Dan Martell - How to Raise Money for Your SaaS

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.

Dan Martell - May 25, 2020

How to Raise Money for Your SaaS

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