For SaaS finance leaders, your stage of growth makes a huge difference in determining what your organization should focus on. A small business seeking product-market fit will have considerably different priorities than a late-stage startup with growing market share, which in turn has different goals than a company approaching an IPO.
In this post, we’ll walk you through what success looks like at each development stage of a SaaS startup’s company lifecycle. We’ll also provide some insights into venture capital funding. Specifically, we’ll cover how you should handle strategic planning for resource allocations and organize the operations of your business at each growth phase in the business life cycle.
How is venture capital funding handled for SaaS startups, and what are some key benchmarks?
SaaS startups typically seek investment capital throughout the various stages of their company lifecycle. This is known as “series funding” because it occurs in a progressive series of funding rounds. In each round, investors might fund the company’s further growth for a year or two and will have specific performance expectations.
If those expectations aren’t met, the next stage of funding is jeopardized. For this reason, venture capital funding is also sometimes referred to as “gated capital,” because the next phase of funding is gated by investors’ performance expectations.
After an initial round of informal pre-seed funding, the five main stages of a SaaS startup’s company lifecycle include:
- Seed: At the seed or introduction stage, organizations are usually not too far past their first year and are seeking as many new opportunities as they can find. Companies at this lifecycle stage are still establishing a strong product-market fit, looking for potential buyers, and fine-tuning their value propositions to raise further rounds of funding.
- Series A: Typically, a series A funding round occurs when organizations have accrued roughly $1M in annual recurring revenue (ARR). Employee headcounts for this company lifecycle stage average around 50.
- Series B: This funding round is usually sought once you’ve hit about $5M in ARR and have an employee headcount of around 125.
- Series C: Organizations at this company lifecycle stage average about $20M ARR with approximately 300 employees.
- Pre-sale or Pre-IPO: As far as venture capital funding for SaaS companies is concerned, a sale or IPO is the final company lifecycle stage. An organization that’s a realistic IPO candidate will usually be a mature business with about $100M in ARR and somewhere around 1,000 employees.
Let’s look at some strategies that SaaS CFOs can use to maximize the success of venture capital funding. After that, we’ll go through a roadmap of each startup stage we just listed and review what your core goals should be for each one.
Venture capital funding best practices for SaaS CFOs (get to the shake-out phase faster)
Venture capital funding for SaaS companies is a layered process, so it helps to have a few rules to follow as you progress through your funding rounds. This will help you reach the shake-out phase as quickly as possible. For SaaS companies, this is the “breakthrough” moment in their development when they shake out their competitors and start to be seen as one of the clear forerunners in a product niche.
Below we’ll cover some fundraising best practices for SaaS CFOs. After that, we’ll walk you through the ways your goals and benchmarks change as your organization reaches maturity.
Pace your funding by company lifecycle stage
One of the most critical roles of any SaaS CFO whose company engages in fundraising is to manage the pace at which funding is acquired. At any stage in the company lifecycle, there’s always the risk of a SaaS startup taking on funding more quickly than it can deliver results.
It’s your job as a CFO to help your organization find the sweet spot between quickly raising capital without biting off more than it can chew. Automated forecasts and reports help finance leaders prevent that by providing clarity around financial results and plans across your company lifecycle.
Ensure consistent data transparency across the maturity lifecycle
As you progress through the company lifecycle from seed funding to IPO, it’s critical to keep your organization’s data organized effectively. Cloud-native accounting solutions are one of the most common ways CFOs streamline their data collection and management.
There are two primary reasons for this:
- 1. Increased communication speed: Data siloing and disjointed data updates make effective communication difficult. Fast and effective communication between teams is vital for achieving growth and hitting your financial goals.
- 2. Manual error avoidance: As SaaS organizations scale across the company lifecycle, the amount and complexity of their financial and billing data rise rapidly. Relying on manual processes to organize and use data greatly increases the risk of accounting errors and the wasted time and resources that accompany them.
What else do SaaS CFOs need to do in order to steer their company through the various funding stages?
Create clear and effective investor reports to set your organization apart
Investor reports that prioritize financial storytelling achieve far more than reports that just give dry data. You should make sure your investor reports use data visualization techniques such as graphs, charts, and dashboards.
This turns raw financial information into a compelling story that your investors and board can quickly and easily make sense of. It also helps you paint the picture of where your business is heading, which is at least as important to investors as your present financial performance. Visualization tools combined with SaaS metric dashboards streamline and clarify financial reports.
Now that you know some best practices to follow for more effective fundraising through your company lifecycle, let’s dive into how your objectives shift as you progress from an early-stage company to a late-stage startup, and from there to an IPO or sale.
