If you’ve been following the series, by now you should know that our reader, Taliba M. (almost feel like we know her personally after the series of articles!), wants to invest in a SaaS startup but doesn’t have experience in SaaS. She asked for our suggestions and we gave our 2-cents in Effective Ways to Invest in the Unknown.
Taliba also asked if we’d cover some topics on SaaS and hence the series is born:
* This series is by no means a comprehensive guide to SaaS, and it certainly isn’t investment advice. Read Effective Ways to Invest in the Unknown for the purpose of this series.
Here, we’ll learn how experienced investors evaluate SaaS startups and go through 2 industry terms that you need to understand before we look into key SaaS business metrics.
We like metrics. They’re more concrete and give us something to evaluate. Though metrics are convenient, in reality, the quality of the team and the solution offered by the product still top the evaluation chart.
As Ed Sim of Dawntreader Ventures puts it, “I don’t invest based on detailed spreadsheet models – getting comfortable with the team, the problem being solved, and the market opportunity are more important in the early days.”
Unlike traditional software delivery model (e.g. selling shrink-wrap), the SaaS model puts more strain on the company’s business and organizational processes. It needs to improve continuously to meet ever increasing expectations without increasing, or substantially increasing, price.
Therefore, you must be convinced that the team you evaluating has what it takes to survive in a frantic product development and launch environment. The startup executives better have an appetite for stress and conflicts, for they’ll be having them for breakfast, lunch and dinner on a daily basis.
Truth be told, the fast-changing environments in startup companies require startup entrepreneurs in all sorts of industry to soak up stress and conflicts like a sponge, but this is even more so for SaaS entrepreneurs.
The team is often the first thing investors evaluate because, more often than not, the revenue model in early stage companies will change.
Why bother looking at the numbers, then?
Because looking at the financials will help you figure out whether “the entrepreneur’s head is in the right place and the economics work right from the start,” writes Sim.
Apparently, if the company is really young, these metrics might not be available. In this case, your evaluation would depend entirely on the team, the product and the market. But mostly the team.
We’ll look at the key business metrics in our next article. Acquaint yourself with these 2 first. You need to understand them before we can proceed:
[I]f Customer A signs a one-year deal at $10,000 per month, and Customer B signs a three-year deal at $5,000 per month. The traditional metric of Bookings would value Customer A at $120,000 and suggest Customer B is more valuable at $180,000. This is misleading because in a recurring revenue model, Customer A is much more valuable to the business (assuming typical churn rates) as they will likely generate $360,000 of revenue for the business with renewals over that same three year period.
Stay tuned for a summary of key business metrics in our upcoming article.
* For series, references are published in the last installment of the series.
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Venture Hype has an interesting concept and an interesting format. It’s apparently well-read. Always good to be controversial and ask probing questions.
