SaaS companies are characterized as having the perfect business model because of both the recurring and compounding nature of their revenue streams. Relative to other businesses, they are capital-light and often generate significant cash flows at scale. Investors have become increasingly sophisticated at evaluating SaaS companies and the metrics to measure these businesses are becoming more and more well-known. However, the evaluation process still remains a mystery to many founders and we continue to hear that KPI benchmarks are tough to come by. IVP has had the privilege of evaluating thousands of SaaS companies and backing many of the top SaaS companies of the last decade, including AppDynamics, CrowdStrike, Datadog, Dropbox, GitHub, and UiPath, among others. While there is no magic formula for success, we created this handbook based on our experience to demystify the process and share some pro-tips.
Our process of getting to conviction has both quantitative and qualitative elements. Our quantitative analysis is primarily centered around exploring a company’s growth rate and sales efficiency as key drivers of product-market fit and go-to-market fit. In this handbook, we highlight key formulas and share proprietary benchmarks, while
also providing handy templates to illustrate how best to structure and present data. On the qualitative side, we’ll spend time with management, as it is critical that we believe we are backing leaders who can clearly articulate and execute against a compelling vision. We’ll also speak to customers to understand satisfaction levels and size a company’s addressable opportunity. Part of our overall assessment centers around believing whether a company can be 3x, 5x, 10x, or 25x larger on its key fundamental metrics and ultimately whether it can return one-third, half, or potentially the entire fund.
While it used to be that all of this work would kick off during a formalized 1-2 month fundraise process, rounds are now coming together much faster than before. Speed to term sheet is being seen as a competitive advantage and investors have inverted the sequence of diligence, doing a fair amount of this market-related work on their own in order to: 1) move quickly during a future process or 2) to preempt a round. Every investment firm has its own approach to diligence and every company can choose to run its own fundraising playbook. Our focus at IVP is to be company-friendly while doing the highest leverage work we need to gain conviction. While no fundraising process is the same, we believe that it is critically important to understand how investors will evaluate your business, which is why we created this handbook to arm you, the CEO, COO, or CFO with all that you need to be prepared for your next fundraise.