We know that the time taken to raise financing can run into the hundreds of hours. Here we go over three of the reasons why this can be the case and some points to consider to make the process more efficient.
In the VC world, stable sensible growth doesn’t cut it. Explosive growth is what’s needed, VC’s are ultimately hoping to invest in a company that can dominate its sector. There is a focus on the Series A rounds and above where VC’s are typically looking for growth of 3x plus. Firms like this are hungry for cash meaning they require larger tickets. This means that there is less capital available for companies growing at a slower rate.
If you have a more stable growth model, it may be worth looking at alternative models of funding that require less explosive growth. The venture debt space is less well known, but growing quickly as venture debt funds target lower returns than VC’s but at a lower risk of loss.
We see the large funding rounds and the aggressive push from VC’s to invest in the leader and not the secondary players, even though they may have better tech or serve a particular niche.
Part of the reason for this is that many markets are driven by the networking effect. This is when the value your product gives its user increases with the number of users. Airbnb is a good example of this: the more users it has, the easier it is for a landlord to rent frequently. Uber too: the more Uber drivers there are, the easier it is for an Uber user to get a ride.
In these markets, the networking effect is significantly more important than the benefits of better technology or a specific niche. The ability to be the first to achieve critical size is one of the most important factors for a VC.
If you are competing with bigger players in your sector, or those with more aggressive growth strategies, it can be difficult to raise capital. You will have to work harder on how your differentiation adds value and the reasons why you will be able to retain your customers.
A complicated strategy or product can be hard for investors to understand and engage with. This is a tricky one as a disruptive idea or new approach can’t always be simply explained.
Often in a SaaS business, the energy of the founders is best focused on the product and technical details. It may be important to hire or engage with a business minded advisor to really help drive the core value proposition closer to both investors and clients.
VC funding is an important part of the investment ecosystem and it’s very useful too. There are times when you will want to grow fast and VC funding is the best way to do this. It’s important to understand if VC funding is aligned with your goals and your business model. This may not be the case when you’re looking to create steady growth or operate in a defined niche. There are other forms of funding available so it is worth making sure that you understand the other options at your disposal.