Additional Rounds or Increased Burn aren’t always the answer

The SaaS industry has witnessed explosive growth in recent years, featuring many emerging unicorns, staggering evaluations, and sizable investments poured into businesses that sometimes barely touch the million-dollar mark.

The trend has predominantly been about raising funds, expanding, securing more funding, supercharged growth, and eventual exits.

The bare fact is, only a handful of businesses have the potential to evolve into a unicorn. However, the majority of them relentlessly pursue this aspiration.

Pursuing a dream isn't inherently detrimental unless it veers into unrealistic territories or jeopardizes the business you've tirelessly built.

So, what if you've been building your company from scratch, gone through the pre-seed, seed, and perhaps Series A financing stages, but you're still haemorrhaging money each month?

Is the solution to secure more funding? Possibly from fresh investors expanding your Cap Table? To recruit more Account Executives to 'undoubtedly boost sales'? Or maybe a new VP of Marketing to 'refine the messaging to generate new pipeline'? Do you increase your burn rate 'for a couple of quarters’ to offset the additional expenses until sales start to surge?

Starting down this path is fraught with peril. As the burn rate rises, revenue ramps up slowly, personnel changes occur, and more funds come in - it can create a snowball effect. Soon, investors may be unwilling to inject more capital into the business, and cost-saving measures, including layoffs, may be implemented. This, in turn, impacts revenue due to the decreased manpower to market, sell, and onboard, which creates customer dissatisfaction… Remember, customers are the ones bringing in the cash to keep your business operational. In a brief period, a business aspiring to become a unicorn could end up closing its doors permanently.

Yet, shifting towards a more 'conventional' business approach can still yield a highly successful enterprise. In sectors outside of SaaS, there are few instances where 'hyper-growth' is deemed vital or multiple funding rounds are commonplace, let alone expected. The immense pressure to expand at all costs, prevalent only in the SaaS realm, is indeed laden with risks.

Think of a scenario:

You are the Founder of a $1.5m ARR SaaS company. Your Cap Table includes a handful of investors who have injected two or three rounds totalling $2.5m. You have a good team, all paid well but you’re burning $25k/month. The investors are pressuring you to reach 200% or 300% YoY growth, but you’re struggling, and have been for the last 6 months. They are resisting investing additional funds due to the ‘low’ growth and hard misses on forecasts.

Your solution is stable, you have perceived PMF, and the majority of clients are happy. The business is growing organically, but this 300% growth plan is just not happening.

There are essentially two plays you can make:

The Hail Mary strategy (hope!):

You raise more, you dilute more and you increase burn with the expectation more will mean more. It generally doesn’t. What this does do is:

Increase pressure on your team to deliver more (when it may not even be possible).

It creates additional pressure on you as the Founder from an increased number of investors. An expanded Cap Table will also affect your chances of securing additional funding rounds.

It greatly increases the risks of fast bad hiring. An SDR bad hire will set that position back 12 months and an AE 12-18 months. You will run through selection, offer, hire, onboard, train, and GTM. Then finger-pointing, blaming and firing. Then the process starts again, but now you are a further 12-18 months into your journey with a large dent in your cash flow.

Significantly decrease your runway. Again this creates even more stress, and even more risk and harms your chances to raise the next round.

Start signing up customers that do not fit your ICP and are likely to churn in 12 months or less

You temporarily de-scale, and structure your SaaS with a traditional business model and most importantly, get cash-positive as quickly as possible:

Freeze your hiring. Hold off on that new VP of Marketing that you possibly don’t even need anyway. Vanity hiring has long been an issue within SaaS, with Founders enjoying the feeling of spreading the word that they have 26 VPs! Hire and retain what you need, not what looks cool.

Evaluate booked events. Attending events with half your team in tow because ‘we need to be seen there’ is a huge waste of direct and indirect costs. Remember, some events have 100,000+ attendees, do you really think anyone is going to notice that you have 3 people there instead of 12?

Temporarily freeze your marketing spend. It's time to evaluate campaigns for their actual worth. If your CAC is high, it may be due to the breadth of campaigns you are running, and not all of them being effective.

Objectively ratio your SDR/BDR to the pipeline generated. Are your BDR team and activities creating a real tangible opportunity pipeline for your AEs? If it's not, do not delay in taking action. You also need to ensure their performance is not hampered by unrealistic targets, the wrong ICP/target market(s), or the foundations of the BDR strategy being unproven.

Objectively ratio your AE to pipeline and close rates. Are you overloaded with AEs compared to opportunity generation? A common issue within SaaS is the sales team having excessive headcount compared to the number of leads being generated.

Speak with all your client base. Engage with them, make sure they are happy and are likely to renew their contracts. Customer churn is a huge risk to cash flow, mitigate the risks by keeping in regular contact with them.

One of the best ways to sanity check your spending is by adopting a ‘Stewardship Mindset’. Stewardship is the responsible management of resources that are entrusted to your care. In the context of a SaaS business, these resources are the capital provided by outside investors. And a sense of stewardship is critical, as it fundamentally shapes how a SaaS company will approach spending, growth, and risk management.

Think about it. Would you still hire that new VP, take 12 team members to a specific event, or hire a BDR team if the funds in the business were invested personally by you?

Remember, a company, by definition, is there to make money.

There has been a common trend within SaaS, especially over the last 3-4 years. Valuations have been highly inflated, investors throw crazy amounts of money at the business. They put a huge amount of pressure on the founders for ‘hyper-growth’. Founders then hire and hire, growing the team that will enable them to achieve that growth.

Unfortunately, during all the rush, no one checks to see if the foundations are proven and stable. More headcount can be thrown at functions that simply will not achieve success even if they had 500 people.

Of course, sometimes the Hail Mary does pay off, it's the law of averages. However, more often than not, the business will fail and the founders will be left wondering what-if.