How to avoid getting caught in the vicious cycle of desperately chasing SaaS funding?

If you look at the funding needs of your SaaS business – is it driven by desperation or from a source of strength?

Answering the question is an easy one. It’s a feeling that’s pretty black or white.

For many SaaS founders, unfortunately, the feeling is one of increased desperation. And more often than not, it’s a result of many things that are just not working as they hoped.

Every month, the situation gets a little bit worse – driven by internal and external conditions resulting in compromised top-line revenue, sub-optimal margins, and non-predictable cash flow.

Here are some of the causes I often see:

  1. Low sales performance – indicated by indecisive prospects.
  2. Compromised margins – due to the too high cost of sale, excessive discounts, and high cost of implementation and customer support (in comparison to the SaaS fees)
  3. Poor product adoption (breath & speed) – often due to poor product market fit
  4. Higher than average customer churn – often due to poor customer fit or an inability to satisfy customers’ needs that, honestly, be better off with the competition.

This is just a tiny subset of the things you can control internally.

More often than not, however – this picture is challenged by what’s happening externally. The things we can’t control

  1. The shifting economic or political conditions as we’ve recently seen again. What was mission critical last quarter suddenly becomes the lowest priority on their agenda (and visa versa)
  2. The speed by which technological development changes the norms. So, what was state of the art last year isn’t anymore today. This also constantly reshapes the competitive landscape.
  3. The constantly evolving regulatory landscape doesn’t make doing business easier either.
  4. And last but not least: The influence of investors. No matter how aligned you are – their agenda is different—the result: Feeling squeezed between a wall and a hard rock.

Put this together, and you got the perfect cocktail of complexity. The pressure to meet expectations often forces us to make decisions to fix the short term, that harm our long-term trajectory. And suddenly – what looked like a position of strength at the start- turned into desperation to fill the unsatisfiable need for more funding to keep the business alive …

How do you avoid this? – that’s the big question.

That’s what I aim to answer in this blog. Here are the 7 habits to embrace.

Habit 1 – Pay attention to the signals

In one of my calls with a startup CEO recently, I asked: “What’s the biggest challenge you have to overcome to achieve your aspirations?”

Without hesitating, he answered: “Money…. and time…We need funding to accelerate. And time is not on our hands.”

I hear this so often. And so, my next question was: “Do you have enough traction already so that you can leverage that funding to make that little fire a big one?”

He answered: “We have traction – about 100 registered companies, of which 60 are paying.”

“Was this hard to achieve?” I asked.

“No, it wasn’t,” he replied, “but most of them are small, about $50.- a month, where we want to be around $1000 MRR, and ideally into the thousands.”

“What do you think is stopping you from achieving that?” I asked

“Getting noticed,” he replied

Now let me pause here. Cause what we see here is a vicious cycle that’s killing many SaaS businesses.

  1. There’s traction – but with the wrong audience.
  2. Not enough money is coming in i.e. runway is running out
  3. This drives the desperation for funding
  4. And then we use that funding to fuel the wrong fire.
  5. Sooner rather than later: Repeat

Then, later that same week, I talked with a B2B SaaS CEO whom I greatly respect. He told me about the rollercoaster he’d been through recently as his business got stuck meeting growth expectations.

The only way out was: more funding to make the necessary turnaround investments, reorganize and avoid running out of runway.

I have nothing against funding as long as it’s a choice – not a necessity. But more often than not – that’s not the case. It becomes an all-or-nothing thing. And it drives people nuts.

Hence, I asked him the question:

Why do you believe so many SaaS businesses end up in this vicious cycle of desperately chasing funding?

Here are some of his answers:

  • “We were trying to aim too wide. Just because we can solve unique problems in multiple industries doesn’t mean we should. It’s not scalable; hence there’s no leverage.”
  • “Positioning was off (or non-existent) – This created confusion and mismatched expectations, and an inability to develop fans from the start.”
  • “Lack of alignment across all departments about what business we were really in – leading to internal confusion and lots of external repairing.”

