How to raise capital when your startup is dying
Finding Product Market Fit
Hey everybody, welcome back to Product Market Fit!! I hope you all had a great week and have some good plans for the weekend. I hope you are as excited as me about what 2024 will bring!
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Also know that there is a premium plan of Product Market Fit in which I will share some more in depth content, as well as private resources, founder interviews and soon a slack channel/ another way to network with the community (investors, founders, PMs, etc.)
If you are serious about growing your startup, I’m certain this will be worth it 👇
And now, let’s get to it, but not without first some music as always 🔥
I haven’t found Product Market Fit, I’m running out of cash and fundraising is tough, what now?
Ok, so it’s no secret 2023 was a rough year for VCs and for Startups. Suddenly the market bounced down and it seems money is slower than ever and very scarce. VCs are seeing how their portfolio companies are suffering and at the same time are weary of where to invest. According to Carta, Q3 of 2023 was a big disaster in terms of Startups shutting down and it doesn’t seem 2024 is going to be any better.
Given this context, I thought it could be useful to try to develop a good strategy to help startups struggling with this situation as well as for investors that want to help their portfolio companies.
So, this is what I would do:
1. Reduce your team
Ok, so you are a SaaS company. What this means is that you are likely to have recurring revenues from your existing clients, a high gross margin and your product should be very scalable and with little need to personalize.
Your first action should be to skim down your team.
Your biggest expense should be your team but there are many Saas Companies that grow to more than 1M ARR with small teams. It might take longer but you might survive.
What does every SaaS team require?
CTO: Your CTO should be able to build your product from start to finish. If he can’t you need to simplify your product until your finances allow you to hire more devs.
Sales/Marketing: Make sure you have a person whose only focus is to get your product to the market. How to do so? Check point 3 👇
Customer support: Customer Success is a cooler name but let’s be real. You are a services company, even though you provide services via technology. You need a person to be there for your customers.
CFO: Finances are the health of your company. You need to know them and have them in order to make good decisions. Keep your CFO and make him work with your fundraise as well as business efficiency improvement.
CEO: Open new sales channels, relationships and fundraise.
2. Stop paid marketing
You shouldn’t need to lean on paid ads to get your product to the market, and at this point you should be thinking in smarter ways to find your customers.
What can you try?:
SEO: You can learn the art of SEO in one month and although it’s not something that gets traction right away you could try positioning some how to guides that allow users to flow into your product.
SOCIAL: If you are B2B SaaS Linkedin is your place to succeed. It only costs time to write down valuable posts and you can start having conversations with potential clients really fast.
AFFILIATE PROGRAMS: You don’t want to do the work of social or SEO? Fine, look for sites and people that are really active and have a big following and offer them to participate in your affiliate program. The way that works is: for every sale they make you’ll give them a x% commission. Make sure you still have margin with that comission and that the affiliates aren’t running ads and cannibalizing your website.
COLD CALL: Cold calling is back baby! You thought being an SaaS entrepreneur was all about computers and screens? Nothing works better to sell than cold calling and the skills needed to do it successfully can be learned by anyone. Get to it!!!!
3. Cut and avoid every other cost that isn’t absolutely necessary
Cut every cost except coffee ☕ Coffee is always necessary. Just kidding…
I came across the cost structure of this bootstrapped SaaS, have in mind they are not in survival mode and grew a 70% in 2023 but still their monthly expenses are as lean as a deer. If you are about to point out that marketing expenses are actually high, those are commissions for the partners of the affiliate program.
If you are a seed/series A startup in survival mode, your costs should look like this or lower!!
4. Kill the products that aren’t driving you revenues
If you don’t know about the power law maybe this is a good time to learn about it. But this is not the time for it. Just know that most likely, 80% of you revenues come from 20% of your products. If you are a SaaS B2B this might translate to product features. Measure what features are driving most of the revenue and kill/leave the rest. Kill the teams that were operating those accessory features.
5. Make the most out of your clients (power law again yes)
It’s very likely 20% of your clients drive 80% of your revenues. Talk to that 20%, make sure you are solving their problems well enough and that they are happy. You have to keep them whatsoever. Also, define exactly their Company Profile. Those are the ones you need to target.
Try renewing expiring contracts even 6 months before.
Try selling your customers year plans with a discount.
20% of your clients will represent 80% of your customer support time. If that 20% does not generate most of the revenues fire them.
Reduce customer churn: analyze customer churn and try to avoid it at all cost.
How to fundraise in a down cycle as a trimmed down startup
So, if you’ve done all this now you should have a longer runway and you’ve increased your chances of survival. Congratulations! Now you either don’t think you can survive much longer without cash or truly think that there is a big opportunity in the market and you’ve built a really cool solution that needs a lot of marketing if you want to go again through the fundraising process.
But this is how I would do it:
1st. Be clear on the opportunity you are targeting 🎯
Most likely you are at this point because you failed to find Product Market Fit. Before going to fundraise again you need to have a clear idea of where is the market and what opportunity you are targeting.
This image is used for motivational content but it’s not what I want it to display now. What investors want to know is where is the gold and what it will take to go get it. So, when pitching you should be able to say. There is a huge pile of gold here, I need this money to make the tools to go get it! Be clear on that and you’ll be able to raise!!
2nd. Forget valuations: you need to save your company
At this point you are trying to save your company. Forget your ego and roll with a valuation that is just ok for you.
3rd. Talk to your current investors
You have more chances of raising money with your current investors, after all, they’ve invested once in you and can do it again, if you regain their trust they will back you again. Also, they don’t want your company to die, since they'll lose their investment money. So call them right away, let them know what is going on, ask them for help, be real. Your investors can help you more than you imagine.
3rd. Be very intense, fast and decisive
As a CEO, this has to be your full time job. Make sure your team is focused on your clients and growing and get them to give you weekly updates but do not get involved in the day to day work.
What is your job? Go raise money. |FOCUS, FOCUS, FOCUS!|
You need to give it your all and work harder than ever. You need to talk with tens of investors in a very short time frame to get them excited and not seem desperate. Get warm intros from your investors and from fellow entrepreneurs and line them up. Try creating fomo between them and try getting small wins as soon as possible.
You should tell investors:
I’ve already committed x from my internal investors
I’m talking with these 3 investors and it’s pretty advanced, let’s move fast with your process
Create a sense of FOMO: nothing works better the feeling that you might lose an opportunity. Try creating it.
4th. Work dem family offices and angels
Mayber at this point you are not as attractive to VCs as before. Your growth isn’t what you’d expect, and many VCs reject you right away. Then try looking for another type of partner. There are many family offices investing directly that have a longer investment time frame and will be happy integrating your product in their family companies or even just helping a local entrepreneur. Reach out to them and try convincing them that you are a trustworthy partner and a good long term business relationship can be built.
5th. If you can’t justify revenues, justify other metrics with potential to be monetized
So, I see many startups that just haven’t found their business model yet and that’s ok. However, they can’t explain the value that they are driving and how monetizable it is.
So, for me there are good indicators of the potential monetization of a Startup. If a product is organically driving massive amounts of users or usage, it means it is solving a problem people care about, and it’s only a matter of trying different monetization strategies.
When talking to investors, show the value in this and again, explain the potential.
BTW, if you want to know more in depth about raising in 2024 check this podcast out!
I hope you enjoyed this weeks NL! If you have doubts or want me to go in depth in other topics you can just reply to this email and le me know. Have a great weekend!!! Let’s go 🚀🚀🚀
