Venture capitalists are like savvy antique shoppers scouring for that one overlooked masterpiece among piles of seemingly identical items. They don’t really care about shiny colors, the latest trends, or cracks in the bodywork; instead, they delve into the story, idea, and the creator’s vision behind each piece.
Picture this: a SaaS startup, buzzing with tech jargon and server specs, is pitching to a group of investors. While the tech team is lost in a sea of code, the investors are scanning the horizon for something entirely different.
We’ve audited and helped over 200 companies prepare for investment with our due diligence service, and we did take notes along the way! Ready for a modern-day treasure hunt at the flea market?
Let's explore five key areas venture capitalists and investors care about before making an investment in a SaaS startup or scale-up.
1. The technical state of your product is rarely a dealbreaker
Contrary to what you might expect, given that we’re software developers writing this, the technical state of a product is rarely a decisive factor for investors. We want to build the best possible solutions for our clients, and that means making pragmatic choices. Startup founders, particularly in their early stages, need to do the same, because investors would rather back a scrappy, cost-effective startup than a tech masterpiece that burns cash faster than a rocket consumes fuel.
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Why is this? Investors don’t care about the intricacies of code, but they do care about the way code and features are brought to life. They are also not really interested in the details about GDPR, security, or where your servers are hosted. They only want to know what it would cost them to elevate the product (and code) to the next level. Technical issues are rarely a concern, as you can always fix them later.
Imagine a developer passionately arguing about the latest tech stack's merits while the investor silently calculates the return on investment. That's the real picture.
2. Cost efficiency & post-investment growth potential
For investors, backing a SaaS startup is part detective work, part fortune-telling. They're not just investing in your current state; they're betting on your future potential.
They assess the team’s composition, sales effectiveness, and operational efficiency, calculating the required resources to achieve predefined goals. Does your team have a sloppy CTO, or is it composed of a bunch of junior engineers who can’t speed up the production process? Are there plenty of senior developers around and is your engineering team mature enough to handle rapid growth? Are operations slow and annoying? While investors don’t really care, they do want to know. They will start calculating how many people or resources to bring in to help achieve set goals before you had the chance to say goodbye.
A well-defined plan and vision and a mature engineering team are more critical than the current business state. Recognizing weaknesses and devising strategies for process and performance improvement is invaluable. Start peering through your current metrics to see a future unicorn.
3. The interplay of sales-driven and product-driven
Here's the ultimate investor's dilemma: a startup with groundbreaking software but no sales strategy/paying clients or a sales-driven company with plenty of users but mediocre technology preventing rapid growth. It's like choosing between a gourmet burger with no fries or delicious fries with no burger. But what tastes better? Des goûts et des couleurs, on ne discute pas.
There is no right answer, and it’s also not that big of a problem for your business as long as there is a plan and vision. And it’s even more important how you will act upon the feedback that comes out of the due diligence reports. Adopting a flexible, problem-solving mindset – akin to the Beatles' 'We Can Work It Out' philosophy – is essential.
We all know that the magic happens when both the burger and the fries are on the plate. Just imagine what the mayonnaise on top will do.
4. It’s almost always a people’s problem
In our extensive experience auditing various SaaS startups and scale-ups, we consistently encounter a common thread: technical issues and red flags in a company often stem from a fundamental misalignment of people and roles. This issue is rooted in the principle that not everyone excels at everything, and recognizing this is crucial for any successful business.
It's essential to understand that misplacement, rather than incompetence, frequently causes problems. A person may not be a poor hire; they might simply be in the wrong role. This insight leads to the importance of leveraging individual strengths and capabilities. By aligning people's skills with appropriate tasks and responsibilities, a business can significantly improve its efficiency and output.
In the process of product development, for example, the decision-making regarding feature implementation needs to be in the hands of those who not only understand the technical aspects but also have a keen sense of market demands and client needs. This alignment ensures that product bloat is avoided and that each feature progresses smoothly from concept to production.
Moreover, it's vital to recognize that roles and responsibilities within a team should evolve with the product's growth - this is especially the case for CTOs. As a product matures, the skills and focus required from the team will change, necessitating a dynamic approach to role allocation and team structure.
Listening to clients and backing decisions with qualitative data is also a cornerstone of successful product development. It ensures that the team is not working in a vacuum but is responsive to the market and client needs.
Strategic goals must be clearly communicated across the team, ensuring everyone is aligned and working towards the same objectives. Furthermore, having a well-defined recovery strategy in place is crucial for handling any unforeseen challenges effectively. That's why in most cases, coaching your CTO or hiring a Fractional CTO is a very valid option.
5. Licensing and Intellectual Property
Just as a house needs a solid foundation, a SaaS startup's legal framework, particularly regarding licensing and intellectual property (IP), is crucial. Investors scrutinize every detail during due diligence to ensure everything is in perfect order. The IP must belong to the company; any ambiguity can be a major red flag. This extends to open-source licenses, which must be compliant and clear to avoid future legal entanglements. Similarly, agreements with subcontractors need to be watertight, ensuring all work, including code and designs, is properly transferred and documented. Imagine a beautifully built house, but if the land it’s on isn’t legally yours, it’s practically worthless. That’s what comes to light during audits.
Reading tip: The 2024 checklist to prepare for Due Diligence
Conclusion
In the world of SaaS startups, it's not just about the brightest code or the most advanced tech. It's about cost efficiency, growth potential, and the ability to fix issues. You’ll need a balance of tech and business smarts, and a functional product backed by a dynamic team. Remember, in the eyes of a VC, your startup is more than just lines of code; it's a potential hidden gem waiting to be polished. So, the next time you pitch, think less about impressing with tech and more about presenting a balanced, promising business. After all, you might just have that overlooked masterpiece they're searching for.
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