Xavier Fuya

Associate

22nd July 2021

5 things startups should do after securing funding

Session 3: “After DD” 

? Hi All! Here we are once again with our Takeaways from our webinar series on due diligence hosted by Nauta Capital and Metrix Partners 

This third and last session took place on 7th July 2021 and it was led by Jordi Pedrol , Founding Partner at Metrix Partners, and Borja Breña, Principal at Nauta. We must admit that we feel a bit sad because this webinar series on “How to master the investment Due Diligence for your SaaS startup” has come to an end. We really enjoyed both preparing the content and the interesting discussion and Q&A. But don’t worry, we have other exciting stuff in the pipeline and we hope to see you all again soon (after the summer break ?). 

The materials of this third and last session “After DD”: 

  • Webinar recording here 
  • Presentation slides here

As always, a quick reminder for those of you joining us on this webinar series for the first time:  

  • Session 1 – Before DD: We touched on why preparing for DD is important. In the end, people buy from people they trust. Fundraising is a sales process, and you need to prepare in advance and organize yourself to gain trust. Takeaways, video and presentation here. 
  • Session 2 – During DD: Take your DD seriously, it is a necessary pain to close the round, and if done properly it will add value. Takeaways, video and presentation here 
  • Session 3 – After DD: Once you have closed the round, the clock starts ticking: you have 18-24 months to create optionality and get ready for the next round. In this session, we give you some tips on how to do it:   
  1. What it means to become fundable in the next 18-24 months 
  2. How to execute on the Business Plan 
  3. Focus on scaling finance operations 
  4. Exploring non-dilutive additional funding 

No need to say that building a company is a very long and hard journey. That is why we need to do anything we can to increase the probability of success. Remember that 77% of the companies that start the VC journey will either go out of business or will become self-sustained. Both Nauta Capital and Metrix Partners have worked with companies that have managed to grow from Seed to Series B and beyond, as well as with other companies that are on a good track to beat this statistic. Onna and ForceManager are two examples that both Nauta and Metrix are proud of having supported in their journey ?. 

? Section 1: Becoming fundable in 18-24 months  

Congrats, you have successfully closed your round: now is time to continue running!  

Do not forget that real success is not defined by the money you raise, but by how you deploy the capital and reach your milestones. The funding round is actually “Milestones Funding”: the investors have provided you with capital to reach the next fundability point whilst creating optionality for the company within a limited time period (usually, 18-24 months). You are not funded forever or until you become EBITDA positive.  

In general, to raise the next round, you will need to show the following:  

  1. Strong and consistent revenue growth.  
  2. Show that this growth is efficient and scalable, from the perspectives of both go to market and cash. 
  3. Good Net Revenue Retention as a key metric of the quality of your product-market fit 

Cash is king, therefore always keep track of cash reserves and anticipate the cash break point. Cash runway is correlated to the amount of pivots/changes you can introduce in the business to validate your hypotheses and reach the milestones. You don’t want to be in the difficult position of running out of cash without having reached your milestones. You can end up out of business if you can’t show proper evolution.  

? At this stage you should focus on:  

  1. Setting meaningful and ambitious milestones. These milestones depend highly on your company’s true phase of development, but they should be ambitious enough to enable you to increase your valuation significantly (at least doubling your share price from round to round) while realistic enough to reach with the cash you have. ? 
  2. Key valuation levers (Revenue growth; Sales efficiency; Net revenue retention).
  3. Executing the Business Plan.  

* Remember: Depending on your company’s stage of development, you are trying to prove different things: at Seed, you are hoping to show product-market fit; at the Early Stage, you are validating your revenue model (which includes product/go-to-market fit and scalability); and at the Growth Stage you are validating your recurring revenue model (sustainability and industry leadership). Most importantly, go step by step: you cannot skip steps in this process.  

Focusing on the right metrics is key to the success of your business: New business models are popping up left, right and centre, and new SaaS models require new ways of measuring business performance (for example, CAC payback period might not be a good metric to track a product-led growth strategy). Creating a relevant KPI dashboard helps you understand your evolution and make the appropriate decisions. Your board of directors should help you with this KPI dashboard, discuss the KPI reports and make sure you use the correct guidelines.  

