Miguel Fernandez

Miguel Fernandez

March 22, 2021



min. read

πŸš€ How much and what to raise VC money for

Hey SaaS founder β€” so you’ve just raised from a reputable VC? Congratulations β€” it’s no small feat, particularly in the current pandemic environment. Let me guess, you also probably dedicated a lot of time and attention to the process and are looking forward to not raising for a while β€” and avoiding more dilution…

In the fundraising process you also made two important decisions:

  • How much to raise β€” i.e. what runway will the raise support, as well as…
  • What to raise for β€” i.e. which investment areas will the raise support.

Let’s unpack each of those in turn. We will leave the choice of your VC investor(s) aside β€” it’s easier to just work with hard numbers πŸ™‚

How much to raise?

Typically the decision of how much to raise is driven by your P&L / cash flow model and things you want to prove out β€” or hypotheses you want to test β€” by the time next fundraise comes around (e.g. series B if you just raised A). You present the VC with a plan full of ambitious milestones you need the money to achieve, and most likely build in a buffer of say 25% to account for any unforeseen circumstances raising more than you actually need. Let’s say you are expecting an average burn of $500K/mo and want to have a safe 13 months of runway so you raise $6.5M in A and gave away ~15% of the company.

Let’s also assume you have $5M in ARR, 2/3 of your contracts are paid monthly or quarterly and you are waiting up to 12 months to see all cash flows associated with these contracts. What if I told you that instead of $6.5M you could be raising only half the amount and keeping ~8% of your company as a result?

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As a SaaS founder, part of the reason you went through the recent raise was because you face the infamous cash gap Miguel wrote about in our previous blog post, resulting from cash lagging investments in product and customer acquisition at your SaaSCo. Effectively, half of the dilution came about because of inability to recycle cash locked up in your business!

The alternative? Your SaaS could be (gradually) unlocking up to ~$3M in cash from your monthly and quarterly paying customers β€” which could grow further to $5M+ assuming you keep on growing at a healthy rate. In practice, your VC investors give you $3M which means around 7 months of runway. The other 7 months of runway comes from unlocking cash tied up in your operations, while you keep 8% of the business. At Capchase, we are working hard for SaaS founders, allowing their businesses to extend the runway by up to 50–60% β€” although we hope they might not have to raise from VCs again…

What to raise VC $$ for?

You are working hard to grow your SaaS company into a large and successful business. This makes selling equity to fund your business the most expensive type of financing. And so you should only use it to invest in true growth engines of your SaaSCo β€” talented team which will help 10x your business:

  • Product development β€” hiring the best engineers, data scientists to enable construction of your rocket ship;
  • Customer acquisition & retention β€” hiring those brilliant AEs and marketers that spread the word about your incredible product.

Depending on the type of SaaS product you are selling, payback calculated on gross/contribution margin basis can vary from a few months to several years. This is before accounting for payment terms and the often yawning gap between bookings and cash. Unfortunately, conventional thinking of just going for that next VC raise and lack of appropriate funding options thus far meant that founders sold more of their equity to fund… working capital!

With Capchase, you get to focus your VC dollars on the stuff that truly matters for the success of your SaaSCo β€” developing amazing products and bringing them to market!

So how should you think about the timing of your VC round vs supporting your raise with Capchase?

It takes some time for us to get to know your business and fully scale into a high addressable multiple of ARR. Should they decide to raise from VCs, we advise founders to get in touch right after they raise equity, or even better β€” think about Capchase as complementary to their VC funding round. The sooner we start working with your SaaSCo, the faster we can scale and the better the cost of financing we can propose.

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