Fast Lane Transcript: Companyon

Summary:

This episode of Fast Lane  is on forecasting sales for an investor pitch. The speakers are Tom and David, who are part of Companyon Ventures, a B2B software company accelerator in Boston. They focus on companies that have a revenue of $1-3 million, and invest in $3-6 million rounds to help build predictable and repeatable sales strategies. The speakers emphasize that there is a difficult shift from founder-led sales motion to a professionally led sales team, and it is important to understand how to take the founding team through this change. 

I wanna, say welcome to everybody,  today’s session. Another episode of Fast Lane is on how to forecast sales for your investor pitch, which is a topic that seems very specific and tactical, but it is, it is in. In the, in the realm of the larger, like, how do I use metrics in my investor pitch?

And I’m, I’m super glad to have. To have Tom and David here with me. Now, as you know, fast Lane is, is a a monthly webinar that we do to kind of demystify the the skill and the craft of, of fundraising and what we are in. We’re inviting venture firms, partners angel investors to share their insights and.

Little gold nuggets that they’re, that they’re ready to give to us. With, with everybody, mostly founders in the early stage venture lane. We are a startup up here in Boston and a an accelerator. We are focusing on B2B software companies and in our accelerator we take on in a very bespoke traction program where we help early stage companies to gain traction and great, great sales.

And we’ll talk a little bit about this later. What kind of an impact actually sales and traction will have in fundraising in a four month program? And we are doing this in a very bespoke hands-on way personalized with only. Up to six companies at the same time in about 10 a year. So if any of you is interested please get in touch with me.

And let’s have a chat or look at venture Lane, the venture lane.com/studio for more information on that Now, I would, I would say let’s, let’s kick it off. It’s great to have you. Tom is co-founder and general partner of Companion Ventures. I’ve known Tom for, for a while. He’s been one of the first who actually greeted me when I came off the boat here in Boston.

So that is great that we’re, we’re coming together and doing this webinar together. And David, you’re operating partner at, AT companion and both of you seem to really share the passion for metrics. Like getting, getting that right and what does it actually mean? The fundraising game is not just I go out there and grab a bunch of money, but also what are the things that are behind it that need to actually up add up from an investor perspective.

So today, I’m really glad that we’re looking into some of those metrics and why is this important? Why is it, why is it really meaningful? So great to have you here. Thank you for making the time.

Thanks, Christian. It’s great to, great to join you and it’s really great that you do these kind of things for the community in Boston, so thank you for that.

Awesome. Good. Let’s, let’s dive into this. Like usually we’re, we’re starting with a little bit of background on companion ventures. Maybe you guys want to give me a little bit of background on how big is the fund? What’s your thesis, what’s the fund size? What’s the check size? So that, that all the listeners and participants actually know what they’re

dealing.

Yeah. Great. So companion ventures, we focus on B2B software companies that’s number one. And we’re really focused at a stage where companies sort of exhaust their growth from their founder-led go-to-market efforts. So usually our companies are one to 3 million in a r. They’ve sort of wrestled with and, and have most.

Early product market fit challenges behind them. And oftentimes it’s the founder and CEO who is generating most of the revenue. So

before, before you hand over to team sales?

Yeah, exactly. And, and we’re investing out of a $60 million fund. Most of our rounds are, are what you would call they’re, they’re sometimes labeled seeds, sometimes series A, but it’s a three to $6 million round, really with the goal to build out predictable and repeat.

Go to market and sales. And oftentimes more, more times than not, that involves hiring sales and marketing leadership, putting in place all sorts of best prac best practices around demand gen, inside sales, how to build a sales team, how, how the sales motion should be implemented, and all sorts of, sort of tools and methodologies around.

Awesome.

Thank you David. Anything, anything else that that Tom didn’t touch? Sure, sure.

I’ll add, and also by way of introduction so my background is that I am typically being the president and c o o who goes in alongside a founder and c e o of the company. And typically helps them build out that go-to-market strategy and then execute upon it.

And I’ve done that like eight times and. All kinds of different levels of outcomes of IPOs and, and m and a and, and growth equity, private equity exits. And so you get to really understand, as, as Tom says, how to think about and tune this really difficult shift from founder led sales motion into a professionally led sales team.