There’s already a pattern here. It all comes down to deliberate focus

  • Acknowledging that you can’t please everyone – and that’s OK.
  • Acknowledging that taking position makes the business stronger in all aspects
  • Acknowledging that a business is as good as the sum of its components. Aligning everything and everyone results in more impact, and velocity.

So my question is: How to get out of this vicious – super stressful loop?

And here are three foundational.

  1. Stop trying to please everyone – clarify who you are ideally for
  2. Define what’s their most valuable and critical problem to solve
  3. Solve that in a way that exceeds their expectations by a big factor

What will happen is this

  1. The right audience will find you – for the right reasons (not for cool, but value)
  2. They’ll happily pay a premium
  3. They’ll become your fan, come back for more, and bring their peers
  4. That will help build the flywheel to fuel the business

Start small – grow from there.

 


My question for you to reflect upon:

What’s the biggest challenge you have to overcome to achieve your aspirations? What could be wrong at the core if it’s money and time?


Habit 2 – Maintain a healthy mindset about funding

I asked a 4-times tech-founder for his view on funding. And his answer is worth sharing.

“Funding is really not a good model for an innovator. You may have an idea, and you know that to complete that idea, you’re going to need $10 million. But if you decide to raise that $10 million because you’re in the valley, and that’s what they want you to do, you’re putting the math in their court. The deal is on their terms, not yours.

Here’s the thing:

Sure, it’s tempting to negotiate some high valuation, but when you’re early stage, you’ll put a noose around your neck that will only pay off if you know how to spend money effectively. If they’re confident you will create the +10x valuation you agreed upon, great. But if you can’t create that growth, you’re in trouble. It’s one thing to raise money, it’s another thing to create the value that the investors who are putting that money in are expecting.

And that’s exactly where things go wrong – and with that, no one wins. The problem is, VCs calculate that 99 out of their 100 investments fail. A better ratio is a bonus. That’s not the motivation of any entrepreneur.

How to go about it?

  • Understand your position. Are you coming from a position of strength to set the terms or are they?
  • Deeply understand the deal that you’re making for the money you’re going to raise.
  • Think ahead. Once you’re in the funding loop – it’s hard to get out. You’re expected to raise again – and again. The bar will only get higher – and dilution will only get worse

If you’re smart as an entrepreneur, the best relationship you’ll have with VCs has got to be a love-hate relationship.

 


Question for you to reflect upon:

Imagine you’re starting a funding round in Q1 2023 – what can you still change to put the math in your court?


Habit 3: Keep challenging yourself: “Fundraise or bootstrap?”

“I’ve got to be very conscious of the competitive situation at the moment. More competition is entering the market, kicking off what in the category creation world would be the two-year war to see who will win.”

Imagine the dynamics in your market would change overnight and create a category war: What would you consider: External funding… bootstrap…., anything else?

What would you double down on, and what would you be willing to give up?

This was one of the challenges we addressed in a recent CEO Mastermind session. Let’s look at the case again:

What was the urgency? “The category leader takes 73% of the economics of the market. If we’re not that one, some VC will mint a winner”

What’s at stake? “We’ve been generating cash for the last 18 months – so don’t need the raise. But we cannot not be the minted winner.”

What’s the problem? “Last year’s growth was 30%, this year it will be 130% – though VCs expect 300% YOY. It’s public sector led – a capped and slow market.”

Here’s the thing:

It’s a real dilemma: Betting on higher valuation and speed versus creating value and building a sustainable business around a meaningful mission.

Being a SaaS CEO, you can feel torn between two sub-optimal decisions. It’s where true leaders rise to the table – and make the right decision – whatever that is.

  • Staying true to the mission vs. prioritizing (valuation) money
  • Prioritizing rapid growth over building a sustainable (profitable) business
  • fighting for dominance in a dense market vs. having a first-mover advantage in a new market
  • Going all-in on one use case or placing your bets on multiple options.

The lesson I have learned from all the hundreds of SaaS CEOs that I’ve interviewed and worked with every week is: Traction before funding. Period.

