For many founders, the most frustrating part of having a big idea is not having the capital to bring it to life.
Luckily, the investor community exists for founders who don’t have the resources or patience to bootstrap their way to success. And while it’s a thrill to close any funding round, from pre-send to Series C and beyond, properly managing those infusions of cash layers on additional responsibility to founder teams.
Typically, each funding round aims to get the SaaS startup to the next level, ideally towards profitability and self-sustainability. The pressures of accelerated growth (to beat the competition and dominate the market) sometimes drive founders to overcommit to risky investments. Growing a team too quickly, overspending on CAC just to hit customer targets, or investing in “nice to have” features outside the scope of the ideal product roadmap are all examples of cash-burning overcommitments that founders may regret.
In other words, even with aggressive growth targets and cash in hand, founders must continue to spend wisely to minimize burn rate, monitor success, and pivot to grow. Successful founders navigate these challenges like an expert river guide on Class IV rapids.
Remember what the funding represents
Never forget that you sold a piece of your business to obtain this funding. Managing it is the equivalent of having a mortgage or credit card balance. It also means you’re indebted to someone else to make this work. That may help to motivate some founders but rattle others, who are dishonest about the current situation because they don’t want to offend or disappoint investors.
Rely on your funding resources
Investors want to see their founders succeed. And often, their experience and resources can provide support to help stuck founders problem-solve along the way. Tap into their expertise. Founding a company is like riding a never-ending rollercoaster. You cannot predict what’s ahead; you can only plan based on the intelligence you have today and prepare to meet the challenges head-on as they come.
Pre-seed Round: Under $1m raised
This earliest stage of funding, sometimes called the “friends and family round” of funding, represents the very early stage when founders convince investors to personally believe in their vision. A founder’s vision should include the innovative way they’re solving a specific problem, the best target market to buy that solution, and a general idea of how to create the MVP. Funding at this time is simply used to set up the company and get operations off the ground to support that vision.
Seed Round: Under $2m raised
At this point, founders have developed an idea that others think is good. They’ve gotten a seed round of investment funding from Angel investors who believe in the initial concept. Now founders must spend money on tightening up their minimum viable product. Mistakes that burn cash at this point include choosing the wrong dev shop, not having clarity in your product requirements, and creating custom code when you can integrate off-the-shelf pieces. Scope creep also drives up costs, and in the end, your MVP can end up being not very “V”.
Because of the need to gain customers, especially before the competition, founders must accelerate their product to market timing, even before it’s perfected. But that’s OK, as the feedback you get from actual paying customers is critical to your long journey in developing exactly what the market needs. After being named to the Latka500 Fastest Growing SaaS Companies of 2021, Hyperproof credited their 328% revenue growth to product feedback and support from customers and partners. Further, customers who feel they have a say in the development of a product are more likely to stick with that company instead of going to a competitor.
Series A: $3-15m Raised
Founders at this stage have launched their MVP, and are starting to generate revenue, but still have a negative cash flow. The purpose of the Series A funding stage is to demonstrate a product-market fit by acquiring customers beyond your initial early adopter fans. Product-market fit can be challenging. Software developer and entrepreneur Norbert Hüthmayr, who acquired and scaled tiny Android app AutoForward SMS to 16X revenue, shared with the GetLatka team that product-market fit is the most challenging part of the journey to success. He believes that if you’ve got a product that has found a market, you can shortcut the development phase to move straight to scaling.
If the fit isn’t obvious, founders need cash to buy time to validate product-market fit and move toward profitability. In this series of funding, founders will begin to experience more scrutiny from VCs who want to see frequent progress updates and actual data.
Hire talent, but protect your company culture
Founders need a bigger team to speak to a larger audience. That includes the traditional 4 Ps of marketing: product, pricing, positioning, and packaging. Founders frequently must invest in market research and testing, as well as in product development to improve the MVP.
An important lesson at this phase is to protect company culture, even when hiring. A startup SaaS can lose company culture quickly when bringing in massive hordes of people all at once. Why? Because the rookies seek guidance from one another instead of team leaders who are fully immersed in the company’s mission and vision.
Stay lean and scrappy
Do you really need to move into a fancy vanity office? The dot-com bubble of the 90s burst in no small part because founders burned money on high-rise offices in the priciest part of the city, filled with Aeron chairs and Herman Miller desks, complete with foosball tables, espresso bars, and massive entertainment bills. Hold off on upgrading until you’re genuinely solvent.
Watch your CAC
Prioritizing growth over revenue often leads to disaster. It can be stressful if you’re not acquiring new customers at the CAC you expect. It takes a while in any sales scenario, from ad spending for self-service platforms like LendingPoint, an AI platform for consumer loans that hit $600m in ARR in 2022 ,to outbound quota-carrying sales teams, to settle in and optimize. But even if a SaaS is closing deals at a reasonable CAC, things can change quickly. Every advertiser feels the initial pain of changes to the Facebook and Google algorithms that throw estimates way out of whack until the pricing finally settles down again (although maybe not as low as before).
Know when to pivot
Sometimes acquiring customers is just too expensive. Why? You might be targeting the wrong ones. Some founders, like Inflectra’s bootstrapping Adam Sandman bootstrapped, began by focusing on SMBs and mid-market enterprises, where he saw an obvious market gap. Along the way, Sandman evolved Inflectra into a $10m SaaS solution for complex regulated industries like defense contractors and banks. When founders have money in the bank, it’s easy to overlook these kinds of challenges. Successful founders monitor the metrics, and know when to pivot, even when there’s still cash in the bank.
Series B funding: $12m+ Raised
Many founders at this stage are landing and expanding after demonstrating a product-market fit. Investing in more marketing and sales to expand into new business verticals or geographic territories ASAP is a common approach.
Founders note that aggressive growth projections can get you more investment dollars but caution that such an approach also puts more pressure on the organization to succeed.
Yet, even though you have a plan, it’s easy to get sidetracked. With available funds, new possibilities arise that weren’t on your roadmap. Companies reach out to collaborate… for a fee. As the distractions increase, founders can experience FOMO if they don’t stay diligent. Stay focused!
Think scalability
Successful founders typically reevaluate their tech stack and internal processes and workflows at this stage to ensure that their business operations can scale. Additional customers and team members make systems more complicated, and what worked before may not work as you scale. Investing in the fix now helps prevent more significant problems later.
Series C funding: $100m+ Raised
Founders closing Series C funding and beyond are doing so to continue to accelerate growth, increase company value, and eliminate competitors. It’s the beginning of the sustainability phase. VCs at this stage tend to be larger and more demanding as the company moves into enterprise mode.
Funds are used at this point for:
- Continuing product development
- Product line extensions, especially for SaaS businesses building platform ecosystems like XYX
- Mergers and acquisitions
- Team expansion, with an emphasis on specialization over people who can wear multiple hats
IPO
Depending on market conditions, IPOs often follow Series C funding, although some companies continue to secure Series D and E funding rounds and more. At this stage, founders can get excited by looking at exit strategies, when the biggest focus is what the transition from private to public looks like.
Public companies face a whole host of complexities as companies deal with shareholders as well as investors. In preparing for an IPO, founders must focus predominantly on making their company look good before opening it up to public scrutiny. All metrics must be aligned and defensible. And once the IPO hits, companies must announce updates quarterly on their progress toward sales goals.
Each funding round brings promise for a new day, while representing a new set of distinct challenges for founders. No matter the round, successful founders manage the metrics, stay focused on the round-related goals, and have the presence of mind to know when to pivot.