And like half of the effort is what are those best practices? What are those techniques? How to build the most sustain. Go to market channels, but the other half of it is like, how do you take the founding team through that change? How do you think about, you know, what got me here? What necessarily get me there?

How do I start to round out my team? How do I think about my role as a founder and how that changes? And so that is kind of like half the battle here is, is understanding and helping founders through that shift. Love

it. And I think this is where we we’re probably aligned in our mission of, of, you know, traction is such an important part of the, of the business.

You know, and helping that along and make it repeatable and having the building blocks in place is one of the most fundamental challenges that that an early stage startup has. Now, let me cast the wider net. Today we’re talking about, you know, forecast, like how forecasting sales, what that does in a, in a, in an investor pitch.

I wanna, I wanna take a step. I think in general, like what kind of metrics really matter? And, and let’s look at the whole situation. The last 12 months, we had like a lot of changes in the funding environment. And like what kind of consequences does this have for, for founders these days? What, what do you guys, what do you guys think?

Maybe Tom first and then David. Yeah, I mean, I,

I think I’ll start just by saying, How you’re forecasting your business at pre-seed. And seed is like at best at, at best, neutral, most likely a liability. So nothing you’re gonna put in your forecast is gonna win you a meeting or seal a deal. It’s really a credibility check at at these earlier stages.

As you mature as a company, you have actual real go-to-market data and trailing 12 months of sales performance and things like that that you sort of get measured on. So I would just say for the earlier stage companies, this exercise is much more of a kind of sanity check. Does really, does the founder understand the growth levers in the business and, and how to roughly model them to.

Result in a, in a round size that’s appropriate for, for that particular stage and inflection point. In general, what we’re seeing in the funding environment is if, if we rewind to 2020 and 2021, we saw firms going earlier and more aggressively at, at target companies. There was just so much capital out there and such competition.

Now, as you probably heard from other panelists, and your companies are probably experiencing everyone’s more patient. They want to see more evidence. They’re, every fund kind of has a, a bullseye of what determines their perfect deal. And, and very few funds are actually public about what that perfect deal looks like.

Everyone’s shooting for closer to the bullseye, whether it’s stage or sector or team d n a or product technology. So I, as a general theme, I think companies need to work a lot harder to find that better match of an investor and be quick to disqualify those who, who aren’t relevant. So that’s just kind of background

for where we’re headed.

Would you, would you agree it’s a little, little less hope and a little bit more effects and, and achievements? Yeah, I, I’d

even add to that, I think a big part of what we look to do and help our companies through is the instrumentation of their process that allows them to have much more of a data informed view on their business and help them actually model it out.

So if some of the disciplines around really understanding what your lead pursuit process is, we, we probably, most people have heard. Mql, marketing qualified leads, SQL L, sales Qualified Leads, S A O Sales Accepted opportunity. What do each one of those things mean? How do you actually capture them in your CRM systems?

What is the information that you need to capture specifically in order to demonstrate that you are targeting your business at the right market Segments that are gonna deliver the most profitable capital efficient growth for the company. And there’s a lot of discipline that’s required around that to introduce that kind of a data informed process.

Yeah. What would you say in the next six to 12 months, like, let’s say I’m a founder early stage, I wanna fundraise in the next six to 12 months. I wanna, I wanna raise a seed or pre-seed, or possibly a Series A. Like what should I, what should I have in mind today? We talked a bit about metrics having more, the metrics in place and the processes in place.

Anything else that today may. The outlook or what you need to prove is a little bit different from what, what the last two years were.

Yeah. I, I think there’s way more scrutiny on this concept of, of product market fit, and that kind of goes at the core of certainly seed and, and post seed and series A investment thesis is, you know, our, our customers buying, finding value and renew.

Right. And if you’re pree, you may not know. And, and so what you’re pitching is a little bit different. It’s more about team market opportunity, hopefully a compelling M V P and maybe a couple of, of referenceable pilot customers. And, and so it, it, it’s so stage dependent that like some of the metrics that David’s talking about are just not relevant.

At thee stage except for how you’re, you know, you might be asked for a three year forecast, which we know is gonna be wrong. But again, do you understand the growth levers of your precede business and how that does turn into your first 2 million, 5 million, 10 million of a r r?