  • Find the product-market-fit.
  • Get some larger fires burning (ignore your whale account – create genuine pull around your product)
  • Do things that don’t scale yourself to deeply understand what works and what doesn’t.

Then decide.

That way you have a much stronger negotiation position (IF you consider funding).

And you can properly target where you invest your funding to make those smaller fires ….big fires.

 


My question for you to reflect upon:

If you could grow as fast by continuing to be bootstrapped – would you take that shot? What would have to be true to do so?


Habit 4 – Stay obsessed with the right thing

In a recent CEO Mastermind, we focused on a case study about what it took to turn a failed startup into a success.

Here’s some background. It concerns an analytics platform that got early traction and collected $28 million between 2015 and 2018 but had to throw the towel into the ring shortly after the last round.

Long story short: A new owner picked up the leftovers and turned it into a glowing success in just three years with benchmark unit metrics.

The big question: What made the difference?

In short, here are the three main changes made:

  1. Instead of being obsessed with chasing large top-down Enterprise deals, they started fueling bottom-up momentum by serving ‘the underserved’ with a land-and-expand approach.
  2. They turned a ‘we know what the market needs’ development mindset into an iterative discovery-led approach listening for the essential signals from their ideal users.
  3. They stopped comparing their progress to others in the industry based on how much money we’ve raised and started focusing on how much value they’d created for each customer.

Key takeaway:

Three issues were about changing the mindset from status-obsessed to customer-value-obsessed.

Here’s the thing

Through the status obsession of the previous owners, they got giddy with the amount of money they raised, got blind to what was essential, spent it their funding on the wrong things, and got themselves into trouble meeting the raised valuation expectations from their investors. End of story.

 


Question for you to reflect upon:

What mindset is driving the critical decisions in the SaaS startup you lead? What would your customers say?


Habit 5 – Apply an outside-in approach – always

One of the subscribers to my Daily Reflection wrote this:

“Two years ago, I approached a non-profit association of pharma execs (my target market) intending to sell them my core product. So, I started the conversation, asking them whether they struggled with this and that technical problem.

Their feedback: “It’s interesting, but we need a solution that solves this problem. Could you build that for us?”

Luckily my ego did not get in the way, and I started building the solution for that problem. Long story short: I now have a profitable SaaS company that sells what they asked me to build to an audience ready to buy.

The big lesson I learned is: ASK your target audience first. Then volunteer your work for a while, building what they want. It will grow trust among you. And those prospects will easily, without any sales team, migrate into paid customers.”

Here’s the thing:

Escaping the vicious cycle of chasing SaaS funding starts by building something that’s solving a problem that’s both valuable and critical to your ideal customers. Of course, they’re the best to tell you what that is.

Once identified, then it’s your job to build it in a way that exceeds their expectations. Something that, when they start using it, they cannot live without it anymore. That’s where the magic begins: the kick-start of your flywheel.

 


Question for you to reflect upon:

Does the SaaS product you bring to market tick all three boxes? Valuable, Critical, Exceeding expectations? If not – what could you change?


Habit 6 – Be guided by your Unit Metrics

A critical component to escape the vicious cycle of desperately chasing SaaS funding is to have high confidence in a straightforward question:

“Can we make more profit from our customers than it costs us to acquire them?

How will you know? It’s where Unit Metrics come in – and more specifically, these two:

  • LTV – the Lifetime Value of a typical customer
  • CAC – the Cost to Acquire a typical Customer

A quote from last week’s CEO Mastermind gives some valuable context about the importance of Unit Metrics:

“I think about unit economics in two ways. The starting point is value. What is the value you’re going to create for the customer? How much is it worth to them? Because that’s going to set the bar in terms of how you establish the price.

And then the backside of that is, what will it cost you to deliver that? If it costs us 500 bucks to land a new user for a $150 subscription in a new company, we better have a renewal rate of 90 plus percent, and we need to have an expansion rate that will grow those seats to pay off. So, I am all over my team 100% of the time, that we ensure high renewal and expansion rates to afford the cost of selling.”

