuss how the R&D Tax Credit might apply to your company.

Anjum Tunuli is the Chief Tax Officer for Early Growth Financial Services.

Disclaimer: This article has been written for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your Early Growth Financial Services tax representative, or your own tax and accounting advisors before beginning your tax work.

The Venn Diagram That Will Change How You Fundraise

This article is co-authored with Ryan Janssen – VC investor and entrepreneur.

Growth is expensive. And cash is king. Yet financing strategy is the most overlooked component of the business plan.

Financing strategy is something to think about from the very outset of your business, but this technique is applicable for anyone with a business model that has prospects for a hockey-stick growth curve and/or that needs multiple rounds of capital to get to an exit.

But how will that number magically fuel your growth? Have you critically evaluated what is achievable, against what you need? Hoping you’ll “figure out how to pay for your growth later” is like buying a lottery ticket for your business.

Here’s how to build a strong financing plan that will keep the lights on and impress potential investors:

Step 1: Find the overlap between your cash needs and your ability to fundraise

First, you need to start thinking of your fundraising strategy as an input to your business plan, rather than an output.

A fundraise is the equilibrium point between:

  • the cash you need
  • the check size that investors would write for your business

You’re seeking product-market fit, except in this case the product is your business, and the market is the venture capital market. The task here is to work out what it will it take, at each proposed round of funding, for your company (the “product”) to be sufficiently appealing to investors to write the check size that you need (the “market”).

That’s where you get Company/Investment fit.

Company-Investment Fit_Graph1

Let’s look at each side of this Venn diagram more carefully:

A. Your Cash Needs:

The required check size starts with summing up your cash flows until the next round, but it requires more strategic thought than that.

The real art here is understanding when that next round will happen.

You need to time your next round with a natural “gear change” for the company, where you have achieved enough proof points to justify a round to get you the next set of milestones (for example, expansion to a new market).

You also must build sensitivity around every part of this calculation: assume your fundraise will take six months longer, your CAC (cost of customer acquisition) will be 25% more expensive and your payback period is twice as long as you hope.

This is where you need to get real around cash burn, and potential cash burn, as it applies to the strategy you’ve laid out and the consequential operating requirements. It’s where you can clearly see that a significant competitive advantage can accrue from being able to do things with higher efficiency and/or leverage than competitors.

B. Your Investability:

The “Investability” side of this equation will depend heavily on your business, but there are rules of thumb (for example – raise 12-18 months worth of cash needs, and keep dilution to 20% in each round). It ultimately comes down to showing strong growth, long-term profit potential and a sustainable competitive advantage. While team is a major factor at the outset when track record is scant, milestones take over greater power as you climb the stages of development. Benchmarks are available for certain business types – Christof Janz has a put together a great one for SaaS businesses.

From there, this becomes more art than science. Look at recent fundraises from similar businesses. Understand where you sit on the Hype Cycle and position accordingly. Most importantly, shamelessly solicit feedback from industry insiders and even failed pitches.

Where your needs and investors’ needs meet, a check size happens. And that sweet spot is not a number to set in your spreadsheet – this is the limiting reagent of your business strategy and operations. The key question is: “what can we achieve with [X] amount of capital in [Y] amount of time?”

Step 2: Do it again

Now, it’s time to extend this thinking beyond your next round, all the way through exit-readiness. Plan out all of the future fundraises you’ll need if your business goes according to plan:

Company-Investment Fit_Graph2

Your business evolves over time – in this case, each fundraise is really a new version of your “product,” which will open up new potential investors.

This step is about aligning your ongoing cash needs with a few discrete fundraising events. Unfortunately, it has all of the complexity from the last step, but now everything is a moving target. Try to project ahead in both your operative markets and the financing markets. Figuring out whether the VC market is moving towards an investor-favored market or an entrepreneur-favored market will have a huge impact on your decision-making here.

For example, data shows that the next year or two may be an especially tough time to raise a Series A, so calibrate your plan to have a backup if your Series A takes longer than usual.

Step 3: Iterate

Now, go back and think critically about each of these fundraising events. If any round requires a check size that’s much bigger than your progress milestones can justify, you are lacking “fit” and you need to rethink that part of your plan.

Company-Investment Fit_Graph3

If you’re already running out of cash in your rosy business plan, you’ll never stay liquid when you’re spending real dollars. But this is why we plan ahead!

At this stage, you can adjust almost everything about your business to close this gap:

  • Move financings either earlier or later
  • Adjust your operations plan to reduce expected burn rate
  • Find a way to improve fundraising KPIs, such as user growth rates or addressable market
  • Adjust timing for key (or expensive) strategic expansions
  • Consider supplemental funding sources such as venture debt
  • Reconsider your company’s positioning with investors – this is indeed a factor in every pitch (more on this in a later post)

The key here is to think about your Company/Investment “fit” starting from Step 1 that will drive investor appetites.