Yeah. David, what I wanna hear from you is like, it’s, you’ve seen teams that are really doing well with fundraising and some teams that are struggling.

Give us a little bit of an idea of what, what’s the best practice here? What are the teams that are actually fundraising really quickly and good valuations still, and the ones that are possibly struggling? What, what what’s the distinction between the two of you had? Print it down on team quality and what they have in place for the fund.

I think it’s the ability to be able to provide evidence around your investment thesis. So it’s the evidence that you have got or you are close to getting to product market fit, as Tom said earlier on, that’s gonna be more kind of signals. As you get later into the process, there’s gonna be more definitive evidence in terms of repeated customers that fit a given profile that you define.

So again, what we help you to do is to create models that aren’t just about having an Excel version of a forecast, but they actually demonstrate your thesis around your growth of your business in a highly quantifiable way so that you can really articul. I’m going after this kind of customer. They’re in this segment.

I believe that they’re typically close at this value and that they’re gonna expand over this rate over a given period of time. And when I look at all of that in aggregate, I can see what my overall revenue growth looks like. And particularly as you’re getting into more of the sort of Poste series A.

I’ve now gotta demonstrate not just that I have product market fit, but I have go-to-market fit i e, that I understand how I’m gonna turn this into a repeatable, scalable process that’s capital efficient. I understand that if I’m selling a $250,000 a AC v. Solution my go to market is gonna look very different than if I’m selling a, you know, 2,500 a cv business.

And so I, I, I’ve gotta demonstrate that I understand these things. I can quantify them, I can articulate them and I’ve thought

through the thesis. What are a couple of mistakes that you’ve seen David? Like what, what, you know, that companies that, that struggle possibly, or not getting it right. What are, what are the, what are the most common mistakes that you see over and over?

The biggest mistake is when you go to an investor trying to tell them what you think they want to hear. So you go and you reverse engineer your whole business around what you think is gonna be an attractive business. You really need to bring to your investor a quantifiable objective view on why your business is growing the way that it is.

We typically see sometimes really ridiculous. Projections in growth you know, for the next 12 months, it’s maybe relatively modest, and then it, it’s gonna be five x 10 x somewhere down the line, outstripping almost every other public company that’s out there. That kind of a representation is really just demonstrating that you probably don’t, unless you’re one of those sort of one in 10,000  that you probably don’t really understand your business very well.

So, okay. Credible business.

I I hear you. Tom. Any, any, I hear you already. You’re like, I got something here. Like I need a, I need a, I’m passionate about this. So what, what do you see with, with maybe most common mistakes that you could avoid?

Yeah, I mean, I, I think a big one is trying for investors that are honed in on what is the evidence trying to distract with shiny objects about, well, look how big our market is growing and look at our advisor.

And, you know, look at the logos of the employees. You know, it’s like kind of that, that stuff’s okay at the very early stages when you’re, you’re just starting to build, but as you mature it’s a huge red flag when, when a founder’s not willing to just have a transparent conversation about where the business really is, what the challenges are, where the opportunities are backed up with some, you know, Basic, basic evidence and for us, revenue growth and renewals and, and some other key metrics are the ones we look at, which is gonna be different than what some of the seed funds in Boston look for, which is different than what inside an open view look for.

Yeah. Yeah. So, so let’s, let’s really go deep down into the, the topic that we have today, which is really the sales forecast. So go to market and sales forecast, you know, play, you know, quite an, quite an important role as something, you said it before a little earlier, it’s more of a. An exercise of making sure that the thinking is right and everything is aligned and a little bit later it’s, it’s when, when revenues and sales are really coming in to actually, to really prove it.

Is it the right customer? Do I have do we have a cluster? All of all of that stuff. Now, how do I get it right between too bullish and too. Tom, maybe you wanna, you wanna give it a first step? Yeah,

it’s a great question and this, one of the first questions I always ask someone when they approach us, let’s say they’re raising 5 million.

I’ll just say, why 5 million? And, and you’d be kind of surprised at the percentage of founders that actually sort of came up with the 5 million cuz they read our website  and, and feel like that’s the right number for us. Which, which it is. Versus we’re raising 5 million because we’re making these investments in sales and marketing.

