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17ReasonsYourSaaSCompanyIsNotInvestmentGrade
February20th,2019
Tim McCormickCEO
550+Customers
$4B+Managed Revenue
$11B In Aggregate
Invested Capital
Subscription Management built for growing B2B SaaS and subscription businesses.
• Billing & Collections• Revenue Recognition• SaaS Metrics & Analytics
About SaaSOptics
About Founders Advisors
Zane TarencePartner &
Managing Director
Founders Advisors is a merger, acquisition, and strategic advisory firm serving middle marketcompanies. Its M&A advisors offer sell-side, buy-side, recapitalization, and divestiture/spin-offsolutions for its clients. A privately held partnership founded in 2003, Founders has offices inBirmingham, Alabama, Dallas, Texas, and Houston, Texas.
55Completed
Engagements Since 2012
$1B+Total Transacted
Enterprise Value From Engagements
21%Average Increase In
Initial Bid To Close Value Last Year
Silicon Y’all2019 Summit
October 7th – 9th
In order toprovide securities-related servicesdiscussedherein, certain principalsof Foundersare licensed with FoundersM&AAdvisory, LLC, member of FINRA & SiPC. Founders M&A Advisory is a wholly-owned subsidiary of Founders Advisors, LLC.
TargetedAcquisitions
Sales & Recapitalizations
GrowthCapital
StrategicAdvisory
ManagementBuyouts
1 YourCompanyLacksRecurringRevenueSoCashFlowIsUnpredictable
ØAllrevenuestreamsarenotcreatedequalà SumofthePartsvaluationmethodology
ØSaaSbusinesseswithheavyservicesrevenuetypicallyhavecompressedmarginsandlessoperatingscale
o Servicerevenueisn’tadetractorifitisdrivingpredictableandstickyrecurringrevenue
ØAtruesingle-instance,multi-tenantsolutionwithoutmuchcustomizationispreferred
2 YourCompanyLacksScale&AHealthyGrowthRate
ØGrowthratesareusedasaproxybymanyinvestorstodeterminetheusefulnessandviabilityofthesolutionà ProductMarketFit
ØOnceaSaaScompanyhasestablisheditselfanditsproduct,itsfocusshiftstocustomeracquisitionandsales
ØBecauseofthemarginsassociatedwithSaaSbusinesses,highergrowthratesenablethebusinesstoproducesignificantcashflowmorequickly
ØHowdoesyourcompanycomparetoTheRuleof40?
3 YourCompany’sMarketDoesNotExciteBuyers
Ø“Neitherastellarteamnorafantasticproductwillredeemabadmarket”–MarcAndreessen
ØIsyourendmarkethealthy?Whatisthecompetitivelandscapelike?
ØGenerally$1BofTAMisamarketsizethatcanexcitebuyers;however,ifyouhavetheabilitytodominateasmallerTAM,itcanbecompellingtoinvestorsaswell
4 YourCompanyDoesNotHaveAMeaningfulMarketShare
ØInvestorswanttoacquirethe#1solutioninaspace,andtheywillpayapremiumforit
ØRoll-upsareaccountingformuchoftheM&AactivityintheSaaSspaceanddrivingvaluations
ØTheonlyreasonpeoplegoto#2(anddeeper)isbecausethe#1solutionhasalreadybeenacquired
ØIfyou’reasmallcompany,youneedtotargetmarketshareinasub-segmentofthemarketanddemonstratethatyouarecapturingmeaningfulsharewithinanichemarket
5 YourCultureDoesNotAttractorKeepTheBestEmployees
Ø“Talentisthemultiplier.Themoreenergyandattentionyouinvestinit,thegreatertheyield.”—MarcusBuckingham
ØMuchlikeyoutrytodifferentiateyourproductinthemarket,areyoumakinganefforttodifferentiateyourcompany’sculturetocurrentandprospectiveemployees?