If you already have investors, this is a great time to surface your concerns about the future pathway and possible stress points.

In addition to helpful feedback on your plan, you’ll gain insight into your investors’ long-term plans for your partnership.

And if you’re lucky, you may even get advance commitments for those future Venn diagrams.

Step 4: Throw the plan out

All done? Perfect. Now forget about it.

No battle plan survives first contact on the battlefield, and no business plan survives first contact with the target market. The financing plan you’ve just built depends on every other assumption you’ve made, and by the time you’re actually doing your Series B, it will be a different universe.

Company-Investment Fit_Graph4

But that’s ok – being a great entrepreneur is not just about planning, but about being able to persevere and adapt when things don’t go according to plan – which is where most fundraises happen anyway.

Why, then, did you spend the effort to build a financing plan at all?

First, because this depth of thought will wow VCs and other investors. It will show in your pitches and supercharge your fundraising.

Secondly, this exercise is the ultimate gut-check for “is this a venture-scale business?” If you’re not, this process will help you understand why most business should not seek venture capital.

Finally, the cash flows to shareholders are the alpha and omega of your startup, and this process helps you see the convergence of the streams. Looking at your startup within the constraints of capital promotes a “cost of growth” mindset. In this context, you’re well-equipped to evaluate your unit economics, cost of growth, marketing ROI and other fundamentals of your business.

For more information contact Sanjay Gandhi at sgandhi@oxfordvp.com. Avoid other fundraising pitfalls by visiting the knowledge section of the Oxford Valuation Partners website.

Startup Culture Podcast: Robbie Allen + Adam Smith of Automated Insights

Robbie Allen is the founder and CEO of Automated Insights (Ai), a company based in Durham, NC that is at the forefront of Natural Language Generation technology.  Ai takes huge sets of data and has algorithms that write prose in real time at amazing scale.  In this discussion, Square 1’s Zack Mansfield talks with Robbie and Ai’s Chief Revenue Officer, Adam Smith, about how the company started, how they iterated the product and culture over time and how they have been able to be successful both as a business and in keeping employees happy.

What to Do When an Investor Says No

We talk a lot about preparing your startup for fundraising. Preparing a pitch deck. Getting your financials in order. Tapping your network for investor introductions. Putting together a valuation of your business. There are many different angles you have to be aware of when getting ready for your big investor pitch.

But what happens if the investor says no?

There are several valid reasons that an investor will pass on your idea. It could be your product/service doesn’t align with their investment thesis. Or maybe the investor feels that your offering is jumping into a saturated market. And of course there’s always the chance that they just don’t believe in your idea. It happens. But that’s not the end of the road. You should be prepared for this scenario. Here are a few things to keep in mind:

Don’t Make It Personal

You have spent months or years pouring all of your effort into this idea. To have someone come along and say it’s not worth funding can be quite a shock. That shock is ok, but remember to keep your cool. Take a deep breath, and thank the investor for the consideration. Avoid being combative, or questioning the investor’s intent or pedigree. It’s not worth burning a very important bridge in the name of blowing off steam.

Ask Questions

Once you’ve caught your breath, don’t be afraid to ask questions if the investor’s reasoning wasn’t entirely clear. Do you need to rethink your go-to-market strategy? Are the financial projections not impressive enough? Suspiciously impressive? Getting clarity on why the investor passed on your idea can really help inform what direction you and your company should head from here.

Seek Referrals

Just because your offering isn’t a good fit for one investor, doesn’t mean that it’s unappealing to all investors. Even though the investor you’re pitching has passed, they may know of another investor – or investors – that would be interested in hearing your pitch. If that’s the case, respectfully ask for a “warm introduction” to make it easier to get another pitch meeting.

Keep At It

Don’t get discouraged! If you get turned down, find out what needs to be improved and get back to work. Just remember to carefully consider the insight you gained from having that face-to-face investor interaction, and come up with a plan that gets your startup to the next level.

Startup Culture Podcast: Kyle Porter of SalesLoft

In the first episode of his Startup Culture podcast, Zack Mansfield (@zackmansfield) has a conversation with Kyle Porter (@kyleporter), co-founder and CEO of SalesLoft. Kyle shares the origin story of SalesLoft and how he “almost ran the company into the ground.” A shift in focus to a values-centered approach was a transformational event for the company and has been a core reason for its success. Kyle shares practical tidbits on how he manages the team on a daily basis, how he evaluated shared values when raising $10MM+ in venture capital and the tactics he employs to lead the team in transparency.

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