We know we need to generate, you know, between 1.5 and 2 million of new a R r. We want a little buffer for margin of error and therefore 5 million. So it’s, part of it is just constructing a credible model for what that inflection point is gonna be. If I, do I have sharing permissions here?

You should, lemme see.

Yep. You should be good,

Tom. Okay. So can you guys see this, this window here with the logos on it? Mm. This is a very famous slide from, it’s dated from 2017 about some of the fastest growing companies at the time, and I’m not kidding, like 20% of the decks we see sort of fall along these lines right here.

And as David sort of alluded, the, the pitch we often hear is, we’re gonna add 500 k of a r r this year, then 2 million, then 50 million, and, and we’re like, Let’s walk through how you got there. Right? And, and, and that’s where the story falls apart. And like I said before, the projections can only really harm you in many cases.

It’s really just there to be supporting evidence. And when I see something like that growth line it’s like it’s a founder who’s either delusional. Doesn’t understand the business or is just tr trying to like stretch for some unreasonable valuation. And those meetings usually don’t result in a second meeting.

Yeah. Because of the credibility factor.

Yeah, no, good, good point, David. Like many times I, I hear, you know, triple, triple, double, double. That’s kind of the first four. Is this good enough? Is this is like what? Do you have trouble with that kind of formula or, or do you, how do you see that?

I think that has been a mantra for, for, for, for more recent years when there was a lot of capital coming in to the tech industry.

But it’s not the mantra right now. And, and the focus now is much more around capital efficient growth. And what we encourage our teams to do is to look at their current plans or, or their projected plans and try to benchmark. And if, if you’re early stage and I’ll, I’ll, I’ll pop a link in the chat once I finish talking.

We actually produced a really, really simple SaaS benchmarking tool that allows you to put in just some very basic information around your projected growth over the next year, and then shows you how you benchmark against peers at your same growth rate using the open view 2022 SaaS benchmarks that they just publish.

And we think this really helps you to sort of sanity check your business model. Like, am I coming up with something that is, you know, ridiculously good, or am I underinvesting potentially in certain areas of the business? How do I stack up to those, those expectations? And that’s a really good starting point for folks.

As you get further down the line. In your looking at a series A a lot of people do fall into this trap where they think triple, triple, double, double. I need a triple. And, and that evokes a whole set of responses. So the CEO kind of sets the, sets the goal, like we want to triple next year. So, you know, VP of marketing, VP of sales all jump in and like, okay, great, yeah, I need a higher X number of AEs, X number of SDRs, you know, a certain amount of, of marketing spend.

And so we created another simple model and I’m gonna put that link in the chat as well. It shows you when you approach it that way, you end up with this incredible amount of capital that you need to raise That in this market is extremely daunting. So you’ll see that in, in the first year of a business trying to, you know, 2.5 x their business with some pretty good N R R numbers, that they’re still gonna need something like 12 or 13 million raise to do that.

And then what antagonizes that. Is that means that you’re gonna have to bring in new money, and new money is gonna want to have a 18 to 24 month window. So I’ve actually gotta look into the year beyond that of how much capital I need to raise. Now I’m in a 20 to 25 million or more raise and, and it’s a really daunting task.

And so we’ve been encouraging companies who are still trying to establish that traction to take a different approach. We call it broom based planning, and we show them how if you focus in on your capital, EF. Typically represented by this metric called the Burn multiple, but it’s basically, you know how much a r r you create for how much you spend it in cash or consuming cash.

If you really focus on that, doing more with less, you can come up with a very credible plan that won’t be tripling. It might be just shy of doubling, but it’ll give you a small raise from your existing investors that will give you the opportunity to build traction that you need to go out at the end of 2023.

We hope the markets will be in a very different position by then and really do the race that you need. So we’re really encouraging people to think much more about capital efficient.

Awesome. By the way, just wanna remind everybody if you have questions for David and Tom, please put it in the Q and as down there in the, in the board here.

And then we’ll, we’ll have come a little bit to the q and a at the end of the session. Now Tom, let me go a little deeper on on, and David, thanks for, for pointing that out. Let’s, let’s. Not, not theory. Let’s talk practic practical. Like if you look at your own investments, what are kind of the metrics that you’re okay with?