Series A goals for venture capital funding
Series A funding is the funding round that follows a company’s seed round. If you’ve reached this company lifecycle stage, it means you’ve established a strong product-market fit. You have some customers who love what you do, some early supporters who believe in your company, and you’re ready to see things grow even more.
The primary goal for your Series A round should be to prove your revenue model to investors. Your company has already proven that it can create a viable product–but product development and consistent profitability through effective revenue modeling are two different things.
You should aim for 100% growth as your ideal benchmark for this funding round. Equally important to overall growth, though, are your growth rate and pattern trends. If your organization achieves stunning growth and then starts to sputter out, that previous growth won’t mean much to investors or to your company’s bottom line.
Consistent and reliable–but still impressive–growth rates are what investors want to see at this stage of your company lifecycle. 10-20% monthly growth rates that culminate into a strong overall trajectory are ideal here.
You’ll also need a consistent and profitable go-to-market motion by this point in your company lifecycle. This means you have a repeatable and reliable strategy in place for getting your products to your buyers.
Series B goals for venture capital funding
When the time for your Series B funding round arrives, your main objective switches to proving your net expansion revenue model. Basically, proving your revenue model for your Series A round was all about showing investors that you can repeatedly generate revenue. Your net revenue expansion model, on the other hand, is about showing investors that you can turn your customers into loyal repeat buyers.
Your net expansion revenue is the cash flow you’re able to generate from cross-sells and upgrades. For your Series B round, investors expect to see customers buying from you for a second or third time, purchasing additional features and upgrades, and showing others signs of long-term interest.
Automated forecasting is one of the most effective ways to prove your net expansion model to investors. It allows you to generate highly accurate forecasts in a matter of seconds by just entering your initial data. Startup investors prioritize hard data, and cloud-based forecasting is a good way to give it to them.
Series C through F goals for venture capital funding
By the time you reach your Series C round, you’re considered a late-stage startup. During rounds C to F, aim for $100M in gross revenue. Your use of resources should be highly growth-oriented at this point.
At the Series C point and beyond, investors want to know that your company’s go-to-market strategy and revenue model check three vital boxes:
- Profitablity: Customers love your products, are highly engaged with your brand, and show brand loyalty by upgrading their subscriptions or taking advantage of cross-sell offers.
- Predictablity: By this point, you will have likely brought several products or different product iterations to market. Investors want to know that your customers maintain a predictable level of interest in your rollouts over time.
- Repeatablity: It’s critical to show investors that you’ve built a revenue model that can smoothly scale across time through steady repetition. Investors don’t want “one-hit wonders,” they want companies that have built a proven, repeatable revenue strategy.
Once you’ve accomplished all this, it’s time to start thinking about going public or making an exit. Alternatively, since companies at this stage usually have enough revenue that they no longer need funding, some simply continue operating.
Late-stage startup approaching an IPO or sale?
This is the culmination of your company lifecycle. Organizations that have made it to this point should focus on strategic expansion and positioning initiatives.
These could include:
Acquiring other companies.
Acquisitions can be a highly effective method of revenue expansion. As SaaS organizations reach the later stages of their company lifecycle, some raise funding rounds specifically for acquisitions.
Expanding into international markets.
International growth represents an important revenue source for companies at this lifecycle stage. At this point in your company’s journey, you should make sure your department can handle multi-entity accounting.
Exploring new but adjacent niches.
Companies at this stage should be investing heavily in product research and development. This will allow you to make accurate and profitable decisions about product and customer niche expansions. Investors at this stage want to see that you can profitably enter new markets.
If you can achieve all of this and make your way to $100M ARR with roughly 1,000 employees, you’ll be an attractive candidate for an IPO.
Learn to succeed at any company lifecycle stage
No matter what company lifecycle stage you’re in, there’s one rule that always applies. Don’t lose sight of your organization’s trajectory by getting tunnel vision around your current funding stage. The most effective SaaS CFOs know how to plan meticulously for the future while staying firmly rooted in the present. Additionally, taking the time to get comfortable with the latest accounting tools and technology will help you avoid the setbacks and growing pains involved in venture capital funding for SaaS companies.
The Modern SaaS Finance Academy provides cutting-edge courses for SaaS finance and accounting leaders at any stage of their company lifecycle. Learn actionable tactics on how to hit your funding goals for each round, the hiring moves you should make as you scale, and much more. Patterned off the success of the Hubspot Academy, but for SaaS CFOs, Controllers, RevOps, FP&A, and CEOs, it is free, and offers the option of CPE credits.
To join the academy today, click here.
Modern SaaS Finance Academy
The Modern SaaS Finance Academy is a free online training hub designed for CFOs, Controllers, FP&A, Revenue managers, Revenue Operations, and other members of the finance community in fast growth SaaS companies.