Growth Equity for SaaS Founder
Hi WSO. I'm the founder of an enterprise SaaS business, and am considering a growth equity round. I thought the userbase of this forum would be good to ask a few questions to get the other side of the table's perspective.
Company Stats:
- Enterprise software ($200K ACV, $1bn North America market, 12-month sales cycles)
- Strong product (validated by customer NPS and win-rates vs. incumbents)
- $8M ARR, 30% YoY growth last 3 years (resilient through COVID), breakeven 2020, 75% margins (35% growth, -15% cash flow is plan for 2021)
- 110% net retention (no customer churn last 3 years), 18 month payback period, 1x magic number, >5x LTV/CAC
Context:
- We built a product to go after an adjacent market that has the same decision-maker, and want to invest in our sales and marketing efforts even further to cover the entire market. While our payback period is long given our sales cycles, our customers are very sticky (with high lifetimes), and I am confident that our sales cycles for this new product will be reduced as we can sell to the same buyer who is familiar with our brand
- I would want to raise $4 - $5M to fund this investment and push profitability out another 2 years or so to get to scale faster before competitors come into my market
- I don't see my business growing >80%, but I definitely see it growing 40 - 50%, so growth equity seems like a better option than venture capital from my limited knowledge
- SaaS valuation metrics are at all-time highs, so this seems like a good time to raise
- It would be nice to take some chips on the table (10 - 20% of my ownership), but I believe this can be a $30M ARR business and plan to keep growing it
Questions:
- Is growth equity the best option for me? What other financing types should I consider?
- What is the typical deal structure (preferred equity, liquidation preference, etc.) and should I expect any incentive plan for myself and/or the management team?
- Most growth equity firms that reach out have an investment minimum of $20M. Is it abnormal for me to raise $5M on the balance sheet and $15 as a secondary? What is the typical split in these deals?
- Most growth equity firms look for >$10M ARR. Am I going to get a big discount for being $8M?
- Friendly culture fit, value creation/ops support, and a high multiple are important to me. Do any firms come to mind that fit this criteria? I've been reached out to by many of the bigger ones, but feel like boutique ones might be the better fits?
- Should I be walking in with terms or expecting terms?
- Presumably I should run a competitive process. Is it worth it to hire a banker for this (relatively) small of a deal?
- What multiples are you seeing in the market and what range of multiples should I expect for my business?
- What else should I be thinking about?
I appreciate all of your help.
I am a VP at a growth equity firm. DM if you'd like to connect. Some comments to your questions though.
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