Investors, they say, love KPIs. But what is it an early stage investors really looks at in a startup? This was one of the topics I was interviewed about by the marketing specialist Christian Weisbrodt from Munich, who worked for Microsoft, Borland as well as for startups.
Christian: Hello Alex, nice talking to you. Please introduce yourself: Who are you? What do you do?
Alex: I am Partner and COO at WestTech Ventures, a Seed Venture Capital firm in Berlin. I also am active in the Bundesverband Deutsche Startups (German Startup Association) as a member of the Regional Board Berlin, in the Digital Industries Committee of the Berlin Chamber of Commerce and also in other networks.
Some words about WestTech. Which startups are you interested in? In which industries and verticals do you invest?
At WestTech Ventures we are interested in Seed-Investments in innovative and technological topics, in the software and internet space, e.g. developer tools, mobile and education, XaaS startups, B2B projects and more. We also founded Project Flying Elephant, our pre-seed deep tech incubator, which offers investment and support to tech-oriented startups from areas like cloud software and software development tools.
At WestTech Ventures you have invested in some SaaS-Startups. Which KPIs are you looking at when doing your due diligence before investing and during the growth of your portfolio companies?
Exactly this is the challenge when investing as a PreSeed- and Seed-VC. We do not have the privilege of Series A Investors, who can look at a longer history and a whole set of real KPIs when evaluating a startup. Therefore we have to concentrate on another set of factors: Does the team understand the market it addresses? Does the market contain enough potential? Does the team understand how to build a SaaS offering in the B2B sector? These are the points where a team has to be convincing.
Regarding KPIs we expect founders to be very familiar with them and the metrics which are relevant for his or her business model and that they really know the competition well. That includes realistic benchmarks in regard to CAC, CLV or Conversion Rates during the different steps of the Customer Journey. More important than the absolute numbers is for us to understand how the founders have come to their expectations and if they can plausibly comment on the numbers. Talking about this we can usually evaluate pretty quickly if the team has done enough work on market and competition.
With our very young startups we very thoroughly look at the cash flow and liquidity planning and have weekly meetings in order to look at KPIs together and discuss next steps.
You are involved a lot with marketing and sales of B2B solutions. What are typical mistakes a founder makes in these areas?
I see especially two common mistakes:
Founders tend to underestimate the duration of the sales cycle in B2B sales (similar to how they often underestimate the duration of their first fundraising). Founders also are often too hesitant in setting a high enough price and tend to often underestimate the value contribution their offer can have for the customer.
Especially in the very early phases of a startup sales cycles are longer (than expected) and hoped for. The reasons for this can be that the founders may not be experienced enough in order to ideally place their product with the customer and to optimize the sales process. Also the startup might not have enough credibility and testimonials in the market yet. If you add to this one or the other postponement in the launch date or with the launch of some important product features, you will need to revise your first assumptions on the lengths of the sales cycle. That is way I remain skeptical, when I am approached by a founder who assumes a sales cycle of 3 – 6 months and tell him, that it is safer to assume at 9 months instead, at least in the beginning. This difference in the seed-phase is extremely important, since the seed-financing of a startup is often raised for 9-15 months only. That means time will be a scarce resource.
When looking for the right price for their product, founders often take too little time time to find out how high the value contribution really is, their product offers to their customer’s business and also what customers would be willing to pay. In B2B sales I often can, different from sales of B2C mass market products, less rely on A/B testing, but I need to gain my insights more from many discussions with potential users and customers. Even though founders have already a lot of responsibility on their shoulders, these are topics where spending more time pays off and they should take time for these discussions. During the customer validation the price should be set high on purpose. Because it makes a big difference if I get 99€ or 990€ from my customers per month. On the long term the right pricing is a deciding factor for the economic success of your startup. Unfortunately some founders do not think about this hard enough, because in the beginning the investors are paying the bill.
What is your advice to founders in the B2B-field in order to avoid these mistakes and raise their chances for an investment?
At least one of the founders should take care of sales him or herself during the first 1-2 years. In the early phase one cannot fully outsource sales or delegate it to one’s employees. Of course you can and should employ sales people, but the founder himself needs to enjoy doing sales, i.e. making cold calls and selling his product. That is why founders should spend more time with (potential) customers and less time with Excel wallpapers. The detailed numbers of month 12 or 24 in the financial planning are less interesting to me as an early stage investor, because they are more often than not fantasy numbers. However, I really thoroughly look at the assumptions a founder is making and if they already have feedback, testimonials or even LOIs of real customers.
B2B products and services are often specialized niche topics – a founder needs to be able to explain why this idea with this team will be a huge succes. What exactly is the market? Who exactly needs the product and why and how much are they willing to pay? Educate Your Investor! That is the clue to gain interest for an investment from me.
Alex – thank you for your time!
Thank you Christian! If you are interested in questions about metrics and KPIs at SaaS startups I really can recommend Christian’s Blog , where this interview appeared first.