A lot of people will give me a lot of hate for sharing this because it’s revealing something that should be kept a secret.
If you’re a small business, know this – you should never buy from VC backed SaaS companies.
Pretty bold claim but there’s good logic behind it. To understand why you need to understand the route a VC backed company MUST take. Now, understand this isn’t an option, it’s not a case of most funded companies going down this route, this is literally a pre-requisite for getting funded. There are as many exceptions to this as there are lottery winners.
This applies to every tech startup
Venture Capitalists are backed by funds. Those funds typically need to generate a 10X return. So if it’s a 1bn fund, it needs to get 10bn back, normally in 5-10 years. I’m very much oversimplifying here.
It’s a given that a massive number of these companies that take investment will fail so the ones that “make it” need to not only fund the losses but they need to make sure that the fund reaches it’s potential too. They’re not looking for a business that generates a nice $1m a year in profit. They’re looking for the next Salesforce, Trello or Workday.
You are going to either be Salesforce or you’re going to die. It’s that simple.
So one VC might specialise in early-stage tech companies and invests say, $1,000,000 in a proposal generating platform (for example). Here’s where things get dicey. Getting 2.5m back in 5 years is a failure. That’s no good. It’s 20-30 million or nothing.
Now, the VC knows that he needs to get $30,000,000 out of this deal within 7-10 years.
The thing people don’t understand is there is no middle ground here. If you fail to make the required return in the required amount of time, one of two things happens, the company folds or you spend all your time trying to raise more money.
The mantra is basically “go big or go home”. Fine but this is the problem, it forces the company to grow faster than it should. Typically, the original investment is to be spent within 18 months. That’s fairly standard stuff. There are outlying situations but in the typical SaaS investment – that’s the situation.
So, lets recap. So you’re buying from a company that:
- Needs to spend all its money in 18 months
- Doesn’t need to be profitable
- Will be a massive success or the company will shut down
Not a great start, but let’s continue.
Assume all the above is fine and there’s nothing wrong with it, why else shouldn’t you buy from a VC backed company as a small business?
They’re not building the product for you as a small business. You are literally not important at all. You’re a user, a metric, a pixel affecting a graph. The objective is simple: Sell the company for a fortune or close it down and move on. Meanwhile, the founders get to play on private jets, party lots and try and secure their next round of investment.
It gets worse when you realise that the product actually isn’t for you. It’s for corporates. They’re the ones that pay crazy per-seat pricing, spend 20/30k on “trials” and will be a 6-7 figure a year customer. The features that those companies need are completely different to the needs of a small business.
Want a clue? Look at the user settings. Look at all the irrelevant options you have. Want a more obvious clue? Look at their homepage. Does it use language you use in your everyday life? No, it’s all corporate speak written for some VP somewhere.
Let’s go back to our proposal generating example earlier. That million in funding is not going to come back to the investor selling proposal software. The market simply isn’t big enough so they need to get you to “pivot”, or switch gears.
It needs to be something more generic, more corporate-friendly like document signing. So you bought into a proposal generating tool and now all of a sudden it’s some corporate document singing service.
Assuming you’re straight, would you marry a girl you knew was going to have a sex change?
Now, of course, you could leave and find another tool, but why get comfortable with that one in the first place? If you buy into a VC backed SaaS company the end game is simple and there are two options:
1. They are a massive success and sell the company to Facebook, Google, Intiut, Workday etc and the product you love gets rolled into some massive corporate mess. I’m rolling going public into this option too.
2. They run out of money and go out of business and the product you spent years integrating into your business is gone. Usually with a really helpful 30 day notice period.
Please understand there is no option where they take millions in funding and keep ticking over, selling a product for $30/month to small businesses. That is not reality.
Here’s what you do instead. Look for the companies who are profitable. Message them, ask “Hey, we’re in this for the long haul, are you? Are you a profitable company, do you have investors?” Find the companies that are, as Basecamp put it, ‘Profitable and Proud’.
Buy from small businesses designed to serve small businesses and are profitable. Support them because you’re the only thing that matters to them, not pleasing investors who couldn’t give a shit about you.
We love you.