ØAreyouattractingandretainingtoptalent?Acqui-HiresareakeyM&Adriverforstrategicbuyers
ØInthelongrun,employeeturnoverissignificantlymorecostlythanemployeeretention
ØTherealcompetitiveadvantageinanybusinessisonewordonly,whichis“people”
6 LackofBarrierstoEntry
Ø“Howdoyoubuildadefensiblemoat?”– WarrenBuffet
ØDoesyourcompanyhaveaMOATthatprotectsitsmarketposition?
o Intellectualproperty
o Proprietarydata
o Differentiateddeliverymodel
o Brandrecognition
o Marketpenetration
Ø Weakbarrierstoentrymakeanassetlessattractivetofinancialinvestorsandmakethebuildvs.buycasestrongerforstrategicacquirers
7 YourCompanyLacksOwner-IndependentSalesandMarketingProcesses
PollingQuestion
7 YourCompanyLacksOwner-IndependentSalesandMarketingProcesses
ØYoursalessystemcan’tdependuponyourCEOoronegreatsalesperson
ØSalesandMarketingefficiencyiscriticaltoagrowingSaaSbusiness
ØInvestorsmustseethatyourSalesandMarketingprocessesarescalableà areyourprocessesdocumented?
ØPerformancedataiskeyà youcan’timprovewhatyoudon’ttrack
o Pipelineconversiondata
o Salesrepperformance
o Customeracquisitioncost
Ø WhatisyourLTV:CAC?Doesyourcustomeracquisitionmodelproduceareturnlong-term?
8 YourCompanyReliesonTooFewCustomers
ØHowmuchofyourrevenueisgeneratedfromyourtop1,3,5and10customers?
ØRegardlessoftherelationshipyouhavedevelopedwithyourtopcustomer(s),concentrationriskwillalwaysbeavaluedetractor(orinvestmentdisqualifier)forinvestors
ØAimfor3%orlessaverageconcentrationpercustomer,withnocustomeraccountingformorethan10%ofrevenueandyourTop10customersaccountingfornomorethan30%ofrevenue
9 YourCompany’sCompetitiveAdvantagesDoNotProtectItsMarketShare
ØAgoodindicationofacompany’scompetitiveadvantageisgrossmarginà canyoudeliveryourproductandservicemoreefficientlythanthecompetition?
o Howdoesyourgrossmargincompareagainstyourmarketcohort?
ØWhatdoyoudobetterthancompetitorsinthespace?
ØPriceisn’tacompetitiveadvantageinthelongrun
10 YourCompany’sBrandDoesNotTranslateIntoNewCustomerAcquisition
Ø“Emotionalconnectioncreateseconomicoutcome”–WaltDisney
ØHowwellknownisyourbrandtopotentialcustomersinyourmarket?
o Logosgivecredibilityandclout
o SEOandPPCdomination
o Tradeshowawareness
ØCapterrarankingsandotherthirdpartylistsareimportanttoyourbrandstrength
ØBrandcategorystrengthwilldirectlyimpactyourCustomerAcquisitionCostàstrongerbrandstrengthleadstolessCACspend
11 YourCompanyIsNotHungryToInnovate
ØAreyouabletocontinuouslyimproveonyourproducttokeepupwiththeneedsofyourcustomer?
ØIsyourProductManagementFunctionworld-class?
ØHowareyoutrackingproductfeedbackandwhatisyourproductroadmapdevelopmentprocess?
ØEfficientdevelopmentcycles&productupdatereleasesarekey
ØAlackofinnovationwilleventuallyimpactcustomerretention
ØInnovateinyourfunctionalareasaswellà strategy,sales&marketing,andtalent
12 YourCompany’sCustomersAreIndifferentToYourValueProposition
ØEverybuyerwilllookforNPSscores(orsomesimilarmetric)duringdiligence
ØAreyouawareofhowyourcustomersfeelaboutyourproductandservices?
ØHowwillyourcustomersrespondtoapotentialbuyer’ssurvey?
