Dan Martell - May 25, 2020


How to Raise Money for Your SaaS

Hosted by
Dan Martell
Mentioned
Nathan Lacca Mark
From Freemium to Premium with Matthew @ Yesware.com - Escape Velocity Show #28 How to Maximize Sleep as an Entrepreneur

Episode Stats


Length

11 minutes

Words per minute

192.14

Word count

2,133

Sentence count

90

Harmful content

Hate speech

1

sentences flagged


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, Dan Martell talks about the options you have to fund your SaaS business, your software as a service business. Many of them you ve never heard of, and the key is to make sure you do it without giving up your business. Equity is the most valuable thing you have in your company, especially if you re gonna build a successful business.

Transcript

Transcript generated with Whisper (turbo).
Hate speech classifications generated with facebook/roberta-hate-speech-dynabench-r4-target .
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
00:00:00.160 Hey there, Dan Martell here,
00:00:01.200 serial entrepreneur, investor, and creator of SaaS Academy.
00:00:03.240 In this video, I'm gonna share with you
00:00:04.500 the options that you have to fund your SaaS business,
00:00:08.800 your software as a service business.
00:00:10.880 Many of them you've never heard of,
00:00:12.760 and the key is to make sure you do it
00:00:14.040 without giving up your business.
00:00:16.200 Equity is the most valuable thing you have in your company,
00:00:18.320 especially if you're gonna build a successful business.
00:00:21.000 You wanna make sure you protect that.
00:00:22.440 Be sure to stay at the end.
00:00:23.280 I'm gonna tell you how to get access
00:00:24.320 to an exclusive resource on the six different models
00:00:27.840 for fundraising, as well as the 11 different sources.
00:00:30.720 I'll share with that more in a little bit,
00:00:32.360 but let's get started.
00:00:46.040 So one of the privileges that I have of coaching
00:00:48.700 some of the fastest growing, you know,
00:00:50.760 incredible human beings and very driven entrepreneurs
00:00:54.280 is that they're always looking to fund their growth.
00:00:56.620 They're always asking themselves,
00:00:57.740 how do I deploy a dollar of profit
00:00:59.560 or funding to generate a dollar 50 in increased revenue?
00:01:04.120 So recently I was working with one of my clients, Mark,
00:01:07.340 they were at about a million in ARR,
00:01:09.140 annual reoccurring revenue,
00:01:10.760 and they were evaluating different options.
00:01:12.880 At the time they thought line of credit, maybe VC,
00:01:16.820 and I walked them through the other options.
00:01:19.100 Most people don't realize that at a high level,
00:01:21.380 I think there's about 11 different funding sources,
00:01:23.700 things that you may have never heard of,
00:01:25.380 like a SEAL, so Shared Earnings Agreement, L,
00:01:29.180 I forget what the L stands for,
00:01:30.540 or RBF, Revenue Based Financing.
00:01:33.260 There are so many new, what are called
00:01:35.580 alternative funding sources available to founders
00:01:38.860 that he went from struggling,
00:01:40.920 trying to figure out the right way to grow it,
00:01:42.500 to eventually closing on about 750K in funding
00:01:46.120 that was non-dilutive,
00:01:47.720 meaning that he didn't have to give up any equity
00:01:49.920 in his business and allowed him to grow to the next level
00:01:54.040 without having to raise venture capital or just wait
00:01:57.540 and do it off of profit generated from the business.
00:02:00.540 And when we look at time value of money,
00:02:03.600 there's value drivers and value detractors.
00:02:06.180 The equity in a SaaS business is the multiples, right?
00:02:09.400 On the low end, 2X annual reoccurring revenue.
00:02:13.260 On the high end, it can be seven to 10.
00:02:15.120 I recently had a client exit their business
00:02:17.460 for 10X on 1.5 million in ARR.
00:02:20.160 So $1.5 million in revenue,
00:02:22.120 They sold for 15 million as an outcome,
