The short answer is "as much as you need". The more tactical answer is "as much as you can raise cheaply". The latter is a pragmatic view. Raise more than you need when times are good. Just because you raise it does not mean you need to spend it - capital efficiency is always good!
In this post I look at what VC are saying SaaS ventures need to raise to get to scale and profitability. But I'll also look at what VC are doing - what SaaS deals they are funding currently. I look at the capital efficiency drivers, what you can do to reduce your need for capital. And finally, I show you which VC are active in SaaS today.
What Are VC Saying?
The answer according to Bruce Cleveland of Interwest is about $40m.
Take that seriously. Cleveland is a SaaS specialist with serious operational experience who has done his research on this subject. But as he points out, the details matter. There are two points of caution:
- This is looking in the rear view mirror at ventures funded some time ago that did an IPO in 2007 or earlier. It is a different world today - less capital available and less need for capital.
- VC are happy with models that require a lot of capital. Capital is what they have to offer and if you need a lot they are in the driving seat.
Lets look at the operational details, the capital efficiency drivers, in a minute. First, lets see what VC are actually funding today.
What Are VC Doing?We looked at the Series A round for 17 SaaS ventures that closed after January 2007:
- Jive Software
- Lithium Technologies
These 17 ventures raised $90.25 million total, an average of $5.3 million. That sounds like the "old normal" $5 million Series A. You can see how you would get to $40 million for a venture that is getting traction and can do a series of larger rounds at higher valuations. Lets say, a) $5 million; b) $10 million; c) $25 million; and total: $40m.
If the C round is pre IPO, everybody does well. But that is the old normal. The new normal is different. First, those 17 deals had two outliers: Jive raised $15 million and Bill.com raised $17 million.
Now let's start with a later date. If we filter by Series A deals that were done after the market meltdown in Q4 2008, the average more than halves to $2.55 million. Those five deals are:
Capital Efficiency Drivers
There are two numbers to obsess over.
1. How much does it cost to acquire customers? Cleveland defines this as CAC/ACV, or Customer Acquisition Cost divided by Annual Contract Value. If this is less than one you are in good shape. You can take this further. If you can get your customers to pre-pay for the year and your CAC/ACV is less than one, you can self-finance growth at least on the marketing side. Charging annually rather than monthly will slow down growth but that would be a small price to pay for controlling your own destiny. In some markets, customers will pre-pay in return for a discount and that is certainly the cheapest capital you will ever get.
2. How much do you need to spend per customer on infrastructure? The SaaS pioneers made a big play out of having their own data centers. When SaaS/Cloud was new, this was essential. Today you will be courted by lots of big, deep-pocketed, credible cloud vendors selling PaaS, IaaS and HaaS on a pay-as-you-go basis. The pay-as-you-go basis means you don't spend precious capex on infrastrucure.
But more important is the total ICC or Infrastructure Cost per Customer. If this is low enough you can afford to be more creative with your freemium strategies - which will reduce your CAC/ACV if done right. In other words, your R&D guys had better pay attention to performance engineering from the get go. The days of throwing sloppy code out there and covering your mistakes with huge dollops of cash later are probably over.
Who You Gonna Call? SaaS Funders!
You need capital to build a SaaS venture. You can self-finance using the cash flow from another business. (Typically a professional services business as this requires no capital.) This is what both 37 Signals and Zoho/Advent did. But that is still capital, it is just your own capital!
If you have a small niche, you might need very little capital as it is easy to reach your market. Which is a good thing as no VC will fund a small niche. If you are have a venture that is in that rare magic quadrant that is both viral and monetizable... well you are one lucky dude!
For SaaS ventures that are going after a big market and have normal marketing characteristics, VC (probably preceded by Angel) is the conventional route. If you do decide to raise VC for your SaaS venture, it is better to go to a SaaS specialist.
We know this is not an exhaustive list. It is not meant to be. We have seen many VCs do one or two SaaS deals. We want to highlight the VCs that have done more than that, and that have an active focus on SaaS (a section on their site, a partner focused on SaaS, some interesting research, etc.). These are the ones that made that cut:
- Bay Partners
What you really need to know is, who is funding SaaS ventures right now. Here is the much shorter list of VC that have done two or more SaaS A Series deals since the start of 2007:
OK, let's make a really fine filter. Who has done SaaS A Series deals since the market meltdown in Q4 2008? That list is down to two firms:
In raising money, relationships matter - a lot. So if you know a VC that is not yet active in SaaS, call them. If your venture puts them on the SaaS map, they will love you. For most VC that like Internet or software like SaaS, the business model attractions are screamingly obvious.Photo credit: Mokra