Be smart when dealing with inbound interest from investors. There is so much liquidity in the market right now that you will probably receive inbound interest even though you are not actively fundraising. Be mindful and be prepared for that. Keep potential investors engaged and updated for the next round but beware of being distracted by these approaches. Focus on executing the plan and do not take your eyeball away from the business. Make sure you are the one leading these conversations and dedicate a limited amount of time to it. Extension rounds are becoming common because, apart from extending your runway, they usually come with a nice valuation increase.  

You can find a short interview with ForceManager CEO Oscar Macià from 35’ to 43’ in the webinar video. ForceManager has gone all the way to Series B, and Oscar shares his experience in this journey with us, how he made sure to become fundable from round to round, what investors look for depending on the stage you are in, and what are the challenges he encountered. We encourage you to listen to Oscar as his insights are very valuable. 

? Section 2: Focus on executing the business plan  

Once you have set your milestones it is time to start delivering. Executing the business plan and aligning expectations with investors will keep you out of trouble.  

Remember to make use of your investors as advisors. Communicate in a transparent manner and keep them properly informed, not only about positive achievements but also about existing challenges. They can be very helpful, and you are all in the same boat. Ask from the investors as much as you need! 

Managing your company’s talent is the most important challenge. In general, fast-growing companies evolve faster than people do. The skills needed change very rapidly from stage to stage. To execute the business plan, you must focus on attracting and retaining the best talent you can considering the company’s needs for the current and future phases of development.  

? Section 3: Scaling Finance 

Business complexity increases significantly as your company grows. To manage it, you need to have a solid and sound accounting and finance operation in place. This is more business critical for later stages, but you should start building it correctly from the beginning to avoid pitfalls in the future.  

Key elements of a scalable finance operation: 

  • Data-driven: “If you can’t measure it, you cannot improve it.” Data demand increases rapidly; focus on data segmentation (product, sales, cohorts, etc.), a metrics dashboard to identify and track key levers; lastly, constantly benchmark and adopt best practices.  
  • Financial planning and budget: Establish both short-term (1 year) and long-term (2-3 years) plans, and track & update on how you are doing vis-a-vis the plan. Again, cash is king, so monitor how much cash runway you have!  
  • Finance infrastructure: As you scale, things will get complicated. It is worthwhile investing in financial products and systems, professionalize your finance department with functional P&L’s, annual audits, and scale efficiently (this includes hiring talent for the finance department).  
  • Financial reporting: Generate monthly and quarterly financial decks highlighting key metrics and compare them to the initial plan. Finally, keep an updated record of your cap table.  

? Cohort analysis is important. The best companies strictly define customer segments, monitor them and invest in them. This can be done by the GTM Strategy, by geography, by industry, by size, by the number of users, by headcount… Try to have a sense of what channels are more efficient, to fine-tune your strategy. 

? Section 4: Non-dilutive additional funding  

There are other ways of getting funding without giving up equity. Make sure you explore all these alternatives, but before accepting any funding, make sure your investors approve of it. Several non-dilutive funding options:   

  1. Bank debt: Difficult because start-ups are not the ideal candidate to receive commercial loans from banks because of the high probability of default and no sizeable assets/equity (besides the company’s talent of course, but this is not sizeable). Please do not back your company’s debt with your personal assets! 
  2. Alternative funding: traditional Venture Debt, where a share of the principal is converted into equity at a lower valuation; or newer Revenue-Based Financing. 
  3. R&D public funding: grants or soft loans for R&D developments provided by public entities.  

? Interesting question –> What is a sustainable and acceptable level of debt?  

Hard to get an exact formula but sometimes we hear the following rule of thumb: keep gross debt under half of your ARR. However, many finance providers advise not to exceed 50% of the ARR adjusted by gross margin (e.g.: if ARR = €5M and Gross Margin = 80% –> €5M x 80% x 50% = €2M would be maximum sustainable gross debt).  

Q&A Section  

You can find the Q&A section from minute 57 onwards in the recording. We answered several interesting questions there, such as how long a company takes to get ready for DD, who in the team should lead the preparation for the DD, and what happens if you reforecast your plan.  

This is the end of our three-session webinar series on “How to master Due Diligence for SaaS startups”. We hope you enjoyed the webinars as much as we did, and that they are useful in your entrepreneurial journey. We received lots of questions from the audience and it allowed us to better refine each session. Thank you very much for your participation and engagement.  

If you have any questions, please reach out to us and we will be more than happy to discuss further. Lots of luck with your future Due Diligence processes and see you soon! ?