Companies looking for SaaS capital might find our areas of focus interesting. While it’s not a comprehensive list, these are the things we focus on when we’re looking at a SaaS company for an investment opportunity. Leadership, market opportunity, product competency, culture, and the potential for scale are our top areas of focus.
In my role as an angel investor and founder, I’ve been through the roller-coaster ride of founding, growing, and ultimately selling a successful software company. Today my goal is to impart the lessons I’ve learned to help promising entrepreneurs leapfrog obstacles and accelerate their success through strategic angel investment.
Angel investment plays a pivotal role in the startup ecosystem. Outside investments stimulate innovation by extending much-needed support during a venture’s formative stages. Entrepreneurs often ask me, “What do you look for in a start-up”? This is an important question that strikes at the heart of the entrepreneur-investor relationship. Today, I’d like to shed some light on the key factors I consider when assessing investment potential.
Leadership
When evaluating a startup, the quality of leadership tops my list. Great ideas are indeed valuable, but great leaders turn ideas into reality. I’m drawn to leaders who embody passion, drive, and resilience. Leaders whose excitement for their product is infectious and are committed to their vision in a way that inspires those around them. As an angel investor, I’m investing SaaS capital into the person as much as the product. Thus, I’ll assess leadership through their knowledge of key numbers and KPIs, because it gives me an insight into how they manage resources and plan for growth.
Market
The market in which a startup operates is a significant determinant of its potential for success. A fantastic product alone doesn’t cut it; the market must express interest and demand for the product. Angel investors look for signs of market validation and that there’s a realistic price point to facilitate accelerated growth. Understanding market dynamics and key market metrics, such as market size, growth rate, and competition, demonstrates a startup’s potential for success.
Product
The product or service a startup offers is an undeniable focus. Investors are drawn to products that are lean, first-class, and well-supported. They address a substantial market need. But a truly compelling product isn’t just great as it stands. It should also offer potential for growth, adaptability, and innovation. How well the startup understands their product performance metrics, like churn rate, provides a clear window into their long-term viability.
I’ve received many comments from founders who were surprised when I asked for a demo. Not because they didn’t want to showcase their product but because it’s not normal for investors to care about it. I experienced this fist-hand when I sold my company. Three of the five offers I received never took a demo of the product.
Culture
The culture of a startup, though intangible, is its beating heart. A positive and innovative culture indicates that employees enjoy working for the leaders and are invested in the company’s success. This speaks volumes about the leadership and their style. Their ability to attract and retain motivated, top talent is important to their long-term success. Metrics like turnover rates can offer valuable insights into the health and potential of a startup.
Gallup did a great article diving into company culture here.
The Potential for Scale
In the SaaS world, scaling potential goes beyond just growing the customer base. It’s about the capability to manage increased usage without proportional growth in costs or complexity. Startups showcasing unique technology or a disruptive business model typically exhibit greater potential to scale. Their understanding of scale-related KPIs, like the rate of customer acquisition and activation rates, are vital indicators of a startup’s scalability. A clearly scalable product with good market interest will open your doors to SaaS capital.
Understanding Customer Acquisition
Deep comprehension of customer acquisition strategies is vital for any SaaS startup. Investors need to see evidence of a diversified, cost-effective customer acquisition plan across various channels. Successful SaaS startups often employ a blend of SEO, content marketing, strategic partnerships, and even paid ad campaigns. Awareness of key performance metrics, such as conversion rates and the ratio of customer lifetime value to customer acquisition cost (CLV:CAC), underscores the effectiveness of their strategies.
Financial Health
A startup’s financial health is a non-negotiable consideration for any angel investor. While revenue and profitability are important, equally critical are the startup’s burn rate, runway, and funding history. These details reveal insights into the company’s fiscal responsibility, resilience, and risk management capabilities.
Proof of Concept
The existence of a proof of concept or a minimum viable product (MVP) is an essential prerequisite before a startup can truly capture an investor’s interest. Prove that you show signs of product market fit. This real-world test of your idea and its feasibility provides invaluable insights into the market’s response to your product.
Getting SaaS Capital – Conclusion
While startups carry inherent risk, the potential rewards can be astounding. The right investor can be the catalyst that propels a startup towards unimaginable success. Leadership, market, product, culture, financial health, and a keen understanding of key performance indicators form the foundation of what investors like myself seek in a potential investment.
Potential angel investors may be closer than you think – at the next corner, the next meeting, or at the other end of your next email. Remember to be prepared, articulate your startup’s value convincingly and authentically, and demonstrate a robust understanding of your business’s key numbers. Raising SaaS capital might not be a straightforward journey, but with the right approach and mindset, it could be a transformative adventure of a lifetime.