Like a seed stage company. Are you okay with like doubling, doubling sales, and under which conditions? Or is it, Hey, if you, if you don’t show 200%, I’m, I’m not even looking at it. That’s number one. Number two, you talked about the, the burn based growth. Like, give us a little bit of a, a reality check on what, what is the bandwidth of, of goods, like you looking at this as being attractive.

Yeah.

So we’ll start with the first question of what looks good to an investor like us? And, and it is very situational. So if you are 1.8 x growth with a sales VP and three. AEs that have been, you know, ramped for the past six to 12 months, that’s not so great. That shows me that probably everyone’s under quota.

Maybe there isn’t product market fit. Maybe this is the wrong sales motion or sales leadership. However, if, if you’re and, and we recently did a deal like this, if you’re a five person company and you. You know, a million and a r r over the past 12 months, mostly through, through founder-led sales in a very capital efficient manner.

That’s, that’s looks great. So again, it’s all about what you’re delivering with, with the capital you’re burning. That’s kind of how we look at it. You get a little bit of credit if you are, let’s say you’re a, a, a technology founder or, or someone who doesn’t come from a, a strong sales background.

If you’re grow. At one and a half or up to two x with, with you delivering the revenue as the founder. You get a little bit of credit because investors like us probably will do a little bit of diligence and realize like, oh yeah, there’s a lot of, lot of easy things we can do to accelerate that growth and, and build a team around that founder.

If you’ve already made those investments and you’re not seeing the growth pick up, that’s kind of a red flag. And we are looking at things like. For a first pitch, how much money have they raised to get to x million in arr? Right? So if you’ve raised 5 million to get to your first million in a r r, not necessarily a disqualifier, because some products are harder and take longer to build than others, but it, it gets a little more scrutiny.

Okay, so the companies that raise. One to 2 million in total money and are at one to 2 million of arr. Just immediately get a second look because we’re like, wow, something’s, something’s really happening in this company.

Yeah. David, give us a little bit of a deeper insight in the burn based growth model.

And like, what’s, what’s good, what’s not good? Again, it probably depends on stage, depends on a business model. Depends on team. Absolutely. Get it. So, but if, if you are looking into early state or early stage seed, seed stage team, maybe SaaS where, where you guys are focusing on what, what do you see as a good.

Yeah. So from a burn perspective, we, we like to see companies that have a burn model of less than two. And that’s not easy to do in an early stage business. If you think about the fact that you are investing heavily in building out your go-to-market channels, it’ll take a while before they become truly productive.

So there is a fair amount of.  of burn that happens

through that early period. And David, just to be clear, like what, what does that two mean? Like what’s the, what’s the ratio here? Sure.

So, so the ratio is net cash burn divided by net new a r r mm-hmm.  For that period. And so, you know, I mean, a, a way to think about it is like for every dollar that I burn how much a r r net new a r do I create in this business?

And that gives us. Of the capital efficiency. There are other factors that we’re also looking at that contribute to that success. So you wanna look at how effective the acquisition of new business is. And, and so some of the metrics and terms that you’ll hear, there will be things like sales magic number and which is.

Sort of misquoted. So there’s actually a sales efficiency and there’s a sales magic number For most early stage companies. It’s about the sales efficiency and the sales efficiency is if you looked in your current quarter, the last three months and said, I, you know, how much new a r r did I create by, from new acquisitions in that period?

Multiply it by the gross margin so I can actually see how much I’m contributing back into the business. And then divide that by the prior quarter. Spend in sales and marketing costs. And so that’s really, it’s kind of like the bone model, but you’re really focusing in on the sales engine itself and getting a sense of how capital efficient that particular

process is.

And sales and marketing cost is the team cost, right? So software that you’re using, possibly marketing cost or anything like that. Everything that can be attributed to the sales and marketing process. Yeah, and

there’s a little bit, just to get into the detail, there’s a little bit of debate that goes on and you can either look at just new a r r, in which case you’re looking at just those sales and marketing costs.

Or you look at net new a r r, which includes the expansion i e To what extent are you actually growing these accounts over time, in which case you also want to count some part of your typically customer. Costs into that cost cuz they’re contributing to that a a r r

expansion. Okay. Got it. Got it.

Now we talked a little bit when we did our prep call, we talked a little bit about how, how different investor types look for different benchmarks, enlighten us a little bit of like if I. Let’s say family, friends, round, pre-seed, round, mostly angel led. What kind of benchmark do you see are the, the most important that a founder should, should keep in mind?

