I enjoy helping SaaS CEOs and entrepreneurs with challenges they’re facing as they start and grow their businesses. But what I enjoy even more is providing them with information and tools to avoid those challenges in the first place. As a result, the business frequently grows faster and generates more value for the employees, founders, and investors.
There are patterns that begin to emerge after working with a number of companies and the list below is an attempt to identify some of the most common finance-related questions and challenges that B2B SaaS founders face. Most of these patterns have been identified and covered individually by really smart people, so I’ve provided links to my favorite posts covering those topics where applicable.
So without further ado, here are the top 20 things B2B SaaS Founders should know about finance:
- Revenue recognition in a SaaS business: ARR and cash do not equal revenue.
- Cash is king — none of the other SaaS metrics matter if you run out of cash. In the early days, focus on how product and business decisions impact cash flow. Building a capital efficient business provides more optionality as you grow.
- Annual up front payments are the best (and non-dilutive!) way to finance your business.
- Venture funding is one way to finance a SaaS startup but not the only way. There are advantages & disadvantages to going down the VC path.
- There are other funding options available outside of venture capital.
- Begin fundraising sooner than you think you need to. And plan to spend about 6 months from start to finish.
- Understand how cap tables work. They can seem intimidating at first but are really important when raising capital, granting stock options, or selling your business.
- Learn how employee stock options work. This is one of the biggest compensation levers startups have and you need to be able to quickly and clearly answer your employees’ questions on this topic.
- Understand the levers in your business when creating a forecast — and don’t have impossible financial projections.
- SaaS metrics — David Skok’s SaaS Metrics 2.0 post is the best I’ve seen on this topic.
- Build cushion in your financial plan as everything takes longer and is more expensive than you think.
- Hire only when ready. Employees and related costs are usually 70%-80% of the total costs of a B2B SaaS business. That means the only material cost savings lever is slower hiring or staffing reductions.
- Hire sales reps on time and remember to factor in ramp time and rep attrition in your sales forecast. I see early stage companies do this all the time and so does David Skok, apparently.
- Over-assign quota at all levels from the sales leader down to individual reps.
- A well-designed sales compensation plan like this one from Jason M. Lemkin can be a huge lever for the business. And simplicity is key.
- Outsource transactional accounting work like bookkeeping. Your time and energy is better spent elsewhere.
- Hire a strategic finance leader sooner than you think you need one. But don’t just take it from me, take it from Brad Feld.
- Understand gross margin and how it impacts the scalability of your business and valuation.
- Update your forecast on a regular basis — monthly or quarterly at least. If the forecast is accurate, you’re able to validate your assumptions and anticipate future changes. If it’s not accurate, you can refine the forecast and not be caught off-guard further down the road. Make it as simple as reasonably possible so it’s quick and easy to update.
- Update your Board of Directors and/or investors monthly (if not more frequently). There are great tools like Visible that make the task easier. The updates don’t need to be long — they can include quick highlights, challenges, and requests for help. The time investment is minimal and payoff is usually big!
I hope this list can serve as a one-stop shop for SaaS entrepreneurs who want a quick reference guide on early-stage SaaS finance. Please share any others that I’ve missed in the comments section below!
There are so many great SaaS and VC thought leaders that expand in more detail on a number of topics from this list and beyond. A few of my favorites are Jason M. Lemkin, Tom Tunguz, David Skok, Brad Feld, Fred Wilson and OpenView. Be sure to check out their amazing content!