00:02:25.500 a total kind of like deal size.
00:02:27.420 And I just think that's the opportunity
00:02:28.840 of getting your funding sources right.
00:02:31.220 So let's dive in.
00:02:32.360 Number one, examine your exit.
00:02:34.600 The first thing I always do with my clients
00:02:36.480 is figure out where do you wanna end up?
00:02:38.560 What does your exit look like
00:02:40.040 or what I call a perfect exit, right?
00:02:42.420 Typically it's either get acquired by a strategic,
00:02:45.180 go public or exit the business and hire a CEO to run it
00:02:49.040 and keep it as an annuity, right?
00:02:50.560 because SaaS businesses, software as a service,
00:02:52.460 they're incredible because they keep paying dividends
00:02:55.040 month over month if we build the business right.
00:02:57.160 If we have a key demand gen process,
00:02:59.560 a way for converting that demand into customers
00:03:01.800 and retaining those customers over the long term
00:03:05.340 with a low churn and high expansion revenue,
00:03:08.000 not gonna get into that.
00:03:08.840 But understanding your perfect exit is key
00:03:12.000 so that we can figure out what that number needs
00:03:14.180 to look like because there's different standards
00:03:15.980 for multiples and then we can figure out
00:03:17.840 how can we get there faster by raising capital
00:03:20.440 and how would we deploy that?
00:03:21.880 And what are we willing to give up to get that capital?
00:03:25.880 If it's a winner-take-all market,
00:03:27.620 then maybe venture capital makes a lot of sense.
00:03:29.620 If it's a niche workflow kind of industry,
00:03:33.540 then maybe we wanna look at some debt financing partners
00:03:36.420 or some revenue-based funding.
00:03:37.820 But number one is figure out
00:03:40.000 what your exit looks like, examine it.
00:03:42.280 Number two, map growth engine.
00:03:45.180 So it is critical for you to understand
00:03:48.120 your unit economics of your business.
00:03:50.180 So what I mean is, can you tell me what your CAC is,
00:03:53.620 your cost-acquired customers?
00:03:54.780 Can you tell me what your payback period
00:03:56.780 in regards to lifetime value, LTV?
00:03:59.120 How quick can you pay back the cost-acquired customer?
00:04:02.180 And the true CAC, a lot of people don't consider,
00:04:04.360 you know, sales commission or even office space.
00:04:07.160 Anything involved in acquiring customers
00:04:09.120 should be part of that CAC.
00:04:10.720 And really your churn numbers
00:04:12.680 and churn by different plans and expansion revenue.
00:04:16.580 You know, what's the, you know,
00:04:18.580 the upgrade or downgrade cycle for your product,
00:04:21.140 but truly, truly, truly understanding your numbers
00:04:23.460 because if you want to go look
00:04:25.400 at some of these alternative funding sources,
00:04:27.560 they are going to ask you of this.
00:04:29.520 And one of the biggest determining factors
00:04:32.580 is how well you as the founder can communicate,
00:04:35.180 understand your own unit economics of your business
00:04:38.760 so they can get a level of comfort
00:04:40.700 to lend you money to help finance that growth.
00:04:43.460 Number three is evaluate options.
00:04:45.880 So as I mentioned a few times,
00:04:47.460 There are several different funding sources
00:04:50.340 from friends and family, to revenue-based financing,
00:04:53.020 to seals, to VC, to debt equity, et cetera.
00:04:57.280 And the key is to just evaluate each one.
00:04:59.920 So I mentioned below, there's a link you can click
00:05:02.320 to download a copy of my funding evaluation cheat sheet.
00:05:06.600 But what I say by evaluate your option
00:05:09.460 is just making sure that you don't hone in on one, right?
00:05:13.000 So whatever you wanna do,
00:05:14.040 you gotta get the business ready,
00:05:15.080 you gotta understand the vision,
00:05:16.100 you understand your unit economics,
00:05:17.700 but then it's to go evaluate different ones.
00:05:19.680 Maybe go talk to the bank