And then we’ll talk a little bit about the later stage of institutional investors, but maybe the first tell you want to give it a step on the angels. Yeah,

no, I’m a member of a local angel group called T B D Angels, so I have a little, you know, I can see what’s going on there a little bit. And I think there’s a lot of, a lot of focus on sort of those early adopter customers and how much are they paying, why are they buying?

A lot of these companies don’t even have renewals yet cuz they’re just starting to get that customer traction so. It’s kind of around like, are these real deals or, or are you like being tested in a lab somewhere and they, they threw you a bone for a, for a pilot agreement, or is there a real path to expansion and revenue growth in that company regardless of what the value is?

You wanna see the good bone? So first glimpses of good bones, would you say? Yeah. Like that?

Yeah. And you know, if your customer is your brother-in-law who’s running, purchasing at your customer, you get kind of get less credit than if maybe you have some five or 10 early customers that, that came in through, you know, maybe more traditional kind of marketing channels versus relationships.

But relationship selling is, you know, how most companies get started. I think another thing is if those customers are, are referenceable, meaning are, are they willing to talk to a potential investor about the pain they’re having about, you know, their experience with your solution? That’s really powerful for that precede stage.

Yeah. And, and shockingly like we don’t, we often see, you know, non referenceable customers where we can’t have those conversations. And that’s one thing for founders to kind of remember is that, VCs are mostly generalists. They’re not gonna exactly understand the pain point that you’re solving and the nuances of your solution.

So customer testimonials tend to be like the most powerful selling asset you might have to an investor.

And on top of it, I think it’s also proof that you’re, that you’re actually creating value for, you know, if somebody wants to give a reference, you’re creating value. They use the product. You see good, good, good feedback.

So there’s a bit of a there’s a validation of that the product actually does the job, right?

Yeah. And, and are you displacing an incumbent who has a lot of revenue? Kind of encouraging or you, a lot of companies are like replacing Excel in some capacity and, and that’s sometimes a tougher sell because your customer has to go create new budget that didn’t exist to use your solution.

And David thank, thank you so much Tom and da David, we, we go to you quickly on the, what are the benchmark that institutional investors want, want to do. And then we go over to the q and as if you have more questions. I see a couple of questions popping in here just putting on there and I’ll ask David and Tom later on.

Sure. David, like what are the benchmarks for the institutional investor that you see really being me, me. Sure.

At that stage they’re gonna wanna see a little bit more quantitative evidence and traction around these around these metrics. So they’re gonna be looking at your a r r growth growth potential.

There’s no question, there’s no getting away from that. It may not be three x to five x, but it, but it may well need to be, you know, doubling or something in that arena to be attractive. They’re gonna look at the gross margin of the business. Is this a, is this a efficient business for a cash generation?

So that should be north of 75%. One of the metrics that’s very important for a SaaS business is how that revenue grows over time. And so the net recurring revenue n r r is a really important factor. That is, if I looked at a cohort in January of one year, and then looked at that cohort in January of the next year.

And divided the last year for the, over the first year, you know, what percentage of revenue would I be seeing? And we typically look for that to be at least 105% or more. So anything over a hundred percent means every investment I made in acquiring this company is gonna continue to grow year on year.

So those are gonna be important. Burn multiple mentioned earlier on less than less than two. Now we’re really into looking at your sales forecast. And so we wanna see a pipeline we wanna see that you understand how to measure that pipeline. And we look for a concept of pipeline coverage, which is, if you’re looking for X amount of revenue in in a quarter do you have at least three x the pipe?

To to deliver on that revenue is a, is a good rule of thumb. So all of those are gonna be important factors. There are just so many more. One of the things that we do provide, and we may be able to open up for you guys too, is that we have a wiki where we help our portfolio companies understand each of these metrics how to calculate them, but most importantly, how to impact them.

Like what do you do to maximize them to get to the

level you wanna. Awesome. Good stuff. And David, I, I, I see already in the chat, people are crying out for the, for the link that you promised. So if you can if you can I actually posted it. Oh, you did? Okay. So it might be a little bit further up.

