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