After due diligence: how to return to business

Session 3: “After DD”

The third and last session of our Due Diligence series with Metrix Partners was led by Jordi Pedrol , Founding Partner, and Borja Breña, Principal at Nauta. In this session, we give you some tips on how to do it:  

  • What it means to become fundable in the next 18-24 months
  • How to execute on the Business Plan
  • Focus on scaling finance operations
  • Exploring non-dilutive additional funding

Although obvious, building a company is a very long and hard journey. That is why we need to do everything we can to increase the probability of success. Both Nauta Capital and Metrix Partners have worked with several companies that have managed to grow from Seed to Series B and beyond, as well as with other companies that are on a good track to beat the pessimistic odds of making it as a start-up. Onna and ForceManager are two examples that both Nauta and Metrix are proud of having supported in their journey.

Section 1: Becoming fundable in 18-24 months

Congratulations, you have successfully closed your round, but now is not the time to slow down!  

Do not forget that real success is not defined by the money you raise, but by how you deploy that capital, and how you reach your milestones. The funding round is actually “Milestones Funding”: the investors have provided you with capital to reach the your next funding stage whilst creating optionality for the company within a limited time period (usually, 18-24 months).

In general, to raise the next round, you will need to show the following:  

  1. Strong and consistent revenue growth.  
  1. Show that this growth is efficient and scalable, from the perspectives of both go-to-market, and cash.
  1. Good Net Revenue Retention as a key metric of the quality of your product-market fit

Cash is king, therefore always keep track of cash reserves and anticipate the cash break point. Cash runway is correlated to the amount of pivots/changes you can introduce in the business to validate your hypotheses and reach your milestones. You don’t want to be in the difficult position of running out of cash without having reached your milestones. You can end up out of business if you can’t show proper evolution.  

At this stage you should focus on:  

  1. Setting meaningful and ambitious milestones. These milestones depend highly on your company’s true phase of development, but they should be ambitious enough to enable you to increase your valuation significantly (at least doubling your share price from round to round), whilst realistic enough to reach with the cash you have.
  1. Key valuation levers (Revenue growth; Sales efficiency; Net revenue retention)
  1. Executing the Business Plan.  

* Remember: Depending on your company’s stage of development, you are trying to prove different things: at Seed, you are hoping to show product-market fit; at the Early Stage, you are validating your revenue model (which includes product/go-to-market fit and scalability); and at the Growth Stage you are validating your recurring revenue model (sustainability and industry leadership). Most importantly, go step by step: you cannot skip steps in this process.

Focusing on the right metrics is key to the success of your business: New business models are popping up left, right and centre, and new SaaS models require new ways of measuring business performance (for example, CAC payback period might not be a good metric to track a product-led growth strategy). Creating a relevant KPI dashboard helps you understand your evolution and make the appropriate decisions. Your board of directors should help you with this KPI dashboard, discuss the KPI reports and make sure you use the correct guidelines.  

Be smart when dealing with inbound interest from investors. There is so much liquidity in the market right now that you will probably receive inbound interest even though you are not actively fundraising. Be mindful and be prepared for that. Keep potential investors engaged and updated for the next round, but beware of being distracted by these approaches. Focus on executing the plan and do not take your eyeball away from the business. Make sure you are the one leading these conversations and dedicate a limited amount of time to it. Extension rounds are becoming common because, apart from extending your runway, they usually come with a nice valuation increase.  

You can find a short interview with ForceManager CEO Oscar Macià from minute 35’ to 43’. ForceManager has gone all the way to Series B, and Oscar shared his experiences of this journey with us, how he made sure to become fundable from round to round, what investors look for depending on the stage you are in, and what are the challenges he encountered. We encourage you to listen to Oscar as his insights are very valuable.

Section 2: Focus on executing the business plan

Once you have set your milestones it is time to start delivering. Executing the business plan and aligning expectations with investors will keep you out of trouble.  

Remember to make use of your investors as advisors. Communicate in a transparent manner and keep them properly informed, not only about positive achievements but also about existing challenges. They can be very helpful, and you are all in the same boat. Ask from the investors as much as you need!

Managing your company’s talent is the most important challenge. In general, fast-growing companies evolve faster than people do. The skills needed change very rapidly from stage to stage. To execute the business plan, you must focus on attracting and retaining the best talent you can considering the company’s needs for the current and future phases of development.  

Section 3: Scaling Finance

Business complexity increases significantly as your company grows. To manage it, you need to have a solid and sound accounting and finance operation in place. This is more business critical for later stages, but you should start building it correctly from the beginning to avoid pitfalls in the future.  

Key elements of a scalable finance operation:

  • Data-driven: “If you can’t measure it, you cannot improve it.” Data demand increases rapidly; focus on data segmentation (product, sales, cohorts, etc.), a metrics dashboard to identify and track key levers; lastly, constantly benchmark and adopt best practices.  
  • Financial planning and budget: Establish both short-term (1 year) and long-term (2-3 years) plans, and track & update on how you are doing vis-a-vis the plan. Again, cash is king, so monitor how much cash runway you have!  
  • Finance infrastructure: As you scale, things will get complicated. It is worthwhile investing in financial products and systems, professionalize your finance department with functional P&L’s, annual audits, and scale efficiently (this includes hiring talent for the finance department).  
  • Financial reporting: Generate monthly and quarterly financial decks highlighting key metrics and compare them to the initial plan. Finally, keep an updated record of your cap table.  

Cohort analysis is important. The best companies strictly define customer segments, monitor them and invest in them. This can be done by the G2M Strategy, by geography, by industry, by size, by number of users, by headcount... Try to have a sense of what channels are more efficient, to fine-tune your strategy.

Section 4: Non-dilutive additional funding

There are other ways of getting funding without giving up equity. Make sure you explore all these alternatives, but before accepting any funding, make sure your investors approve of it. Several non-dilutive funding options:  

  1. Bank debt: Difficult because start-ups are not the ideal candidate to receive commercial loans from banks because of the high probability of default and no sizeable assets/equity (besides the company’s talent of course, but this is not sizeable). Please do not back your company’s debt with your personal assets!
  1. Alternative funding: Traditional Venture Debt, where a share of the principal is converted into equity at a lower valuation; or newer Revenue-Based Financing.
  1. R&D public funding: Grants or soft loans for R&D developments provided by public entities.

Interesting question >>> What is a sustainable and acceptable level of debt?  

Hard to get an exact formula but sometimes we hear the following rule of thumb: keep gross debt under half of your ARR. However, many finance providers advise not to exceed 50% of the ARR adjusted by gross margin (e.g.: if ARR = €5M and Gross Margin = 80%, then €5M x 80% x 50% = €2M would be maximum sustainable gross debt).

As a quick reminder this is part of a three-session webinar to shed light on what a good Due Diligence process should look like and what the best practices that will help you nail the process for your SaaS startup are. You can check out chapter 1 (Before DD) & chapter 2 (During DD) of the Due Diligence Series below.