Discover key strategies for SaaS enterprises to meet debt funds expectations and secure funding.
Beyond Investor Metrics
While metrics like revenue growth and profit margins are essential, they're not the only factors that matter. B2B SaaS companies must focus on their core business fundamentals rather than just chasing metrics to please investors.
Contracted ARR is a commitment, NOT a revenue.
One common mistake SaaS companies make when seeking funding is, misleading debt funds about their contracted annual recurring revenue (ARR).
It is important to understand that contracted ARR is merely a commitment to pay and does not represent actual realized revenue or live ARR. Debt funds are well aware of this distinction and will not be fooled by misleading claims.
If your business heavily relies on contracted ARR rather than live ARR, it is essential to spend time justifying why you believe the contracts are rock-solid. Debt funds prefer to see contracts that are not only solid but also have a high chance of being fulfilled.
For example: Government contracts are almost impossible to break, and it's not like the government will declare bankruptcy like a client would, being themselves out of business and in payment default.
By providing evidence of the reliability and stability of your contracted ARR, you can instil confidence in debt funds and increase your chances of securing term loans.
NRR's true importance
Net revenue retention (NRR) is a critical metric for SaaS companies seeking funding. NRR measures a company's ability to retain existing customers and grow revenue from them over time. A high NRR indicates that customers are satisfied with the product and are willing to spend more on it. NRR is the main long-term cash flow indicator upon which funds will base their risk appetite.
However, it is important to consider industry norms and customer profiles when interpreting NRR figures. Different industries have different benchmarks for NRR, and what may be considered a high NRR in one industry may be average or low in another. Similarly, customer profiles can greatly influence NRR.
For example, if a SaaS company primarily serves large enterprise customers with long-term contracts, it may have a higher NRR compared to a company serving small businesses on month-to-month subscriptions.
When presenting NRR figures to debt funds, it is essential to provide context and explain how your NRR compares to industry benchmarks and customer profiles. This will help debt funds understand the true relative importance of your NRR and its relevance to your business.
Strategic Customer Acquisition
In addition to focusing on metrics and financials, SaaS enterprises seeking funding should also highlight their strategic customer acquisition approach. Debt funds are interested in understanding how a company acquires and retains customers, as this directly impacts revenue growth and sustainability.
When discussing customer acquisition, it is important to highlight the strategies and tactics you employ to attract and convert potential customers, as they are conducive to . This could include targeted marketing campaigns, partnerships with complementary businesses, or innovative sales techniques.
By demonstrating a thoughtful and strategic approach to customer acquisition, SaaS enterprises can show debt funds that they have a clear plan for sustainable growth.
Operational Efficiency and Scalability
Debt funds are not only interested in a SaaS company's current financial performance but also its potential for future growth and scalability. Operational efficiency plays a crucial role in demonstrating this potential.
SaaS enterprises seeking funding should focus on optimizing their operations to maximize efficiency and scalability.
This could involve
- streamlining internal processes,
- leveraging automation and technology,
- implementing cost-saving measures.
Furthermore, scalability is a key consideration for debt funds. They want to invest in companies that have the potential to grow rapidly and capture a significant market share. By highlighting your scalability plans and strategies, such as expanding into new markets or verticals, SaaS enterprises can attract the attention of debt funds and position themselves as high-growth investment opportunities.
Rule of 40 in Focus
Let's talk about the Rule of 40, a metric gaining traction in the SaaS world. Imagine a SaaS company with impressive annual revenue growth but struggling to keep its expenses in check. Investors use the Rule of 40 as a rule of thumb: they want to see that a company's growth rate plus its profit margin adds up to at least 40%.
For instance, if a company grows its revenue by 30% and maintains a profit margin of 10%, it meets this benchmark. This balanced approach appeals to investors looking for sustainable growth rather than just rapid expansion, which can sometimes lead to financial instability.
Conclusion
In conclusion, when seeking funding from debt funds, SaaS companies must look beyond traditional investor metrics like revenue growth and profit margins. While these metrics are important, they should not be the sole focus. Instead, SaaS enterprises should prioritize core business fundamentals and focus on building sustainable and scalable business models.
If you want to impress a debt fund and/or convince them to give you a term sheet, rather than another SaaS Enterprise, you need to follow these principles. And it doesn't help to know how to model your financials for debt funds. We have made a blog just for this:
To delve deeper into the subject, here are the blogs that inspired this one; made by one of our favourite lending partners:
- SaaS Metrics: What’s really important to investors and management teams in 2023 and beyond? - Claret Capital Partners (claret-capital.com)
- SaaS Metrics, Part 2: Which ones really matter? - Claret Capital Partners (claret-capital.com)
- What Does it Take to raise capital for SaaS in 2023
Speak to us and kick off your fundraising the right way!
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