In the game of baseball, there are two ways to play offense: swing for home runs or load the bases.
When you’re trying to grow your tech or SaaS business through the tranches of fundraising the key is to focus on one base at a time, says Mark Peter Davis, founder of Interplay Ventures.
“From your friends-and-family angel round, to your seed round and your series A and B, the game is to understand the criteria for getting that next round of capital,” he says. “Your objective in each phase should never be to build a big company; that's implicit. The explicit objective is to prove the milestones that allow venture capitalists to comfortably finance you.”
Davis is also the managing partner at Interplay Ventures—a New York City-based innovation hub that incubates, cofounds, and invests in burgeoning companies of all kinds. It’s one of the largest providers of services to venture-backed businesses in the United States, from basement start-ups to public companies.
In the past eight years, Davis and his team have worked with tens of thousands of new businesses.
“If you're not in the venture capital market, you're probably less aware of how many people are trying to start things,” he says. “It's very inspiring because even if a small percentage of them hit, society will be changed and be better for it.”
A sampling of Interplay’s SaaS and subscription-based success stories include companies like AdHawk, Course Hero, and Provi, among others.
“I think entrepreneurs have been creative in thinking about how to construct revenue models that are recurring because it's easier to manage cashflow and to scale the business,” says Davis.
The problem with a lot of SaaS subscription businesses though is they try to hit that home run right out of the gate. They try to skip over the step of understanding and fulfilling the criteria necessary to prove their next milestone. And they don’t do the things they need to do to help demonstrate the unit economics of their business, he says.
You want to show that for every dollar you spend, you make some predictable amount. And to understand that, you have to show customer acquisition cost, lifetime value, retention rates, and a number of other standard SaaS KPIs that everyone tracks.”
That’s the goal in that first cycle; to show those numbers. The second goal is to show that those numbers are repeatable and that your business’s processes are scalable, he says.
“One company I talked to recently hired a bunch of friends for free to go to all the college campuses and tell everyone to sign up. But the problem was, while that worked, it wasn't the way they were going to acquire customers in the future.”
It’s all about math and proving your revenue machine works and is scalable before testing new avenues to push your growth.
“That allows investors to say, ‘hey, no brainer. When I give you money, you make me money, so let's, let's do more of it’.”
But of course, building a strong, reliable revenue engine at the core of your business takes talent and resources which come with time and monetary costs.
1. Build a lean, flexible SaaS team by outsourcing early on
Ten years ago, the conventional wisdom in the business world was to keep everything in-house. Those days are gone.
From the early stages of a SaaS business’s development, outsourcing talent can provide a full range of specialized expertise to foster rapid growth and success without the costs and limitations associated with full-time internal hires.
The companies that do this early will generally pass other companies that are not, and they’ll have more money to spend on marketing and other things that are core,” says Davis. “They also spend less time cleaning up mistakes on their team.”
So what areas of your business should you focus on outsourcing first? Almost everything is on the table, says Davis.
“The area between being able to automate it and just needing human logic to deliver something with competency is the perfect sweet spot.”
Most businesses aren’t yet aware of the options available to them regarding outsourcing. But there’s a mind shift happening, and more sophisticated entrepreneurs are taking advantage of it as a competitive solution, he says.
“They're really being lean about who's on the core team, and it gives them a tremendous amount of flexibility. It allows them to adapt and be very agile as an operation.”
Interplay Ventures is involved with a company called Spoke that enables companies to outsource key functions—from customer service to data science to capable teams—at a fraction of the cost, says Davis.
Another way to support the rapid growth of your SaaS business is by fully leveraging the potential value of every customer you acquire.
2. Increase the lifetime value of SaaS billing customers with alternate revenue streams
If a business has the bandwidth and the opportunity, there are often creative ways to weave in other revenue streams, says Davis. Doing so not only complements the lifetime value of your customers, but it also increases your competitive advantage.
