In speaking recently with Brian Parks, founder of Bigfoot Capital, we touched on the primary reasons that SaaS financing deals ultimately fall through – or fail to even get off the ground in the first place.
Bigfoot receives hundreds of inquiries a year, evaluates ~40% of those inquiries, and ultimately finances ~10% (25% of what they spend time evaluating). Throughout their process, it’s paramount for them to run as efficiently as possible and not string Founders along. In order to do so, they rely on Founders to engage with them, providing data and time to talk through their request for capital and the business holistically.
Even though many founders claim to need growth capital, Bigfoot is at times left standing there with open arms with the founder nowhere to be seen. Without true engagement, the process stalls out, creating a mutually frustrating outcome.
It seems counter-intuitive, perhaps even unlikely, that founders would go radio-silent on a partner who could provide them with much-needed capital and ongoing support, but it happens consistently.
So, why do so many founders ghost?
In our conversation, Brian quickly summarized what he perceives as the primary reasons as to why founders don’t follow through on the funding process, which we’ve summarized below. We’ve also included suggestions for founders/executives to get ahead of these hurdles, so that their own funding process isn’t delayed when it matters most: at the time when capital is needed to sustainably grow your business.
Reason 1: Lack of commitment
Brian sees a lot of Founders come through who lack commitment to truly investing in the fundraising process. For success, alignment of effort between the founder and the potential financing partner is really important. By no means should this be a harrowing experience, but it does take attention, communication and collaboration to succeed, all of which also matter for relationship building and getting the partnership off on the right footing.
Regardless of the type of funding they are pursuing, founders need to mentally and logistically dedicate time to their fundraising processes. “Fundraising is a full time job” is an adage often attributed to raising from VCs, and it ought to apply, at least in part, to the process of raising non-dilutive capital as well. In other words: clear time on your calendar and make sure your team or co-founder can handle the day-to-day of the business for 2-3 days a week so that you’re able to focus solely on the fundraise during those times.
Reason 2: Coming Unprepared
Bigfoot really tries to communicate and streamline their process and requirements as clearly as possible to minimize any surprises. If companies have their operations in order, it’s pretty straightforward. If not, it’s a lot more manual with more back and forth and confusion/pain.
Make sure you have your data, story and documentation in order before you begin your investor conversations. A helpful post on this topic can be found here if you need to learn more. Brian recommends utilizing tools like ProfitWell or SaaSOptics to track/share metrics and having at least outsourced accounting/finance support in place. Bigfoot has built SaaSScore.co on top of ProfitWell’s Metrics API to streamline the data acquisition process and provide Founders with an indication of their SaaS health and financing that may be able to access from Bigfoota. Check it out! See in section 4 how this puts you in a position to WOW any potential capital partner, have them lean in and drive a successful financing. Ideally, you are the most buttoned up company they have ever looked at. That’s a good goal to set for yourself and your team from the get go (and applies to any form of financing throughout the life of your company). Being fully prepared across all facets of your business makes every subsequent financing that much easier (and enjoyable).
Raising money is always an unknown endeavor, whether or not you’ve done it before. If you haven’t done it, it’s fear of the unknown, fear of failure, fear of impending judgement and pain to be inflicted upon you. If you have done it, many of those fears still exist along with any battle scars you still carry from previous fundraising experience. There’s also the psychological fear of debt. What if I can’t pay them back? Can/will they take my company? How will other potential investors view me/my company having taken this money? It’s our job to cut through all of this and deliver comfort and certainty as a partner.
This is unique for each person, so it’s a bit tougher to provide blanket advice. However, remember that you already have a business, you know where you’re headed, and with the right capital partner you’ll be able to simply be even more successful. Any investor who works with you wants you to succeed as well (test them on that, get references) – they’ll be right there, literally supporting you and cheering you on, so don’t view it as a daunting task… instead, perhaps it’s helpful to view the fundraising process as simply finding the partner with whom you’d like to succeed.
4. Value Perception Mismatch
When there is a material mismatch between the perceived investment that you have to put in up front and the resulting value you may receive by having done so, that can foul things up. If you can’t clearly determine the value you can create (and retain) from the capital you’re seeking, you may need to pause and do some thinking. Also, have the potential capital partner help you determine the value (do some collaborative modeling). Take the time to build a relationship with the lender.
Brian mentioned he recently received a 10-page beast of a diligence request from a new capital partner for Bigfoot, and he simply has to satisfy it to get their $ and grow Bigfoot. He and his team cranked it out in four days with focus and collaboration. View this as your opportunity to shine and differentiate. Brian’s proud of the way they have built Bigfoot, so this is an opportunity to expose new parties to how they operate.
How did they do it? They had their sh&t together from the previous three years as they were building their business, with an eye to the future. Founders need to realize that you just have to put in the work (and should do so beginning day 1) and the value will come from doing so.
This is related to both #1 and #2 above, yet we’ve decided to parse it out as it’s focused more on the expectations than it is on the actual documentation and diligence process. Simply remember that someone is going to be cutting you a sizable check. Would you give a stranger $10,000 without asking questions and receiving some assurances from them? How about $100,000 or $1M? If you put yourself in the shoes of the investor, you’ll understand why they are requiring certain elements within their diligence process, and as a result, you’ll be a better partner for them as well — all of which will likely result in a better working relationship long term.
If you avoid the hurdles above it certainly doesn’t guarantee that you’ll get funded, but if you go bumping into these hurdles one by one, fumbling through the process because you weren’t prepared – it’s going to be damn hard to get that term sheet in your hands.
– Collaboratively authored by Brian Parks and Thomas Rush