Building a Capital Efficient Vertical SaaS Business
By Guru Hariharan, CEO of CommerceIQ
Global venture funding is at an all-time high, with $125B invested in Q1 of this year and Q2 shining even brighter. At the same time, there were on average two unicorns per day being created and 561 IPOs as of this writing. Money is flush right now, and it is easy to lose sight of the business fundamentals in such a climate. When money is cheap, and with so much spectacle associated with companies announcing monster rounds, how do you maintain discipline while raising the round that you need, and not the round that you can?
Two weeks ago, when CommerceIQ announced a $60M Series C funding round, we witnessed these unique market dynamics firsthand and were faced with a situation that ultimately led us to strategically turn down millions of dollars in funding from investors. On the surface, this is surprising, but there are several strategic benefits to making this choice in your own funding journey – and a few questions you can ask yourself along the way.
When we were determining the amount to raise, we analyzed the resources that were needed to take the company to the next level. The market we play in accelerated dramatically in the last year as a result of the pandemic. This translated into strong tailwinds for our business. Based on what we saw, it was time to double down. The pandemic made clear that e-commerce, especially omnichannel e-commerce, had become a must-win battlefront for brands. About 85% of e-commerce happens in indirect channels and it is our mission to help companies win on Amazon, Walmart, Instacart and other channels. We created an aggressive fundraising plan. While our balance sheet could carry us two to three years without additional capital, we determined that with some extra funding, we could accelerate our execution and be better positioned for the future.
We planned for a $60M round, and in a matter of weeks, we were oversubscribed. We were faced with what some might consider as a difficult decision - accept all the money, or reject some. However, it wasn’t hard for us to decide.
As a CEO, the idea of accepting expertise and big checks from outside investors can seem like a complete win for you and your business, but this isn’t always the case. As a business leader, you have to weigh up whether the funds will benefit the business and increase ROI.
If you believe an investor’s injection of capital and expertise will help your business grow by a larger percentage than the percentage of equity they are looking to take, then generally speaking, this is a good scenario. However, if this is not the case, you need to take a step back and assess how much money you actually need to get your business to where you want it to be.
Instead of taking additional capital for the sake of more cash in the bank or bragging rights, we decided that we would stick to our plan, which was aligned with the resources that were needed to take the company to the next level and meet our customers’ needs.
It’s incredibly important to weigh up the cost of dilution and know what your target marks should be at each funding round, whether it be Series A or Series D. You should consider both the hurdle rate (minimum acceptable rate of return) and the cost of capital, to make sure that the increases in valuation properly offset dilution.
Another important aspect to take into account in any funding round is how excess capital can translate into better customer delivery - from product development to services. If there is no justification in this regard, it is better to decline further offers of investment, no matter how enticing they may be.
While fundraising is often a special success milestone, it’s also one of many things to do to manage the business and set it up for success. It’s not just money that can benefit the growth and success of a business, but an investor’s expertise can also be incredibly valuable.
Our Series C, which was led by Insight Partners, allows us to go on the offense, and, for the first time, consider partnerships and inorganic opportunities.
Ultimately, there are several important questions that a business should consider when trying to decipher how much capital is really needed and whether it makes sense to turn away funds.
- What’s your end game?
- What will the money be used for?
- How much are you prepared to give away and what’s the cost of dilution?
- Do the investors align with the business?
- Does it make sense to turn away capital if a funding round is oversubscribed?
Ask yourself these questions the next time you’re considering raising capital and consider the possibility of taking a path less-traveled to funding. Turning down millions can end up being the most valuable play, if it helps you best leverage your investors and achieve your long-term business objectives.
 Source: Crunchbase, StockAnalysis.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.