These are Strange Times Indeed in SaaS and Cloud. The best SaaS companies from Datadog to Snowflake to HubSpot to Salesforce are growing faster than ever, even past $1B or more in ARR. And yet, the stock market has taken a big tumble, leading among other things to dramatic change in the VC ecosystem.
Venture funding almost overnight gotten twice or more as hard, often at half or less the valuation.
And perhaps most important of all is keeping your existing investors’ confidence. They may be panicking a bit. Their investments may be underwater in some cases, and in other cases, their own investors, the “LPs” (Limited Partners) may be panicking a bit or struggling.
And in tougher times in venture, you do want to keep your investors’ confidence. Why? They are the ones that can write you another check, in many cases. They are the ones that often will bring you the leads for the next financing round. And most importantly, any new investors and leaders will reach out to them for diligence checks on how the company is doing. You want them to be SuperFans. Even, and perhaps especially, when times are a bit bumpy.
Perhaps one lesson we can take away from this story is that if you raise money at $45B valuation, you should try to make it your last round of financing. https://t.co/MbsctAFH4W
— Villi 🇺🇸🇺🇦 🏳️🌈 (@villi) June 17, 2022
And most VCs are used to tougher times, and a missed quarter, and a botched hire or two. That isn’t what undermines confidence. Lack of vision, honesty, and transparency do. So here’s a quick checklist of what undermines confidence in your existing investors:
1. Surprises. Every VC expects a rough quarter or two, and even a rough year. But as founders, you should know well ahead of time. Nothing undermines confidence more than an out-of-the-blue email that growth plummeted. This spooks investors most of all. Give everyone multiple heads-ups early.
2. Lack of a (realistic) plan. What’s your realistic plan to grow faster? It’s usually impossible to make up for a rough quarter. How have you adjusted? Where is the product going? How are you upgrading the team? More here.
3. Lack of an understanding of the Zero Cash Date, and the implications. The best founders are keenly aware of exactly how much runway they have — and share it all the time. More here.
4. Too optimistic — or too negative — investor updates. Be positive, but grounded in data and reality. Crazy optimistic investor reports spook investors. As do ones that give everyone the impression there is no real hope.
5. Not having a realistic financing plan, and/or needing for existing investors to bail out the company. It’s the founders’ job not to run out of money (even if the VCs are often part of the problem). Founders that blindly rely on or hope their existing investors will bail them out of a tight spot … lose investor confidence almost overnight. The best founders are constantly communicating their plans, thoughts, and realistic strategy here. A related post here.
6. Blaming macro issues and externalities 100%. Sometimes, the market is down. Sometimes, your customers do struggle. But this is never 100% the root cause of any post-revenue SaaS company’s problem. Highlight the macro issues, but don’t blame them 100% for your issues.
7. Not recognizing a key mishire — for too long. We all make some bad VP hires, and that’s on us, not the VPs. But if you defend a key poor choice for too long, when the results aren’t there — that undermines confidence as well. Be honest about your mistakes, and fix them. More here.
8. Being too slow. Too slow to make key hires. Too slow to evolve the product. Too slow to change. Investors know the best founders evolve quickly. When it takes founders 9-12 months to see issues and take action — investors know that’s too slow. Too slow to win, and sometimes, too slow to make it.
Mere rate of shipping new features is a surprisingly accurate predictor of startup success.
In this domain, at least, slowness is way more likely to be due to inability than prudence. The startups that do things slowly don't do them any better. Just slower.
— Paul Graham (@paulg) April 14, 2020
9. Not Sharing Enough Financial Information, and/or Not Providing Prompt Investor Updates. Many founders share less when things get tougher, but that’s backward. Few things inspire more investor confidence than a prompt update the first day or week of the month. And few things create anxiety and undermine confidence more than an update that never comes.
10. Hiding Things. This is related to point #1, Surprises. Maybe it’s part of surprises, but it deserves a call out. Don’t hide bad news. In fact, run to it. Share it, but share it with an action plan. About how to do better, how we got here, and what we’re going to do about it. Children hide things. You shouldn’t. The best CEOs always get ahead of issues. The mediocre CEOs hide them, stalling for time.
At least up until $10m-$20m ARR or so,
If you haven't gotten your investor updates out by the 10th of the month, VCs assume it's not good
If you haven't gotten your investor updates out by the 15th of the month, VCs assume there's trouble
— Jason ✨Be Kind✨ Lemkin (@jasonlk) April 12, 2022
Again, bumps and even rough times aren’t what lose you the confidence of your VCs and other investors. It’s how you handle them, and where you go from there.
And a bit of the flip side here:
Don’t Believe image from here