Can your company raise in a downturn?

It’s no secret that market conditions have changed since the liquidity filled boom of 2020 and 2021. The cocktail of low interest rates, stimulus, and a supply chain crisis has finally intoxicated the economy, sending inflation and interest rates soaring and growth stocks tumbling. These effects have hit venture backed software companies particularly hard, as the whiplash of the public markets has spooked crossover investors (remember Tiger?) out of the venture market, where they had been setting the pace and driving up valuations over the past few years. Many SaaS entrepreneurs are now asking a question they’ve never before had to grapple with: where will my next round of funding come from?

The good news is that while harder, it’s still possible to fundraise in this environment. However, investor diligence and expectations will look different than they have the past few years. During this most recent boom growth was the only metric that mattered: investors were heat seeking missiles for hypergrowth, believing that there was no problem scale couldn’t solve. In 2022, efficient growth is back in vogue; investors are seeking not just great growth numbers, but unit economics that ensure the business will continue to compound over time without consuming too much capital, which is now scarce for the first time in a decade.

Craft Ventures but together this great chart to show what the 2022 fundraising bar looks like for early stage SaaS companies:

Let’s dive into the SaaSGrid dashboards for two companies to understand these key growth and efficiency metrics, and what they can tell us about the viability of the business.

‍Company 1: Efficient Co, Inc.

• Growth: This company has great growth that would be attractive in any environment: right around 3x year over year.
• Gross Margins:Their gross margins are consistently very high, including the costs of their customer support team. This means a high percentage of their revenue goes to offsetting sales and engineering, instead of being spent just keeping the product up and running.
• Net Dollar Retention: I’ve changed this chart to a quarterly view to make it easier to read. This company actually doesn’t have best in class retention: their cohorts end the first year without about as much revenue as they started with. We can see in Logo Retention they have about 10% churn after the first year, which is offset by some expansion. By not having “excellent” NDR (>140%), they don’t get the benefit of their ARR growing on its own, but by being at ~100% they at least don’t have to sell new deals just to prevent ARR from declining.
• CAC Payback: Here is where its business shines: CAC Payback is under 10 months in almost every month, meaning the company consistently produces more new ARR than they spend on sales and marketing. This is best in class efficiency and something VCs love to see. If acquisition is efficient, the rest of the business tends to be as well.
• Burn Multiple: As a result of their margins, retention, and sales efficiency, this company operates with a very low burn multiple. This is a company that would have no problem raising another round of funding.

Company 2: Inefficient Co, Inc.

• Growth: At first glance there are some similarities between these two companies. Inefficient Co is closing in on $4m ARR, and is still growing at >3x year over year. However, we can see that the growth rate is slowing.
• Gross Margin: A good thing this company has going for it is high gross margins, which hover around 80%.
• Net Dollar Retention: This is the first sign of trouble: this company is struggling to retain customers and revenue. After 4 quarters, the average cohort retained just 88% of its original revenue.
• CAC Payback: Payback has soared recently to over 3 years. If you flip to the “S&M Expense vs New Sales ARR” graph, you can see that they have 4x’d their sales & marketing spend in the last year, but the amount of new ARR they produce each month is basically flat. Clearly their investment is not paying off.
• Burn Multiple: With customers churning and sales and marketing expenses far oustripping new sales, this company has a poor burn multiple before overhead expenses are even considered. The burn multiple was 5.2 in the most recent month, and you can see on the “Burn & Runway” chart that this company already had to raise an additional round of funding in April 2021 to avoid running out of money. This is a business that may have had success raising in 2021 with its strong headline growth, but will likely struggle in 2022.

If your growth and efficiency are hitting the above benchmarks, you’re doing great! Even if ARR multiples are lower than they were last year, you can likely still have a successful fundraise. If your metrics are lagging, you there are two paths you can take:

1. Reduce burn and buy time. Over the course of a company’s life there will be many periods when metrics aren’t great. Maybe lack of sales leadership has slowed growth, or missing product features are causing customers to churn. Regardless of what the issue is, it will likely take time to fix, and you need the cash runway (which you can now track in SaaSGrid) to do so. Consider reducing your burn to give yourself time to iterate into product market fit and better metrics.
2. Get cash flow positive. If you’re unlikely to hit the growth thresholds needed to raise venture capital, the best path is to get cash flow positive and control your own destiny. To do this you’ll need to be laser focused on your cash balance and likely even more efficient than defined above, though you’ll be able to grow at whatever pace is most natural for your company.