Product Marketing
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June 11, 2020

Inside The SaaS Venture Capitalist’s Mind

By Aggelos Mouzakitis

How does a venture capitalist analyse your SaaS product metrics? Do these metrics impact their investment decisions? Can this change how they evaluate your product/market fit and overall value proposition to your target market?

In this article, we are going to dive inside the mind of a SaaS venture capitalist to help you get ahead of the game when it comes to pitching your SaaS product to potential investors. We hope this article will provide you with an understanding of how VCs evaluate your product metrics.

To help us dive deeper into the psychology of a Venture Capitalist, I recently spoke with Collin Gutman, Managing Director at SaaS Ventures

In our conversation, Collin Gutman explained the VC’s point of view on assessing SaaS startups to help us understand in an informal manner, how he and his team evaluate new products that might end up in their portfolio.

Collin Gutman has been investing in early-stage enterprise tech companies for 8 years, with a portfolio of over 100 investments. SaaS Ventures are a 20-million dollar seed-stage venture capital firm based in the United States. They focus exclusively on B2B companies selling enterprise SaaS technology.

There is a big discussion at the moment about the product-led approach. This is where a SaaS company makes their product the primary source of growth in their go-to-market strategy. I wanted to find out how venture capitalists like Collin are evaluating products in order to make a decision on investment, from their product launch and marketing strategy to their pricing strategy and sales strategy.

“There are a lot of metrics that come out of having a strong product that becomes self-evident”, Collin explained.

According to Collin, the following two questions will typically be asked by decision makers to SaaS startups seeking investment about their business plan:

  • How much have you burned since your last fundraise?
  • How much have you grown in revenue?

Ultimately, it’s all about measuring how much a company has to spend in order to generate revenue from customer acquisition. Collin does acknowledge that this will vary depending on what stage the company is at in their roadmap.

“We definitely look at the efficiency of cash spend, sales and the overall efficiency of the funnel. In terms of customer acquisition, if you have to touch 100 companies and do 100 demos to convert one customer, there’s something missing in your product/market fit”, Collin told us.

He continued, “By contrast, if you’re not getting enough qualified potential customers but you convert three customers for every five you do a demo for, then that’s really compelling in terms of us wanting to invest and get you more of those qualified potential customers ”.

This was one way in which venture capitalists see product and sales going together and how a product drives the metrics they look for when they go out and fundraise, as part of their GTM strategy. As Collin told us, there are ways of assessing whether your growth rate is good, such as looking at levels of efficiency, rather than just dollars.

“We see a lot of people saying that they have a really high conversion rate but they haven’t had enough opportunities because they don’t have enough money to spend on their marketing plan. I would rather see people work a narrower funnel with really high efficiency than work a really big funnel with low efficiency”, Collin said.

Collin continued, “The root cause of that is product. If you’ve got a really strong new product, you’re more likely to get people converting, increase customer acquisition and get the sales funnel moving efficiently. A weak product is going to cause leaks in the funnel”.

Product/market fit is often considered to be an intangible thing, something that cannot easily be qualified. I wanted to ask Collin about how venture capitalists recognise and identify the strength of product/market fit when they meet a SaaS founder.

As Collin told us, “It’s about repeatability. If you have five customers, all in different sectors and the use cases are slightly different and the price points are all over the map, I wouldn’t say there’s tight product/market fit. If you have five customers that are all in one industry, using the same product without any customisation, then you have a really tight product/market fit”.

Collin likes to use Slack as an example of a SaaS company that has a very clear product/market fit. “The use cases are the same for every company, so you can see the repeatability and why it got there. I think a lot of companies have five customers, but they’re all using the product slightly differently”, he said.

Product/market fit comes down to use cases. Can you have a one-line use case that defines how every single one of your customers is using your product? Do you have a large set of customers that have bought the same product for exactly the same use case? “Product/market fit is much less about the number of customers and more about the tightness of use cases”, as Collin explained.

I wanted to talk to Collin about a situation that I have experienced with one of my own clients. This was about a SaaS startup that found product/market fit and has raised some capital for their MVP. Since raising this capital, they now need to prove that they can have a repeatable selling motion.

