Best practices for B2B software startups

Raising funds from venture capital firms in uncertain times

Newion associate, Jingyi Wang

Yes, Newion is still looking for interesting investment opportunities! Many startups and scaleups assume venture capital deals are on hold due to Covid-19. Yet at Newion, we have actually evaluated more startups and scaleups this year than during the same period last year. However, in today’s distressed markets, venture capital firms are more cautious and spend more time assessing the robustness and resilience of companies for potential investment. Last time Patrick gave tips on the general domains investigated by VCs in the pitch deck. Here I will explain how the emphasis has shifted as a result of the pandemic and suggest specific topics to focus on. Hopefully this can help you prepare for the fundraising conversations.

People

As an early-stage investor, we invest in people. A crisis tests people and leadership. We are keen to see how founders and management teams respond to crisis. Many companies have put a freeze on hiring or resorted to headcount reduction. If you have an agile and fast-learning team, you may be able to reallocate resources from Sales and Marketing to Customer Retention to limit long-term value damage. If you want to enter a new market, we think, in the current climate, opening a new office in the US or elsewhere in Europe will involve additional risk. While venture capital investors are unable to visit companies in person, we are eager to talk to individual employees to understand how they are doing. An engaged team is key to sustaining business in difficult times.

Investors are looking for companies that can withstand downturns, potentially benefit from the current situation and rebound after the pandemic. We want to know how robust your business is and how you are addressing the risks and leveraging opportunities to make your company more resilient.

We want to know how robust your business is and how you are addressing the risks and leveraging opportunities to make your company more resilient.

Market

The pandemic has had a profound impact on the global economy with some markets being more affected than others. Venture capital firms monitor market dynamics and trends and will be more cautious in investing in startups that serve particular niche markets, such as the hospitality, travel, oil and gas, and automotive industries. It’s easy to tell if a software provider serves a specific vertical, but for horizontal solutions, we would want to see an assessment of the short and long-term impact on the installed base. If your company focuses on heavily impacted markets, you may wish to consider pivoting to less impacted markets, such as (scheduling and networking) software solutions that support conferences, which are now moving online. Market segment based on customer size is also relevant. Software sales to SMEs are still growing steadily, unlike software sales to enterprises, which are more risk averse and have longer decision-making processes during economic downturns. For example, Newion portfolio company Deliverect is benefitting from Covid-19, mainly due to increased demand for food delivery services from small and medium-sized restaurants.

Product With companies carefully assessing all suppliers, a ‘need-to-have’ proposition is crucial. We encourage potential portfolio companies to continue to invest cash resources in product development to increase the importance of their products for customers. It is essential to proactively inform venture capital firms of KPIs such as product payback time and ROI. In fact, being a fully data-driven company from day one is a major advantage when talking to potential investors.

Bear in mind that the more the solution is mission critical, the more stakeholders are involved in the decision-making, and the longer the sales cycle, especially at the moment.

Product stickiness and the cost of switching also become more important during a recession. Products with stronger lock-in generally have lower churn.

While it is difficult to change a product overnight, some can be smartly positioned to meet new needs. For example, Newion portfolio company Roadmap has been heavily impacted by travel ban measures, but the features of its business travel communication and real-time travel mapping help enterprise customers meet travel compliance requirements and support business travellers during this period.

Go-to-Market Adopting alternative go-to-market strategies in the 1.5 metre economy can also make your business more resilient.

The budget initially allocated for lead-generation events can be spent on more account-based marketing through LinkedIn or (creating) your own online forum. If you are struggling with field sales, a product-led sales approach may be an option. Switching from top-down to bottom-up sales may enable you to gain traction without closing a full enterprise deal.

Sales cycles will inevitably be longer, especially when dealing with enterprises. But high-velocity sales can be more efficient with everything being managed online. If you rely on land-and-expand strategies, introducing a self-service model that allows customers to grow their own usage without having to contact your Customer Success team might make upselling easier.

Adjusting pricing and payment terms may also help your business. Adjusting contract terms from monthly to annually where possible will certainly reduce cash flow pressure. Discounts can also be an effective marketing tool. Newion portfolio company CustomerGauge, which focuses on customer and employee retention, offered a free simplified employee-NPS product as part of a marketing campaign that turned out to be an effective lead-generation channel.

Revenues Your revenue model is probably the most critical factor. Recurring revenue will cushion the initial impact of a recession. But, very often, companies have mixed revenue models: SaaS combined with consulting revenues or volume-based pricing, such as pay per use. The more recurring revenue, the better. We look at numerous SaaS metrics, but when it comes to assessing short-term impact, the most straightforward ones are bookings, sales pipeline and retention relative to historical performance.

  • How do new ARR, upsell and expansion in the last 3 months compare with previous figures?
  • What about leads? Has your conversion rate progressed from MQL to SQL and from SQL to close?
  • Are you seeing, or do you anticipate an increase in churn?

We will also want to know if you have adjusted your business target for 2020, and what measures you have taken to lower your burn rate and lengthen your runway.

Our perspective Venture capital firms invest for the longer term. They know a crisis will pass. More importantly, they know these periods create opportunities. A significant number of today’s most successful B2B SaaS companies were funded just before or during an economic recession: Datadog, Twillio, MongoDB, Slack and Coupa to name a few. This pandemic may also turn out to be a catalyst that accelerates digital transformation of other market trends.

So, remember to keep an eye on the long-term perspective!