The Perfect Time to Raise: Product, Revenue and Scale with Dawn Capital

Let's kick off a little bit early and then we can be done sooner. My name is Evgenia Plotnikova. I work at Dawn Capital, which is an early-stage B2B software and fintech fund. I'll tell you a little bit more about us later, but my topic today is the perfect time to raise product revenue and scale. So if we first start off with, with a simple statement that Europe today is clearly the hotbed of technology and innovation. Saastr being here for for the first time is probably one of the best indicators for that. But equally, I think a lot more American investors are coming here to invest. There's 17% of American money that poured into European businesses in 2017, and that's bound to increase. So if Europe is hot, so should you raise now while the party lasts and go as quickly as you can to get that exciting round? Perhaps, but before we talk about the best time to do that, let's demystify a few things first. So I think myth number 1 about fundraising is every startup needs VC backing. Now, I spend about a quarter of my time talking to people who don't need to raise VC capital, and that's not necessarily a bad thing. Raising VC money means a few things. You need to get alignment on control of your startup. You need to be comfortable giving up a portion of your control to have a backer in the corner who will support you, but who will also protect their capital and push you further. You need to get alignment on your ambition. Having a life, nice lifestyle business that generates you $5 million in revenue is fantastic achievement. But the VC will push you higher to get there, 5 times return. And you also need to get alignment on speed. Whatever you hear about horizon of a venture capital, most of us will have funds who have a life of 10 years, right? So you kind of have to keep that, keep that in mind. So not every startup needs a VC. So if you want, come and talk to me. But it's OK not to get a VC backer. Oh, yeah, humble brag, that's us there in the corner. Myth number 2, VC funding is non-cyclical. Well, it is, unfortunately. We also take holidays. You think that might be a joke, but actually, if you look at the data that Tom Tunguz recently published, with 90% of confidence interval, which is a lot, There is a 15% increase in your round size if you happen to close in August or December. Why is that? Well, typically 3 months fundraising time, so you probably started in September or in May, hence before summer holidays and before Thanksgiving. So there is sort of an optimal period to pick when you're actually going, going into the market. And of course, there's also the, the 6, the general cycles of the macro to take into account. Myth number 3, you should raise money every 12 to 18 months. Yes, but not always true. If you are running out of cash, there's probably an inverse correlation between the money that you have left and VC interest. We can smell desperation from very, very far away. So you need to be raising when you don't need to raise, frankly. And this is probably when you create the best scenario for yourself, where you can create a little bit of FOMO, a little bit of competition between the VCs. And that's ideally probably not 12 or 18 months in the road. So with this myth in mind, when is a good time for you to raise a Series A? I figured I'll focus on Series A because that's where I invest. So this is what I know about. Obviously, it's different for seed funding or growth funding. So knowing that it's kind of end of the day, I figured we'll go through a case study. So please meet Brian. Brian is a CEO of a software business. Brian did math in Stanford. He then worked at Google and at Facebook. He then dropped out of his Harvard MBA to create a very exciting software startup. So Brian is perfect. He's your ideal software CEO. So when Brian was interning— when Brian was, sorry, at Stanford, he was interning at an independent coffee shop that closed down and was replaced by Starbucks. The reason that that happened is because they, the costs were too high. So Brian comes up with an idea. How can I save all the independent coffee shops from going bust? So he creates a SaaS product to enable coffee bean buyers to negotiate prices based on the bean variety, on the global supply and demand, historical prices, consumer preferences, but also the margin of each end product. That's really shitty formatting. Excuse me for that. So he calls it Bins as a Service, and it's a piece of cake. Onboarding is fairly easy. It's fully self-served. The pricing is very simple. It's based on the number of analysts using the data. And you don't need to be a data scientist to use his tool. So he's thinking, bingo, I've got what I need for my product. Is Brian ready to raise? Well, probably not. If you start analyzing that market, Then you realize, well, actually, the cost of the bean is marginal. If you look at an average cup of coffee will cost you $2. It's actually 4%. So $0.08 is the price of the coffee. But then on top of it, the coffee prices for Arabica have been in decline. So when you think about it, actually, that's probably not a good problem to solve. So if you take a step back, your conclusion number 1 for your Series A, you need to build a product that someone actually wants, and they want it today. Size matters in VC, so you do need to pick a big enough market to go after, and you need to