ØTrackingandimprovingonanNPSscorewillgiveyoucomfortheadingintothatphaseofdiligence
o NicetohavetwoyearsofNPStrenddata
13 YourCompany’sFinancialsAren’tButtonedUpAnd/OrYouCan’tRelateThemToYourBusinessModel
PollingQuestion
13 YourCompany’sFinancialsAren’tButtonedUpAnd/OrYouCan’tRelateThemToYourBusinessModel
ØAsetoforganized,accurateandbelievablefinancialstatementswillhavemoreinfluenceonabuyerthananythingyousay,doorpromise
ØBeabletoarticulatetheuniteconomicsofyourbusinessà howdoyougeneraterevenue,whatdoesitcosttoobtainandservicethatrevenue,andhowdoyoucreateoperationalscaleovertime?
ØUnderstand&presentafairlyburdenedgrossprofit
ØAppropriatelytracknon-core/one-timerevenueandexpenses
ØCreateabudgetorforecastforatleastthenext12monthsà performannuallyandcompareagainstactualstoself-assess
ØCustomerbasemetrics
o ARR/MRRbuildup
o Retentionà customer,gross,net
o CACandLTV
14 YourCompanyDoesNotHaveTheIngredientstoScale
ØDoyouhaveoperatingleverageinthebusinessà Areyougrowingrevenueatafasterpacethanyourexpensestructure?
ØInstitutionalknowledgeisgreat,aslongasitdoesn’twalkoutthedoor
ØThinkthroughthemostimportantareasofyourbusiness(dev,sales,etc.)andensurekeyprocesses/proceduresarecapturedinaclearandeffectivemanner(thatcanalsobeeasilyandcontinuallyupdated)
ØCaptureeverythingfromuniqueworkflowstohowyouhire/trainemployees
o Operationalchecklistsareirresistibletoinvestorsandbuyers
15 YourCompany’sLegalHousekeepingWillNotWinAnyAwards
ØOrganizationoflegaldocumentationà corporatedocs,employeeagreements(IPassignments,NDAs),andoperationalagreements
ØCanyouproducetop20vendor&customercontracts?
o Standardizecontractswithcustomersandvendorsà salesteamdoesn’thavefreereigntochangeterms
o No“handshake”agreements
ØAreyoufullyawareofprovisionsinyourtopcustomerorvendoragreementsthatwouldlimitafuturetransaction?(RightofFirstRefusal,non-assignabilityprovisions,etc.)
ØIntellectualProperty
o Areyouusinganyopensourcesoftware?
o HaveyouremployeesexecutedIPassignments?
ØTaxesà AreyouproperlyfilingSales&Usetax?Ifno,areyouawareofthepotentialrisk/exposure?
16 YouCannotExplainWhyYourCompanyExistsAnd/OrCanNotTellItsStory
ØArticulateyoursummaryinlayman’sterms,withafocusonhowyouaddvaluetoyourcustomersandevenyourcustomers’customers
ØCreate,refine,andpracticeyour3minuteelevatorpitch
ØHaveawell-designedandhard-hitting1-pageexecutivesummary
ØAnswerthequestionofwhyyoudeservetoexistasacompany
ØBuyersareturnedoffbyfuzzycommunicators
17 TheMarketProcessisNotinYourPlan
ØAlwaysbepreparedtoengagetheinstitutionalcapitalmarkets;haveawell-thoughtoutback-upplan
ØBepositionedforalloptions:
o Holdandcontinuetobeagreatcompany– needtobepolishedtorecruitandretainthebesttalent
o Raisemoneyortakechipsoffthetable– haveyourhouseinorderincaseyouwantorneedtomovequickly
o Establishanadvisoryteam– accountant,attorney,investmentbanker,andwealthmanager.Don'twaittoolatetoplanforatransaction.Awell-plannedexitalwaysproducesanoutsizedoutcome
17ReasonsYourSaaSCompanyIsNotInvestmentGrade
February20th,2019
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