This article is adapted from a panel discussion that took place at Future of SaaS Festival 2022. Listen to the full unedited talk OnDemand right here.
Scaling your SaaS org can seem like a monumental task. Like a well-oiled machine, there are so many moving parts that need to be in sync in order to make it work.
What if you could break each of the parts down and examine them one by one?
Well, if there’s a group of people that have a discerning eye for what makes or breaks a SaaS org, it’s investors. Before taking that chance on your business, they’re gonna need to know that all the crucial components are in place to see a maximum return on investment.
In this panel discussion from Future of SaaS Festival 2022, a seasoned investor, Michael Bereslavsky, and a SaaS Financing advisor, John Gallagher, chart the essential steps you need to grow (and keep growing) a viable SaaS business.
Key talking points include:
- Challenges of finding the right talent
- Focusing on the right channels
- How marketing spend is evolving
- Equity vs debt financing
- What investors and lenders look for
- How to prepare to sell your business
About our panelists
John Gallagher: Let’s give a little color on our different backgrounds and what we do, just to frame the discussion. I run a finance company that helps various SaaS companies with growth, M&A, and investors. Michael, maybe you could give a little bit of background on what you do.
Michael Bereslavsky: Sure. I run a small private equity firm, Domain Magnate. We acquire content and SaaS businesses, and we've been involved in that for close to two decades now. I'm excited to get into this discussion about SaaS businesses.
John Gallagher: I'm sure you've seen a lot over the last 20 years. Obviously, SaaS and eCommerce are going through somewhat of a challenging time at the moment with valuations and investors, but that doesn't take away from the fact that most of these companies are very successful growing companies and will continue to be so.
The challenges of finding the right talent to grow your SaaS business
John Gallagher: With that, we’ll get into some growth chat. Whenever a company's looking to grow, there are certain fundamentals that they need to get right. From your experience, how can people best leverage talent to grow?
Michael Bereslavsky: I'd say this is one of the primary indicators of a healthy growing SaaS business. However, it’s becoming increasingly difficult now as talent is more and more expensive. Still, it's essential to have great people, including a strong developer team, to bring a good product to market.
John Gallagher: Absolutely. Without that healthy product, you're not going to win the customers and the growth that you're looking to achieve. And then once you have that product, getting it to market is key, and having experienced sales, marketing, and executive teams around that is fundamental in growing the business.
Focusing on the right channels to grow your SaaS
John Gallagher: What channels and marketing should people be focusing on when they're looking to grow?
Michael Bereslavsky: That's a good question. These days, the easiest thing is to focus on paid traffic, and we see a lot of startups and up-and-coming SaaS businesses do that. It's scalable and it's easy.
The downside, of course, is you have to have quite a bit of capital, and you have to make the numbers work because if you end up spending way more on acquiring visitors and customers than monetizing them, it will be challenging to present a compelling long-term vision to potential investors or acquirers.
My recommendation is to focus more on SEO and other long-term channels. Building up some social assets and a good brand will help you get visitors much more cheaply.
John Gallagher: Absolutely. Five or six years ago, people were just pouring money into digital spend. Nowadays, there's certainly a law of diminishing returns when it comes to digital marketing channels, so people are having to take a multi-pronged approach to their marketing.
You've mentioned SEO. In a similar vein, we're big on content and trying to be out there in the market. We look at what our companies are doing in the arenas where their customers are, whether that's attending conferences, giving talks, or sharing content that will help their customers.
How marketing spend is evolving
John Gallagher: Do you see people using their marketing budgets in different ways now than they were a couple of years ago?
Michael Bereslavsky: Yeah, I think people are more aware of the benefits of content now. We have a few SaaS companies in our portfolio, and we generally prefer to spend the marketing budget on content because it’s a long-term investment, as long as you have high-quality content that's going to keep bringing visitors who will convert to customers to your website.
SEO is a good resource, but I would say it’s wise to first test your different channels, and then, once you have metrics to show which channels work better, you can allocate the budget based on what gives you the best results.
John Gallagher: Absolutely. Testing those budgets on what gets the better results leads to you seeing what works right for your business and what you get traction on. Then, once you get repeatable traction, you can spend more money and focus your budget much better to get new leads to your website.
Equity vs debt financing to fuel your startup’s growth
John Gallagher: Let’s move on to financing that spend – my area of expertise. We're a debt provider, but people raise equity at different stages as well to fuel their growth.
Do you think it makes sense to determine what type of capital to use for your business depending on its stage of growth? You run a private equity firm, so you've raised your own funds, but should companies be looking at equity and debt in different scenarios?
Michael Bereslavsky: So far, we've only raised equity – we haven't really worked with debt. That said, I think that nowadays you can find cheaper debt options, so the optimal approach would probably be to have a mix of equity and debt. I'm curious to hear your opinion on that.
John Gallagher: People often use equity to get to a certain stage. They have a lot of customers, market traction with their product, and a good marketing strategy, and they’re looking at the next 18 to 24 months. They might not need a huge amount of capital – they’re not looking to raise a series A or a series B from a venture capital fund.
They’re looking to spend and they’re looking to finance that spend and grow their company to the next level before they raise further equity. They might even just be looking to break even – there are a lot of great companies out there that don’t make money.
This is where debt can come in, to finance growth in a measured and cost-effective way. It's flexible and allows the funders to keep their shares in the company, which are obviously very valuable.