make sure that the problem that you are solving is relevant and non-trivial. And that's the case of our case study Brian. Now, Brian realizes maybe it's time to pivot. He created a tool that can run large data analysis and that can easily be used to barista. Well, bingo, gold mine. Data's hot. Maybe it's time to pick a different product. Luckily, his intern's dad is a big shot at a big Wall Street bank. So Brian gets an introduction and secures his first juicy contract with the Bank ABC. Bank ABC will pay him $120,000 to develop a data analysis product. Is Brian ready to raise? He got cash money from Bank ABC. Yes, now he's got a product. He's tackling a big enough issue, and there is early traction. However, banks saw this $120K investment as a one-off thing, not a recurring contract. It also going to take 24 months to get through the very hard procurement process of the bank. It's probably not quite yet. So lesson number 2, show growth beyond friends, family, and fools. Pay attention to your metrics early. So it's perfectly normal for a startup founder, particularly before Series A, to use the, the network to get that initial contract, to get that initial client, and that's absolutely fine. But ideally, your product is good enough to go a little bit further than that. There's either enough referenceability in your sector, and if it's a bank ABC, perhaps you'll get bank XYZ, or perhaps it's a content-driven one where you're going top-down and you're getting developers adopting your product, right? There's gotta be traction beyond that first client. Paying attention to your metrics early is equally important, and thinking about your ACVs versus your sales cycles. This will not only drive your metrics, and funds like mine will look at your metrics when you fundraise, but it will also determine how you sell. A higher ACV, long sales cycles, you're gonna wine and dine. Lower ACV, you will be content-driven, marketing-driven, inbound-driven company. So Brian has thought about that now. So luckily, as I mentioned, Bank ABC shows off their new data tool to Bank XYZ. Bank XYZ gets very excited. The word on the Wall Street spreads very quickly. Brian signs a handful of banks for recurring contracts and proof of concepts. He now has 5 clients and $50K MRR. Growth is triple-digit CAGR. Things are looking up for him. It's now time to raise. Well, one more thing that you really have to take into consideration as a founder is the famous leaky bucket. He's got 5 clients, but he also lost 5 clients earlier in the quarter. And that with analysts leave the bank, they don't really sign up any new seats, and so he's losing his users and all of his fancy new features are being used. And that's lesson number 3. Scalability is beyond just up and to the right. Growth is good, but you have to look a layer deeper. That means looking at the churn, looking at the customer retention, and looking at your cohorts with a lot of attention. So this is the best time then to raise. I have a product that solves a current pain point. There's a solid initial traction. Proof of concepts for my license are flying off like hot pies. Looks like this could scale efficiently. My biggest customer is buying more seats and no one has yet churned. And this is our sweet spot at Dawn Capital. So we come in this awkward position between the seed round and your expansion. When you have got your product, it is scaling, you got good customers, and we're there to help you scale people and processes to grow to another level of growth. Now, if you keep that graph in mind, this is what we help you do is go a little bit faster. Some of our investments like Mimecast and IZettle, which we've already exited for a billion and $2.2 billion. One is an IPO and the another one is a PayPal acquisition, have already proved that. But we've got another exciting companies like Calibra, Showpad, Automile, and many others in our portfolio to help them do just that. Few parting thoughts. In terms of the strategy of the actual fundraise, now that we know what we're looking for for a Series A. I probably shouldn't say this, But some VC FOMO is healthy. We do message each other, and there's a lot of gossip in this industry. So raise when you don't need to raise, and create that momentum, create that fear of missing out. It's real. Low dilution matters, high valuation does not. Absolutely understand the sensitivity around 10 percentage points, 15 percentage points, whatever it is. As a founder, this is your baby, and I know how you feel. Giving away that control. So yes, watch out for the dilution. Valuation, don't go with the ego. It doesn't really matter if you are 100 pre-money or 120. If you are building a billion-dollar business, you will get there, and that extra 20 percentage points is not going to matter at your Series A. This is a marriage. Pick your partner wisely. Unfortunately, you can't divorce your VCs. They will sit on your board. They will give you advice that you want or you don't want. So it is very important to take references and pick that partnership very carefully. And finally, in SaaS, always be closing, but also always be raising. Coming back to the timing point, what really matters is that you create those relationships with people who matter early on and you keep that relationship going so when the time comes, you can pick the right partner for yourself. Come and talk to me if you have a software business.