Yes. Let’s, let’s go into, let’s go into the, the questions. So Jessica’s asking if our business is precede, should we stick, stick to 10 Samsung over any forecasting?

It’s a, it’s a part of it. I think you, you’re gonna be raising money and you’re gonna be spending it. So at the very least, you have to forecast your spend.

Right. And if you have some revenue goals, which you probably should, yeah, you need to forecast that. Even if it’s modest you need to be transparent with your investors. How you’re investing their money and where you expect to be, you know, 12 to 18 months down the road with those investments. So I personally at, at companion I, I discount projections like more than two years out cuz like the one year ones are definitely wrong.

The two year forecasts are, are sort of fantasy and anything beyond that is just spreadsheet math. Hence that, that slide I showed earlier You may be asked for it, and you might have to just go through the, the rigamarole of, of creating a five year forecast. But as a pre-seed company, I don’t see a lot of value of that.

If, if the TAM is there.

Yeah. So in a way it depends a little bit like, I, I agree, I would say a two, three year forecast. And it’s not even for the matter of being accurate and it’s just thinking it through and see that, that people put the right metrics together and they make sense. So many times it’s.

How do I project my sales to go? And then how many people will I have to actually fulfill that? Right? So that’s sometimes a, a really good, really good insight rather of Did you, do you understand your business, the cost structure and the, the revenue structure and what needs to come together? Yeah. Yeah.

And I,

as it, just on the topic of forecasting you’re gonna be potentially raising for six to eight months, which is kind of the normal even for some of our companies. You’re gonna be asked for your forecast, maybe in your second meeting. You do not want to be wrong on your forecast within your fundraising window.

Right? And, and that’s like a, actually a huge red flag when three months into a relationship that the c e o is already explaining all the things that went wrong and why they missed their number. It’s just so much easier to like give your, give your plan that you’re like a hundred percent or 99% confident you can.

At least over the next six months. And if you’re not sure, like maybe you’re an enterprise focused software company and there’s like one deal that makes the difference, you just just call that out. Cuz things happen and, and deals slip, but it shows that like, again, you understand like at least how to forecast or like where the risks are in your forecast.

Yeah.

Next, next question is for, for David. I have a client with a product who wants to raise but doesn’t understand how early stage in seed investors should either dilute to cash out some of their shares. Are there some best practices here?

I’m actually gonna defer that one. At Tar  it’s more a more of an investor type question than an operating question.

So they wanna raise but they don’t really understand the, how, how early stage and seed investors should di either dilute to cash out of, of some of their shares. Let me see. I’m not a hundred percent sure if I understand that question. Is it about the founder diluting or is it the early investors diluting?

Maybe it’s a, since it’s an anonymous attendee, maybe you can just rephrase that question and we’ll jump to the next one and come, come back to this one. So next one is we have a, a self-funded business that generates $800,000 of profitable revenue last year, and we’re moving on now onto a SaaS. For, for new customer driven, market driven opportunity in large market.

Any recommendation? I guess probably recommendations around fundraising. Yeah. We,

we actually see a fair number of, of sort of services businesses that are transitioning into a SaaS business model. There is a healthy degree of skepticism because you have a profitable business, it’s hard to divert resources to not.

Create revenue to go, you know, invest in r and d. I think the key for that transition is partly in pricing. So, so like if assuming you’re selling your SaaS product to similar customers or maybe the same customers it’s presumed that you understand the customer needs and, and what the product should do.

I can’t tell from the question whether the product’s developed yet or not, but I would say if you have those customer relationships, get the pricing nailed as early as possible because you, you can actually ask your customers and test pricing. Then if you can start to win those SaaS contracts and, and wean yourself off of the services business your forecast will have a lot of I guess, sort of credibility to them because, You’re presumably already socialized the pricing.

Maybe you’ve closed a few deals and now we can believe the extrapolation going forward. So but I think above anything else, like get some sass deals done before you talk to VCs, because I, not too many investors want fund the experiment to see if you can make the transition. So I guess I would start.

Awesome. And as we’re going to the end of the session my last question for both of you is, is there any best advice that you give founders that you usually can only see from a VC or from a third party perspective? That is really hard. For a founder to to, to grasp what comes into mind, what’s the, what’s the best advice that you would give, like a gold nugget, let’s say, oh, if you just did this and you saw that, that would make a huge difference.

