Every Unicorn starts at $0 revenue. The difference between failed companies that called themselves the “Next Google” and real skyrocketing growth can be summed up by the years it takes to get from $1M Annual Recurring Revenue (ARR) to $100M ARR. This is where you need to focus when you think about getting seed funding.
According to Bessemer Venture Partners:
- Good companies take four years to get to $10M ARR and ten years to get to $100M ARR,
- The best get to $10M ARR in two years and $100M ARR in just five.
Get Seed Funding by Proving You Can Turn Capital into Growth
Hypergrowth potential is what VCs are looking for and what startups need to show. Seed funding for startups is about demonstrating growth and the ability to scale.
The problem is today that too many startups try to do everything, selling 3 different products with a “horizontal approach”, which means they target every market. Growth, and therefore potential, comes from your Startup Sales Strategy.
Before you even start talking to VCs or dreaming about VC funding for startups, you need to work on your go-to-market and sales strategy.
T2D3: Triple Revenue 2 Years in a Row, Double Revenue 3 Years in a Row
How do you reach these levels of ARR in so little time? The objective for startups today is T2D3 – Triple revenue 2 years in a row, Double revenue 3 years in a row. Simple, right?
The world of sports is a good analogy. Basketball scouts noticed LeBron James when he was in middle school as NBA potential. Did this attention mean that LeBron James would end up with the career he had? No. But there were clear indications that betting on James’ potential had much better odds of success than other good middle school players.
Startups are similar. While raising a successful Series A, with the right amount of capital, valuation, and the right VCs, doesn’t mean the company will become Unicorn, it is an indication that the odds are in the startup’s favor.
However, while LeBron James had standardized Basketball statistics to prove he was above the rest; how do startups prove that they have the potential? What metrics separate the good from the best?
What does a VC see on your Website?
What VCs Look for in Startups
All things considered, B2B software is a simple industry. Vendors get prospects to buy in their vision, they transform prospects into customers, and they grow how much money they make per customer through upselling and cross-selling. So drafting a business plan to get Seed Funding should be easy right? Well, it’s a bit more complicated. These billion-dollar company objectives must also be the objectives of a million-dollar company trying to prove billion dollar potential.
Metric 1: Lead Velocity Rate or How Fast Can You Put Leads in Your Funnel?
LVR = (Qualified Leads this month – Qualified Leads last month)/Qualified Leads last month.
Qualified Lead Velocity Rate is a way of tracking, not only how many leads get in your funnel, but how fast the number of leads is growing.
In B2B sales, this metric is critical as sales cycles can sometimes take months. If 5% of your leads become customers on average and your sales cycle is 6 months long, then by tracking Leads, you can estimate your ARR months ahead.
If you track the speed at which the amount on monthly Qualified Leads is growing, you can prove that you are on track to reach $10M and $100M ARR in a few years. If you are on track to reach $10M ARR in two to four years, then according to Bessemer Venture Partners (see above), you are golden.
Use LVR to Audit Your Startup
LVR is also interesting as it allows you to identify company weakness quickly. If the number of leads is growing but sales are not growing as quickly, I can see your company having one of three problems:
- Low correlation between LVR and Sales is a sign that your marketing is not sending qualified leads, just volume. Speak with your VP Marketing fast.
- Recent changes in your sales team mean that you need to solve sales hiring or onboarding. Find out what is happening with which ever cofounder owns sales. If onboard is an issue, then work on the first few weeks. If hiring is an issue, then think about getting a VP Sales.
- If your sales team has not changed significantly, then your product is the problem. Create an action plan with your head of product to meet as many prospects as possible and understand what your competitors have that is important. Some “missing” features may just be a UX problem, where a key feature isn’t easily found and marketed.
LVR is a great indicator that gives you a real time pulse on your company’s performance before quarterly results start getting missed and the impact is deep.
Metric 2: Monthly Recurring Revenue or Annual Recurring Revenue
Whenever I discuss Seed funding or Series A with an entrepreneur, I ask if they have recurring revenue. Annual Recurring Revenue is what gives SaaS its incredible value. The customer pays every year and sees the software evolve with his needs over time.