00:05:20.840 and see if they're willing to write a line of credit
00:05:22.400 with no security.
00:05:23.680 Maybe go talk to, you know, one of these RBFs, 0.60
00:05:26.480 revenue-based financing companies,
00:05:28.880 or maybe talk to some VCs
00:05:30.640 and see if they have any appetite.
00:05:32.200 And it doesn't mean you're officially raising,
00:05:33.480 you're just saying, look,
00:05:34.340 we're at an interesting point
00:05:35.920 where we're trying to fund our growth,
00:05:37.280 we're evaluating different options,
00:05:39.220 I just wanna have a conversation.
00:05:40.480 But to me, not knowing that, not looking at it,
00:05:43.680 not even understanding the six models for funding.
00:05:46.320 So as I mentioned, they're all linked up
00:05:48.160 in the download below, you can go grab a copy,
00:05:50.080 but I have six different models of funding
00:05:52.680 from bootstrapping to bootstrapping to VC
00:05:55.160 or private equity, et cetera.
00:05:57.200 Or maybe it's VC to VC to VC to public offering.
00:06:00.640 There's essentially six different patterns
00:06:02.960 that most software companies go through
00:06:05.880 to fund their growth,
00:06:07.520 depending on the outcome they're looking to achieve
00:06:09.680 in the market that they're in and the opportunity.
00:06:12.080 So it's really understand just to evaluate them
00:06:14.520 and not get what I see too often is like,
00:06:16.560 oh, I'm doing a venture round.
00:06:17.800 It's like, okay, you can do that,
00:06:19.400 but did you know that there might be a different path
00:06:22.160 that will ultimately, if you raise some debt capital,
00:06:24.680 you can get to a higher level of revenue
00:06:26.520 that will give you a better multiple,
00:06:28.260 which means you're gonna give up way less equity
00:06:30.260 to raise that total amount of capital without giving,
00:06:33.400 by doing this debt equity financing upfront.
00:06:36.720 So there's a bunch of different ways to look at it
00:06:39.620 and it's just key to evaluate your options.
00:06:41.980 Number four, calculate the cost.
00:06:44.900 Now, I'll be the first to admit
00:06:47.360 that it is very tough for you to calculate
00:06:49.620 what's called the total cost of the funding source,
00:06:53.100 the capital, total cost of capital.
00:06:54.840 There are a lot of people, Nathan Lacca is one of them.
00:06:57.140 If you search total cost of capital, Nathan Lacca,
00:07:00.040 you'll come across some links
00:07:01.560 and some articles he's written
00:07:02.920 to really try to demystify the different funding sources
00:07:07.000 and kind of like the percent you're giving up.
00:07:09.560 Because at the end of the day,
00:07:10.800 If you raise a million dollars today
00:07:12.800 and you gotta pay back 10 million in a year,
00:07:17.560 then you've given up a huge percentage of return.
00:07:21.680 So the cost of capital isn't always based on equity,
00:07:24.680 it's based on what you think the outcome's gonna be.
00:07:27.380 So even one of my clients raised $500,000
00:07:30.820 when they were starting, 15 years later,
00:07:33.740 they paid those early investors back
00:07:36.600 because they bootstrapped the rest of that journey.
00:07:38.600 they paid back those investors $15 million.
00:07:41.260 So 500K to $15 million in a 15 year period
00:07:44.680 is a large percentage on an annualized basis.
00:07:47.940 I think the number works out to 30 to 40%.
00:07:50.820 So just understanding the cost of capital
00:07:53.380 based on different outcomes and what you're trying to raise
00:07:55.520 is really important to just run the numbers.
00:07:57.480 If you want to exit the business
00:07:59.480 and personally take home 25 million, 10 million, 5 million,
00:08:03.440 whatever that number is for you,
00:08:04.840 you need to look at the different funding options
00:08:08.000 and what they're requiring
00:08:09.380 because they might ask too much equity
00:08:10.860 to not allow you to get that outcome
00:08:14.560 without aiming bigger
