Most SaaS Businesses Don’t Fit Any VC Investment Criteria

I have been asking VC investors:

What percentage of the pitches they see will be great SaaS businesses for the founders but aren’t a fit for their fund?

The average is 30%. One in three software companies they look at are great founder-scale businesses, but the math won’t work for the fund:

  •  Their market isn’t big enough to provide “venture scale” companies that can grow to over $100M in revenue.
  •  Their growth rates won’t create this $100M revenue company in 5-7 years.
  •  The M&A or IPO markets aren’t likely to value the company high enough to provide the investors’ required returns.
  •  Now VCs are more concerned with capital efficiency–how much funding is needed to create fast growth at scale?
  •  The founding team isn’t likely to create this $100M revenue business.

All VC investors have specific requirements for the kinds of companies they invest in. It’s in their legal docs. They can’t vary from what they told their investors they would focus on.

VCs will talk to 500 good software companies to invest in 1 or 2 companies that best fit their investment-return model.

Bigger VC funds mostly talk to founders of up-and-running software companies with real customers and revenues. These founders already have real companies that are very valuable.

VCs know that these founders will do VERY WELL when they grow their companies to $5M or $10M or $25M in revenue and sell them someday.

They just can’t invest in them. They don’t fit their VC-scale math.

A few VCs have even told me they want to start a SaaS company, grow it quickly without VC investment, and sell it for $30M+ before it gets too big.

They see what’s going on in the software market.

  •  More companies are starting and growing without VC funding fuel.
  •  There is a very active market to acquire smaller SaaS companies and practical valuations of 5-7X ARR.
  •  VCs can’t invest in companies that won’t quickly grow to $50M or $100M.
  •  Most SaaS companies won’t be worth a billion dollars soon.

If a VC needs to invest $10M or $20M at a time, with more at later stages, a billion-dollar outcome is required to get their 10X minimum return. And VCs only win when they have one or two 100X winners.

A few of the founders I meet have the potential to win the VC-scale game–and some of those founders want to play the big funding game. Those are the ones I connect with the right VCs. But that’s one in a hundred who I know.

VC funding isn’t bad or wrong.

It’s just overprescribed by funders and misunderstood by most founders.

And it’s much more rare than we think.


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