I’ve read many articles that recommend $2M ARR by Series A. When setting milestones, it’s critical to remember that the value of SaaS comes not from the size of the contract but from its recurring aspect. The stickier and more recurring, the better! In other words, $1M ARR on a very sticky product with an enterprise account is worth more than $2M ARR selling a gadget that, while cool, can be replaced overnight.
How much ARR to raise Series A? It depends.
- In an established market, get to $2M ARR. This number proves that you have something competitors don’t. $2M may sound arbitrary, and it is. But if everyone is aiming for $2M and you meet with a VC a show him $1M ARR, you will not be in front of the line. Differentiation matters when competing for capital.
- If you are creating a new category, ARR doesn’t matter as much as usage. If replicable, customers use your product every day, then you can prove there is a real need to change the status quo. It’s easy to use these references and grow your pricing significantly. For sake of clarity, I’ll recommend (somewhat arbitrarily) that you reach $1M ARR. Also, you need to show data proving that usage grows over time.
- Enterprise Sales sales cycles are long and tough. However, Enterprise accounts have, by definition, the highest customer LTV (Lifetime Value). They sign big deals and change slowly. Show 3 Enterprise customers who have gone from POC to production (around $100k). Complete this metric with other POCs being negotiated, a growing pipe, and a roadmap to take your best customers from $100k to $1M per year, and you will be a very credible candidate for Series A.
Metric 3: Net Dollar Retention
Getting Seed Funding isn’t magic, it’s simple mathematics. As an example, Net Dollar Retention is a key objective used to track what each dollar of SaaS revenue today will become in the future.
Net Dollar Retention = (Beginning Period Revenue
+ Upgrades – Downgrades)/
Beginning Period Revenue
For example, Startup A has an NDR of 90%. This tells investors that $100 ARR this year will generate $90 ARR next year. In other word, Startup A is a leaky bucket. As time goes, new customers will be harder to find, and the company will be bleeding money.
Startups that get Seed Funding or Series A today have 110% NDR in average. The very best have +120%. NDR over 100% (also called net negative churn) means that a Startup sees low levels of churn and is growing inside existing accounts. This happens by selling the same product to more internal users and adding features. Existing customers become a growth engine.
So, what to do about NDR as a Startup? Firstly, track it. Knowing how much you are selling isn’t good enough if you don’t identify holes you may have in your bucket.
If your NDR is less than 100%, there are multiple steps you can take:
- Collect data on every churn and understand why it happened. Churn is a lagging indicator. Look for the indicators that precede a churn. Often, companies may buy your product as they like the concept but stop using it after a few weeks. Was the onboarding poor? The UX is too complicated? Find out why and fix it.
- Target your customers more precisely: while the NDR is an average calculated on your whole customer base, look for clusters. Maybe a type of customer needs your product more than others.
- Bigger customers churn less. One way to grow NDR is to grow the size of your customers to boost LVR. Companies from Salesforce to HubSpot may have started with small companies but focus on Enterprise today.
Finally, for startup entrepreneurs with low NDRs, don’t despair. If your NDR is awful, but you are working on solutions and seeing results, you can still raise capital. For example, categorize your customer base in batches depending on when they became customers and analyze NDR per batch. If you can prove that newer customers have a high NDR, investors will forget you had a high churn rate a few years ago when you were still looking for your market.
VC Funding Requires a Clear Plan for Growth & Scale
The current batch of SaaS IPOs show that Unicorns proved their Unicorn potential before raising Series A, with the right Lead Velocity Rate, ARR and NDR. But what does it take to raise a $2M Seed round?
Seed rounds, by definition, are very early in a startup’s life. This means that many companies will be selling a half-baked product and receive a lot of questions about their business model that they may not be able to definitely answer.
Top 3 tips to Raise Seed
- Always raise Seed thinking about Series A. How much capital and resources do you need to reach Elite metrics 18-24 months after the Seed round? Asking yourself this question will allow you to clearly explain to VCs why you need the capital and what you will do with it.
- What initial traction do you have that proves a growing LVR, ARR, and NDR? Show metrics moving in the right direction!
- Finally, the more your B2B SaaS company grows, the more visible you will become. Competitors will come after your business. What is the secret sauce that proves that no one can catch you up? How do you build your monopoly?
Still have questions regarding How to Get Seed Funding? Want some honest feedback on your Seed Funding deck? Contact me through LinkedIn!