00:08:15.720 and really adding a lot more complexity
00:08:17.100 into your business model.
00:08:18.320 And those are decisions we make earlier on
00:08:20.500 to make sure that we don't make the wrong one
00:08:23.220 and get locked into a certain path.
00:08:25.200 Number five, lock it in.
00:08:27.160 So here's the deal, evaluate the options,
00:08:29.440 understand your unit economics,
00:08:30.760 understand the different funding sources,
00:08:32.420 but the moment that you decide
00:08:35.500 that that's the path you're going,
00:08:37.160 I need you to commit to it.
00:08:38.540 I need you to execute against it.
00:08:40.340 Too often, I see founders totally lose opportunities
00:08:44.620 because they're trying to do two things at the same time.
00:08:46.480 They're trying to continue to grow their business,
00:08:48.420 show up for product meetings,
00:08:50.080 manage the marketing team, et cetera, sales management,
00:08:53.440 and at the same time,
00:08:54.760 go close an incredible round of funding.
00:08:57.320 Those two things are really tough to do at the same time.
00:09:00.420 What I would suggest is you tell your team,
00:09:02.900 I'm going to go down this path
00:09:04.360 for the next three to six months.
00:09:06.040 I'm gonna be available, but at a reduced capacity.
00:09:09.180 So I need you guys to really step up
00:09:10.760 and lead these projects so that I can go execute
00:09:14.460 and complete this really strategic important thing
00:09:17.640 to fund our next stage of growth, okay?
00:09:19.500 So to me, it's really important
00:09:21.100 that you set that expectation.
00:09:22.340 If you have co-founders, then it's a lot easier
00:09:24.220 because you can kind of push a lot of that stuff on them,
00:09:26.780 but you need to commit and execute against closing.
00:09:30.460 And I call it hashtag money in the bank.
00:09:33.060 Until the money is in your bank account,
00:09:35.520 There's no funding deal that is closed.
00:09:38.080 Trust me, at the last hour,
00:09:40.180 there could be a whole global meltdown
00:09:41.920 and all these different options go away.
00:09:43.800 So you need to make sure that you push,
00:09:45.900 you drive and get that money wired in your bank account
00:09:50.020 and lock it in.
00:09:51.040 So quick recap, how to evaluate funding options
00:09:54.140 without giving up your business.
00:09:55.400 Number one, examine your exit.
00:09:57.220 Number two, map your growth engine.
00:09:59.340 Number three, evaluate options.
00:10:01.480 Four, calculate the cost.
00:10:03.580 and five, lock it in.
00:10:06.580 As I've mentioned a few times so far,
00:10:08.060 if you wanna download my funding options cheat sheet
00:10:10.940 and click the link below to get a look at that,
00:10:12.920 I break down the six different funding models
00:10:15.760 that are traditional that a lot of people
00:10:17.540 in the software space use,
00:10:19.060 as well as list out the 11 different funding options for you
00:10:23.500 and the different covenants and timeframes
00:10:25.680 that might take you to raise or the amount of capital.
00:10:27.860 So you can get a sense of effort and focus,
00:10:31.280 but obviously dive into each one of those,
00:10:33.180 work with your own legal team to make sure
00:10:35.180 that if you get involved with one of these different options
00:10:37.560 and I don't mention any specific vendor
00:10:39.720 or a company or a service,
00:10:42.280 I just wanted you to be aware of what those look like.
00:10:44.760 So you can click the link below to download your copy.
00:10:47.300 If you like this video, be sure to smash the like button,
00:10:49.180 subscribe to my channel.
00:10:50.840 If there's anybody you think that this video
00:10:52.420 could support or serve,
00:10:53.560 feel free to share it with them directly.
00:10:55.480 As per usual, I wanna challenge you
00:10:57.340 to live a bigger life and a bigger business
00:10:59.300 and I'll see you next Monday.
00:11:00.800 The problem is I keep banging, alright that's good, that's good.