“We have an insurance brokerage named Founder Shield that builds custom insurance products companies sell to customers,” he says. “For example, a customer of a software might need insurance for the risks or liability that software might create within their organization. Not the software itself, but around the function it provides. The software provider can say, ‘if you want to get the bad outcomes within your organization insured, we have a custom product for you.’ The software provider is able to tack it on and generate additional revenue.”
It all comes back to being able to spend a dollar and make three, says Davis.
It’s a race to buy customers, and if you can expand the value of your customers on the back end by outsourcing and implementing alternate streams of revenue, then you create the opportunity to spend more to acquire new ones.
“That is a huge competitive advantage when it comes to growing your company,” he says. “Think about it. It could just be one simple brainstorming session and a little bit of work to set it up, and it can really have a very positive impact on your company's KPIs.”
Once you’ve put in the effort to maximize your customer lifetime value and reach your revenue potential, you may determine it’s time for an outside capital investment to take your business to the next level.
3. Explore all your financing options to scale your SaaS Subscription Business
Growing SaaS businesses should be aware there are financing options other than selling equity to venture capitalists, says Davis.
“They've heard venture capital for a long time, and 90% of the time that's the right choice,” he says. “But there's an array of different types of constructs through which people can get capital that are not equity dilutives.”
Each of these constructs has slight variations and differing pros and cons depending on your business’s situation. But since these options aren’t venture capitals, they aren’t investing to buy equity in your company. Instead, they may be giving you money as a loan, or they may be buying future cash flows from revenue.
Revenue-based financing is often a great option for SaaS companies, says Davis.
With revenue-based financing, a SaaS company can take in X million dollars, and what the financier is buying is a share of the future revenue flowing into that business. This allows the SaaS company to then take in additional capital—maybe between financing rounds if it’s tight, or in a recession when there's not as much capital available—in a non-dilutive way, he says.
“The key takeaway is to know there are financing options other than selling your equity to venture capitalists. And they're not one-size-fits-all. Our company Chelsea Capital helps companies navigate and secure these various types of financing.”
But if you’ve done your homework and determine that venture capital is the right way to take your business to the next level, how do you position your business as an attractive option?
Davis and his team love companies with all the usual things investors look for, including an impressive team, a great product, a large market, and market fit. But they’re also very focused on the fundamental KPIs.
“We like to know that the engine is really working,” he says. “We like to see enough traction to know the marketing equation is profitable. That every time they spend a dollar, they make three. For most companies the best path to getting this right is hiring a great marketing agency. We launched Firon Marketing to help founders dial-in their marketing efforts to ensure that it’s profitable and scalable.”
Then they start to look at the lower-level KPIs that feed into that equation to ensure they’re rational and make sense.
“When we see those things in alignment and a healthy growth rate in a big market, we're usually pretty excited to invest.”
4. Get the help you need to grow
Of course, growth isn’t just about having the proper financing. It’s also about having good strategy and support to drive your business in the best direction.
“One of the critical success factors for founders is to be humble and not to have a lot of ego,” says Davis. “We're all navigating challenges as business leaders that we don't have full visibility into. If you think you know it all, you don't.”
It’s up to founders to have an awareness and understanding that difficult challenges lay ahead of them, and that they need to seek help when required. Davis recommends joining a peer support group.
“I think the best support a founder can get is from other founders because the situation they're living in is a lonely one,” he says. “They can't communicate authentically very often. So to have a safe environment where they can speak to other people dealing with the exact same kinds of challenges is the only path to getting full support.”
Establish strong fundamentals at every growth phase
There’s a very specific set of expectations investors have that helps them determine whether a company is viable at each stage of its journey, says Davis. You have to be able to demonstrate the unit economics of your business, and you have to show they are repeatable and scalable.
SaaS businesses need to reorient from, ‘build the biggest thing however you can’, to really confirming the mechanics of how they function, he says. By ensuring they have solid fundamentals in place at every phase, SaaS businesses place themselves in the best position for growth. And, if needed, obtaining that next round of capital.