Here’s the thing

I noticed that many B2B SaaS entrepreneurs are over-optimistic about how much it costs to acquire a customer. There’s a strong belief customers will be so excited about what they have built that they will pull it out of their hands. But unfortunately, that reality is often very different…

 


Question for you to reflect upon:

What’s your current sales cycle telling you about the % of hard-gained customers who will happily renew and expand? What does that tell you?


Habit 7 – Dare to say No at the right moment

Last week, one B2B SaaS CEO in my network said this:

“I tell my Sales team – If you sell a deal you don’t think you can renew, I don’t want you to seal the deal. I don’t want that ARR. I do not want revenue today that I can’t renew tomorrow.”

This might make you think: What?! revenue is revenue, right?

Short-term yes, but beware of the consequences.

Renewals and expansion are the essentials that will create your growth down the road.

Now, if you can bootstrap and don’t need money, this might not be that important to you. But if you know you’ll need investment capital, you’ve got to be very conscious.

Here’s why:

“Fifteen years ago, all the investors in technology were technologists. They had built previous companies, and they understood the problem you’re solving. All the investors today are young hotshot MBAs. They are very metrics driven. That’s all they care about because they don’t understand what you’re doing, your technology, or your customers. The fact is, they can read a chart and see ARR, Gross margin, Cost of Customer Acquisition, Renewal Rate, and Net Expansion.

So, depending on wherever you are, in the funding cycle, be conscious of your core SaaS metrics because that is what the investors will hammer you on.

They’ll line up to invest in you with 10X valuations if your metric performance falls into the category they call Investor-class metrics. But, conversely, suppose you fall just a little below those metrics, none of those investors will talk to you. You’ll drop into a whole different class of investors; I’m going to call them ‘bottom feeders”, who will want to invest in you at <2x, i.e., a significantly reduced valuation.”

Here’s the thing

If you can’t maintain a Net Renewal Rate above 90%, you got a problem.

If you get a Net Expansion of well over 100%, you got a problem.

What is it that drives renewal and expansion? Its adoption. You got to understand users to create the functionality that will drive adoption. Adoption is going to drive renewals and expansion.

 


So my question for you to reflect upon:

On a scale of 1-10, how happy are you with the speed and breadth of adoption of your SaaS product? What can you change tomorrow to improve that?


In Summary

Every SaaS business has funding needs. Obviously – and it starts on day one when we embark on the journey to find product market fit. But there are two sides to this: do we start from a position of strength – or does this become a torturous journey of chasing money out of desperation?

It is possible to start from a position of strength – and strengthen it along the way. And as outlined in this blog, it’s about paying attention to 7 different habits:

  • Habit 1 – Pay attention to the signals
  • Habit 2 – Maintain a healthy mindset about funding
  • Habit 3 – Keep challenging yourself: “Fundraise or bootstrap?”
  • Habit 4 – Stay obsessed with the right thing
  • Habit 5 – Apply an outside-in approach – always
  • Habit 6 – Be guided by your Unit Metrics
  • Habit 7 – Dare to say No at the right moment

As with many things, the power is in the mix – make each habit work for you – and your strength will build. Then you have choices. And choices is what it’s all about.

Stop the vicious cycle of desperately chasing funding

Start choosing your funding from a source of strength.

Good luck

 

 

Additional resources to prevent you from getting caught in a vicious cycle of desperately chasing SaaS funding

The easiest way. Book a free call to explore if there’s a fit to do this together.

Otherwise – here are three other options

 

A daily email for B2B SaaS CEOs who want to end unpredictable traction.

About the author

Sales Pitch

Ton Dobbe is a former B2B software product marketer who's on a mission to save mission-driven SaaS CEOs from the stress of 'not enough' traction. He's the author of The Remarkable Effect, the host of the Tech-Entrepreneur on a Mission podcast, and writes a daily newsletter on the secrets to mastering predictable traction.