To achieve this, they have built a user onboarding process, but at the same time, the CEO starts to be less hands-on, stops selling and starts spending more time managing. At this point in time, they are now experiencing a lack of product/market fit.

I was curious to hear Collin’s thoughts on the role of user onboarding and whether it can affect product/market fit. “I think onboarding is important because we talk about churn and if you’re not onboarding people well then churn will go up, but when do founders stop selling and stop being involved with customers?”, Collin pondered.

He continued, “The answer is never. Even the CEO of Microsoft will go into some very large customer meetings. I think the product needs to be built in a way where it’s easy to get started, it’s easy to onboard, it’s easy to keep coming back but I think founders need to realise that just because selling is hard, it doesn’t mean you turn it over as soon as you have the cash”.

Collin believes that founders should be speaking to customers every week if not every day, no matter what stage your company is at. If you don’t, he feels that you will lose product/market fit fairly quickly because you established the initial product/market fit.

Unless you’ve hired unbelievably adaptable and entrepreneurial people onto your sales team, no one will raise the flags as to what you need to do to build and evolve the value proposition of your SaaS product.

“The real visionaries of the company need to maintain their hold on how the company stays responsive to the needs of customers because those in charge of the sales process generally just sell what they have, they’re not the ones of iterating, building and learning like the founder are”, Collin explained.

I wondered whether this approach might be a bit risky – shouldn’t growth be product-led? If we have the CEO or founder doing a lot of the jobs that the SaaS product is supposed to do, aren’t we supposed to build a product that is ‘self-serve’?

In response to my question, Collin said that most of the companies he works with have to go out and sell their products. “I do think that the lower your price point is, if it’s consumer or SMB, you have to do more of your selling through marketing channels, such as social media, with a conversion funnel [and a clear action plan.”

“Having said that, when you’re at a lower price point, you need more automated touches and more self-serve, but you’re always still going to have some percentage of those self-serve customers that are enterprise opportunities and maybe that’s where the CEO then spends the time”, Collin continued.

I was interested to hear Collin Gutman’s thoughts on enterprise selling of SaaS products. Something that I have noticed is a sense of pressure that enterprise customers put on SaaS companies to build products that meet their bespoke needs and requirements. It can be very challenging to build a one-size-fits-all solution for enterprise customers.

I wondered what the balance was between keeping your huge enterprise customers happy and avoiding the cannibalisation of your product roadmap.

As Collin explained, “What it comes down to, is it a repeatable product feature? If it’s a one-off integration or something you really don’t see being applicable to all of your other customers or at least a large number of them then you might not want to do it or you might decide that you’re only going to do it for this customer as a one-off thing”.

He continued, “When people ask how this can fit into their product roadmap and whether they need to reprioritize everything, my useful answer is: yes, your product roadmap is not right because you’re not building what your customers need the most. Maybe it’s what you think is the most important, but you should build what your customers need”.

Final Thoughts

Securing capital for your SaaS business can bring unique challenges. With the insight provided in this article, we are confident that you will now be well-equipped to meet these challenges with grit and determination.

Before approaching venture capitalists for funding, you should ask yourself the following questions:

  • How efficient is our sales funnel?
  • What does your marketing spend look like in proportion to customer acquisition?
  • Does your SaaS product have a good product/market fit?
  • Do all of your customers have the same use cases for your product?

In answering these questions, you will be able to confidently determine whether your SaaS product will appeal to venture capitalists.

Aggelos Mouzakitis

Aggelos is the founder and Growth Product Manager of Growth Sandwich. He is among the first Customer-led experts in the world, leveraging advanced, Jobs-to-be-done customer research to orchestrate and guide Growth for B2B SaaS companies. A- and B- series SaaS are hiring him to organise, design and execute programs that infuse the whole company with qualitative data, empathy and the necessary knowledge to address any growth dilemma. In the last 4 years, he has worked with more than 100 SaaS companies and trained literally, thousands through my physical and online courses.