Debt financing can bridge the gap between a company reaching a certain revenue stage. For instance, if a company is doing $5 million in revenue, and its goal is to reach $15 million over the next few years, but it’s got a limited burn profile, debt can very much come in and fill that need.
What investors and lenders look for in a business
John Gallagher: So, Michael, your firm acquires SaaS and eCommerce businesses – maybe you could give us some more information on that and what you look for when you're acquiring a company?
Michael Bereslavsky: Yes, sure. We currently focus primarily on acquiring businesses with Google organic traffic. We look for opportunities to grow the business with more content and improved SEO.
And frankly, we look for limited technical complications, so we avoid businesses that are too complex technically, as it's not our primary focus. Our due diligence focuses on three areas – opportunities for growth, numbers, and risks.
We have some existing connections with advertisers and partners in certain niches that we've been operating in, so we have a preference for those niches. Other than that, we’re fairly opportunistic when it comes to the types of businesses we work with.
We look at deals and try to find the good ones. I think in the current market that’s the best approach because there’s such a high variance in the prices and quality of assets for sale right now.
You see quite a few deals with the financial side of the equation. What kind of spread do you see in terms of the prices people pay these days?
John Gallagher: In the market for people acquiring businesses, people have been working on a range of valuations. They’ll automatically go to the stock market and compare themselves against Airbnb, Zoom, and companies that are valued at 40 times their revenue and then start haircutting from there.
In the private market, there has been a range of between four and 12x revenue paid for companies over the last 18 to 24 months, which is much higher than what it historically has been (normally between two and eight x).
I think we'll see those valuations come down into old parameters again, depending on the company's growth, the industry it's in, the product, its customer base, how well it’s run, and other parameters that affect a company's valuation.
A lot of what we're seeing now was caused by the economic policies led by governments with cheap money chasing too few assets. That’s caused valuations to increase, and we've certainly seen that in the SaaS market.
As a lender, it doesn't affect my company too much. We're not taking any equity participation in these companies, so we're looking at the company's fundamentals in a very sustainable manner.
We're looking at management teams, who are key in making sure that the company grows or survives. The financials, the product, and the marketing also play in, but we have to take a sustainable view. That's the way a lender looks at it rather than an equity investor.
The key factors for investors
Michael Bereslavsky: That's very interesting. There are some differences in the approach but also some similarities. We look at a company from the perspective of how we can grow it, and find what needs to be fixed, but for you, it might be quite different.
What are the main aspects of a company that you look at when you have to make a decision regarding lending? Does the interest rate come into it, or is it dependent upon the company's risk profile?
John Gallagher: We have a very narrow risk profile, so our interest rate might go up and down a little bit, but we lend to very similar companies run in a very similar manner.
When we're looking at them, the financials obviously tell us a lot about a business, but we also dive into the revenue and the customer base, looking at retention, churn, how sticky the product is with customers, and how often they use it, as well as the growth side of the business and how they're doing that.
Getting into those fundamental metrics of how customers use the product and the company is key to any business, not just a SaaS business.
We also look at how much they have to pay to acquire a customer, how long it takes them to acquire a customer, how long that customer stays, and the value of that customer over their lifetime. Those are very salient SaaS metrics that I think every investor, whether an equity investor or lender, will look at.
VCs are much more accepting of high burn rates, where a lender has to see quite a managed financial burn rate, so we work a lot on the cash flows of the business and making sure that we can lend them enough money to get them to a point where they can stand on their own two feet – they’re breaking even or profitable – and go from there.
How to prepare to sell your business
John Gallagher: Have you any tips for people selling their companies as to what they should do and how they should prepare themselves for the process? Afterwards, I’ll share what they should do if they're looking for a loan.
Michael Bereslavsky: The first thing is to get your finances and documentation together, and maybe make the business a little bit more attractive to investors by reducing some unnecessary costs or increasing revenue and profits where possible.
Finances are the most important thing that any buyer will look at. They’ll be especially interested in your records from the last 12 months, so you need to get your P&L in order.
It’s also wise to set up the business so that it can operate without you as the owner, unless you plan to stay on. For that, it’s a good idea to prepare a roadmap to show where the business can go.
It’s important to fix any existing problems as well. I quite often see people trying to sell a business that is frankly broken without even trying to fix it first, even when fixing it might not be a very difficult thing. If there are issues that you can solve before selling, that's always advisable.
How long it takes to prepare for sale depends on the size of the business. For bigger businesses, it might take a year to get all your things in order before you go and present it for sale. For smaller businesses, just a few months could be enough.
There are different options for how to sell, of course. You can find a broker, you can list your company in a marketplace, and you can also try to sell directly. I would say the cheapest, easiest, and potentially best way is to approach your direct competitors or someone who you know might be interested in buying.
Often, people already know who their biggest competitors are, and those are the companies that might benefit the most from acquiring them. Finding a connection to the decision-makers in that company just to pose a quick question could be one of the best ways to get the ball rolling, but people rarely do that, for some reason.
John Gallagher: From a lending point of view, it’s similar in terms of having your ducks in a row and all your financials, your legal setup, your structure, and your shareholders boxed away so that you’re ready to answer any questions.
From a value point of view, you hit on something there. Getting your costs in line and making any bits of growth that you can six or 12 months before you sell is going to add to the value of the business.
