How SaaS fundraising will be looking in the near future
About Joshua
Joshua: I’m an analyst and investor relations person for Wesley Clover. I look at our different portfolios of companies, do the valuations, and help them prepare the pitch. I do market analysis as well, I take care of our boot camps for our incoming entrepreneurs, and I also support the development of our different micro funds globally, where we have we have different programs. We have a companion micro fund, others would be an incubator or accelerator program, and it could be private or public, depending on the country. We have programs in the UK, France, Turkey, Mexico, Canada, and a few other countries that we’re looking at as well, but like everybody else, the pandemic put that stuff on hold.
Now we have a recession of some sort, and we have to decide what’s a good market, where we want to be, and where we want to play. We typically look for countries that have a large market in terms of people, as it seems to work well with tech. We also look at what I would describe as maybe tier-two markets or up-and-coming so that we can play in that area with a micro fund. Wesley Clover is the private holding company of an entrepreneur Terry Matthews, and he started Mitel Networks and a few other companies as well. He likes building tech companies. That’s what interests him. That’s what he does. If you’re building tech companies, you make investments, but his real passion is building tech companies, global ones.
What companies do you invest in?
Joshua: Primarily, we invest in SaaS companies and networking. If it’s related to 5G, we have some direct investments in companies in that area. Our micro funds are very much focused on SaaS-related B2B enterprises, and that’s our space too.
How is the process of investment looking?
Joshua: Let’s say it’s a country with one of our programs. They would go through the LAC program if they were selected. Some of these programs do direct investing, and some do venture building, or they do both. The decision process is really localized in Canada. We have a couple of different programs. Our west coast has its own process and operates very similarly to the other equity programs. And then we have where the east coast of Canada, in Ontario, where I’m based.
We have two ways I would say that it occurs – one would be direct, and one would be indirect investing. The indirect investing,we have an accelerator here, so around a hundred companies have gone through that accelerator, and we have an indirect relationship with the activities of that accelerator. And then we have direct investments, which really comes down to the founder’s interests, more so how we get initiated into valuing potential investments.
In terms of valuations, I would say there’s no secret to it. I’m sure some analysts believe they have the secret sauce, but we’re all looking at the same thing. And it’s who has the best relationships and the best timing that gets the better deal. And then they can tell everybody they knew it the whole time and they had special knowledge. I’m so smart and all that stuff, but we play mostly in the early stages, and after the companies have reached a certain level of revenue, we consider them grown-up or graduated, and we don’t really interact with them as much.
When you do the early stage, you don’t have fundamentals to look at. There’s zero this year, zero last year, and zero the year before. You’re not going to use historical patterns. And I mean, if you had any absolute insight into the future, well, then you’re probably doing really well in the public markets. Our focus really is on the founder. As I mentioned before, I am an analyst looking at an industry and markets.
KPIs to be looking for in 2023
Joshua: For our companies, we don’t consider them graduated until they hit a certain revenue threshold, I’d say further along in the growth phase. Once you’re hitting around the 10 million plus mark, you’re transitioning to evolve into the next part of a startup organization. We’ll provide any assistance with that usually. But at that point, they’re already changing once they hit over 10 million. For the ones underneath, it’s different. We have companies that are under a million. We have companies between one and five, and then we have ones that are hovering around that five, working towards 10, and I will be looking at different KPIs for that, but we’re always looking at growth.
I would say we’re a little bit more traditional, and we’re not exactly a VC. But we play in that world. We have some companies that would fit into the demographic they look for, but we’re a lot more conservative. I would say how the market is right now is probably a little bit closer to how we view it because we look much more at capital efficiency. Generally speaking, we want you to do more with less. We’re not really expecting you to have 300% growth month over month. If it happens, it’s great. We’re usually supporting you pretty early. We’re looking more at product-market fit and capital efficiency because that’s what’s popular now.
Net dollar retention was the one everyone was talking about last year, and also every VC warning manager, runway manager runway, that hasn’t changed. You still need to manage your runway this year, and if you didn’t do it last year, you’re probably in for not a very good 2023 as it’s now a buyer market. They’re going to come back to you and say – remember when you asked me for this Well, and I think you should get that.
I’m also looking at active users and looking for trends and patterns. I think that’s really important because the strong and hot companies for this year will have some resistance to losing or churn. That’s how it’s always been. Are you an aspirin or a vitamin? I believe that’s the term that people are familiar with. In recessions, nobody’s spending money on vitamins. Are you a company that offers value, or are you a company that has really strong marketing?
Advice for SaaS companies looking to raise funds in 2023
Joshua: I would probably suggest that they need to focus on their runway this year again. I would also say that if they can raise debt, it might be better for them. Again, none of this is isolation, and every situation is different. There are different factors, but I really do think that this year’s going to be a buyer’s market. Last year around 50% of the exits were acquisitions. I think that’s probably going to continue this year. I think the difference is people will get a lot less for those acquisitions, especially if a really terrible recession happens. And in that case, it’s gonna be a buyer’s market, so lots of deals will be offered. Founders are not in a position of power right now. They were in 2020, and now it’s swinging in the other direction. There’s lots of dry powder out.
If we just look at American data, 71% of the funding raised last year went into larger funds, and they didn’t go into emerging funds. They’ve been at this for a while, and they’re operating more like a sophisticated Wall Street style investment firm. Now they’re looking at things like profitability and capital efficiency, and they’re not acting like typical VC, which is high risk, high reward. In that case, it might be difficult to get the money if you’re not doing something where they view the upside from a financial perspective or technical perspective. In that case, you might want to look at alternatives.
I think running your runway will be the most important thing because you really want to put off investing if you can. Definitely, I wouldn’t be. If you happen to be one of the fortunate companies that are doing well, I will make sure that you think you’re doing well over the next 12 months at least. And you do not need to go back out for money if you’re going to start allocating a lot of cash into places. Regarding what these companies are doing, I still think digital transformation will be a very good area to be in. There are a lot of legacy industries that have not used tech yet. In terms of that, they’re also going to have pressure from their shareholders to cutbacks this year.
I think you will do well if you’re building a digitally transformative product that ties into that mandate. The solution to recessions is always to fire people. You will be okay if you can sell a product that reduces costs for other companies. That’s what they’re going to be focused on. They’re not going to be focused on growth, and they’re going to be focused on holding the line and keeping costs low.