David, you wanna, you wanna start? Yeah, again,

it’s gonna be a little repetitive cuz kind of kind of touched on this earlier on, but I, I think one of the biggest mistakes is, is when founders just try to reverse engineer everything. They try to build a story around what they think wants to be heard. And, and you really want to be able to come into this conversation and, and a, you know, a genuine.

Where you are representing to the best of your abilities, abilities, how you think your business is gonna work. That insight that we get from you around how you think of the business and how you think about growing the business is gonna be really, really telling for us. But also bear in mind that we are here to help and we don’t expect you to know all the ins and outs of how to build those super efficient businesses.

But we’re here to help you through that process. But be genuine.  and what you’re representing. Don’t, don’t try to just tell a story that you think will get

you funded. I think that’s, that’s, that’s good advice. Be, be genuine, be yourself, and be you know, be, be in line with your own beliefs here. Tom, what’s your, what’s your advice?

I, I think mine’s just more around the general fundraising approach, which is you know, investors are looking at 10, 20, 30, 50 companies other than yours. And, and widen that funnel and do your research to target relevant investors and realize that a no from one investor probably just means you have a great company, but they have some other company they like better and that’s where they’re gonna put their time and attention.

So you gotta, you gotta sort of knock on doors. A lot of doors, but not blindly. I mean, I think founders don’t do the mail merge blast approach, like research your investors. Select the ones that really seem like a good fit and and, and just get a lot of meetings going early and don’t get discouraged with those early nos.

There was also a question in there about using agencies for r and d. That’s like, yes, 10 different investors, you’re gonna get 10 different answers. For us, it’s not unless, unless there’s like an intrinsic IP play. And the intellectual property is like part of the core story here. In that case, probably don’t want to see the outsource team developing that ip, but I think a lot of investors view that the sort of serving the customer need as the really hard part.

And if you’re delivering value to that customer with outsourced r and d, I don’t think you’re gonna get a lot of pushback. At some stage series A, B, C. Yes, they’re gonna want to. You know, internal r and d team, but for pre-seed and seed, I think it’s an appropriate way to efficiently get to market. Yeah,

good.

Good point, Tom. And I think it’s about having something in place and having a, having an answer to, to the question of how does this go on and what, what are you gonna do? It’s like, hey, You know, once we reach this we already identified a co couple of people or an outsource partner, or we, we gonna do, we know offshoring and this is in place.

I think people wanna know that, that this is not just falling off or is on the shoulders on an of an agency. Yeah. Now last, last question is, If people want to approach you, they feel companion would be exactly everything that David and Tom said in terms of benchmarks we fulfill already today or in the future.

And we w we wanna reach out. What’s the best way to reach out to you guys? The best

way, and we would love that by the way. The best way is we have a page on our website that actually goes, Fair amount of detail about what an appropriate stage is, and company pitches@companion.vc is our address.

Certainly put Venture Lane in your subject line and, and we will we’ll give you due attention. Also, say, we have a lot of great resources on our, in our blog section about marketing and selling and some of these growth tools. Other things to help you just think about the future. So please help yourself to, to all that content as well.

Awesome. Good stuff. I learned a Tom, David Tom, thank you so much for, for giving us your wisdom and, and being so open and transparent with, with everybody. I learned a ton around metrics and I think the, for me, one of the most valuable was really the reminder of. Different stages, warrant different metrics and different benchmarks.

And it’s a lot of the time it’s about the, the context that you need to provide to, to investors to explain it this or that way. Do you have a, you know, do you have a technical founder that does a great sales job, but maybe it doesn’t look as as good as the, the 10 person team? So putting things into perspective and be genuine and, and be, be out there.

But of course, These are probably times where delivering real results and real customers and real experiences is probably ranked much, much higher than, than the than the hope that there will be something. So in that respect, David, Tom, thank you so much for making the time. Thanks everybody who was participating.

Have a great rest of the, You will find a transcript and a video of this, of this call on our block site. If you wanna, if you wanna check it out. And of course Tom and David, I know that they have a really great block section with a, a ton of insights and content. So go wild and nuts. There’s, there’s, there’s great tips and gold nuggets in there.

Thank you so much. Every.

Thanks for having us, Chris. Guys, it was really great.