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What do investors look for in a SaaS startup?

Investor focus varies, but a handful of company qualities are important across the board. We answer this common question with lessons from a panel of VCs at SaaStock, an in-depth interview with Connect Ventures managing partner Pietro Bezza, insight from David Skok, and more.

I was lucky enough to be at SaaStock, a B2B SaaS conference in Dublin this past September. There was a big presence of SaaS investors, and one of the final sessions was a panel discussion with five different VCs:

Mike Chalfen – Co-founder and Partner at Mosaic Ventures
Gil Dibner – Venture Syndicate Lead, Angelist Syndicate
Sitar Teli – Partner, Connect Ventures
Conor Stanley – Founder, Tribal.vc
Jos White – Notion Capital

I took scrupulous notes and am happy to get to share them with you. I’ve sprinkled in other first-hand insight from my colleague Ed Shelley’s interview with Pietro Bezza, a co-founder and managing partner of Connect Ventures, an early-stage VC firm in London. And I rounded it out with some classic advice from David Skok.

First, it’s important to keep in mind that specific focus will vary from VC to VC.

“Some will swing between Product, Market, and Team” – Pietro Bezza

But there are underlying themes that indicate what’s on any investor’s radar. Let’s get to it!

Product

When considering early stage investment, investors for a product that is “solving a real problem, with clear potential for PMF, and a big enough market to promise a big opportunity.” (Sitar Teli at SaaStock.)

Sitar’s colleague, Pietro Bezza, expanded on that. Connect Ventures expects more of the product:

“Product must be the answer to every strategic puzzle. It should be the foundation of solving the problem the founders want to tackle, but also it should be the answer for growth, for hiring strategy. And it should be the start of the company but also the growth engine.”

Also, it’s not enough to adequately address the market’s need.

Investors also want to see differentiation. What sets you apart from the competition?

At SaaStock VCs discussed the technology at the foundation of your product, and also the design.

“Technology is what differentiates from competition. Execution really matters, but you can hire for that. Technology is the only weapon.” – Gil Dibner

“It’s key to understand UX design… I’d say that design and UX are fundamental. It’s not something you can copy; it’s part of the founders view of life. If it’s not part of the founder’s view of life, then it’s not part of the company’s view of life. Design and UX can be as differentiating as technology.” – Sitar Teli

Founder

Investors look for founders who have a unique insight into the market or the problem they’re solving.

David Skok mentions this repeatedly, and Pietro Bezza mentioned something similar in our interview with him. Bezza called it “Founder-Market Fit.

It doesn’t require years of experience, domain expertise, or having the right professional network. Rather it’s about an intimate knowledge of the space and the need — plus an attuned, innovative perspective on how to solve it.

In an era when markets shift and innovation cycles quickly, companies need to be agile in their response.

“Technology companies keep surfing on all the changes. And only someone who really has a bond with the market can reimagine a product solution with great UX — that’s the key.” – Bezza

That’s Founder-Market Fit.

Of course, investors want to see drive, energy, and passion. The most appealing form and ferocity of these will vary from VC to VC. At Connect Ventures, they look for mission-driven founders.

“Only someone who is mission-driven can expand the boundaries of their sector over time and go after big things.” – Bezza

Other qualities?

  • Solutions-oriented, not just wanting to build a company or explore an idea.
  • “Strong opinions, loosely held”: Someone who will fight for what they think, but is also open to other points of view. Someone who will (and wants to) learn.

Vision

As in, have one. Think big — envision your idea after funding, at scale, going global. What kind of impact will your company have on the industry, on the world?

But not only that, also be able to express this vision pointedly and persuasively. It seems investors don’t hear that enough!

“I’d like to see a founder better articulate their vision — crisply, in a way that’s easy to grasp. It sounds simple, but actually it’s remarkable how few can do that in a way that is clear and compelling.” – Conor Stanley

Other investors agreed. The vision is what sells them, because it is the vision — the big picture — that is enticing. Sitar went on to explain it’s especially important to articulate this vision during fundraising meetings — perhaps just as important as stressing numbers and performance metrics.

“In meetings to raise, founders focus too much on KPIs and metrics. It’s not exciting. You can see the growth of the company, but not how it will impact or change the market. Big impactful things lead to the biggest returns. If you pitch metrics and not vision, it’s hard to get excited.” – Teli

SaaS Metrics

There are two so-called metrics that Connect Ventures typically looks at before an investment.

  • Customer/user engagement
  • Monthly Recurring Revenue (MRR)

“In the end, MRR doesn’t lie. It encapsulates everything — what’s the ARPA? What’s your ability to expand with a certain customer and add an upsell? And on the negative, it shows your ability to retain your customers and where you have unhealthy churn.” – Pietro Bezza

It’s not just static MRR that is important to investors. Even more important are the trajectory and the velocity of your revenue growth.

“In Series A, revenue is a general reference point, not a deciding factor.” – Jos White

“The pace of growth matters more than the number.” – Mike Chalfen

Business

Keep it lean!

David Skok listed “capital efficiency” as one of his top 6 qualities he looks for in a new investment.

Sitar also touched on this point at SaaStock:

“Unfortunately, leanness erodes as a company grows. As you have the money, you spend it. And then you built a fat business and the next round you raise needs to be even bigger. Yes, I think you need to raise money to scale, but I don’t think you need to raise as much as some companies do today.”


This answer originally appeared on Quora. View the original thread here: What do investors look for in a B2B startup?

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