A Healthy B2B SaaS From a Debt Investor Perspective

The Debt Investor Perspective

 

From the optic of a debt investor, we’ve been looking for the ideal characteristics of a healthy B2B SaaS scale-up and we’ve identified a few patterns that occur in most cases.

High Growth Rates:

B2B SaaS companies might experience a slow start given the long sales cycles. Nonetheless, successful scaling driven by effective marketing, strong product-market fit, and operational efficiency can lead to rapid revenue growth, High customer retention and effective acquisition strategies also play key roles in maintaining growth rates YoY.

 

High Gross Margins:

B2B SaaS companies achieve high gross margins due to the scalability of its business model based on technology and its low Costs of Goods Sold (COGS). Low ongoing expenses for customer support and infrastructure enhance the maintenance of high gross margins.

 

Product Market Fit:

When a B2B SaaS effectively addresses a specific need or pain point within its target market, it leads to higher customer satisfaction, increased retention, and positive word-of-mouth referrals. Strong product-market fit not only drives genuine demand but also simplifies scaling efforts and supports sustainable long-term growth. Metric-wise we can see this reflected in higher conversion rates, higher engagement, higher contract values, and lower churn.

 

Majority of Revenues are recurrent:

In successful B2B SaaS companies, we tend to see that recurring revenues represent above 70% of total revenues. This enables the company to perform more predictable financial planning, and it also facilitates its access to both equity and private debt markets.

 

Low customer concentration:

Despite seeming harder due to having enterprises as clients that may represent a relevant portion of total revenues, diversifying the customer base reduces risk by avoiding over-reliance on a few large clients. This stability helps maintain revenue consistency and protects the business from potential losses if a major customer leaves.

 

Founders continue working in the company:

Founders staying with the company ensures confirmation and continuity of vision and leadership. Their ongoing involvement helps drive growth, maintain company culture, and navigate challenges effectively. Additionally, if they continue having relevant ownership of the company, their skin is on the game, having also a monetary incentive for the success of the company.

 

LTV/CAC tends to be at least 2x:

In B2B SaaS, the LTV/CAC ratio is essential for evaluating the efficiency of customer acquisition and retention efforts. It compares the Lifetime Value (LTV) of a customer to the Customer Acquisition Cost (CAC), indicating whether the revenue from a customer justifies the expense of acquiring them. A ratio of at least 2x is particularly sought because it means that the revenue generated from a customer is at least twice the cost of acquiring it, demonstrating positive unit economics. A high ratio suggests effective acquisition strategies and strong customer retention, supporting profitability and scalability, and making the business more attractive to investors.
At Lendity, we wrote an article detailing the essential tech metrics often used in B2B SaaS companies. In the article, we share our view on each metric, its formula to calculate it, and the importance of each in measuring the success of a tech company.

 

Net Retention above 100% and Gross Retention above 90%:

Customer acquisition involves attracting potential customers using diverse methods, such as inbound marketing which emphasizes creating valuable content to generate interest, and outbound sales which uses targeted outreach and data-driven techniques to engage prospects. Additionally, offering freemium models or free trials can attract users by providing limited access to the product, to convert them to paid plans based on their experience. On the retention side, businesses focus on ensuring a smooth onboarding process that helps new users quickly realize the product’s value. Providing responsive support through various channels, including chat, email, and phone, is essential for maintaining customer satisfaction. Regular updates based on user feedback and market trends are also crucial for sustaining engagement and loyalty.

 

Spending on S&M and R&D:

Initial investments in marketing, sales, and technology are high. We believe it is necessary to have efficient spending in R&D and S&M, controlling relevant metrics such as LTV/CAC to understand how efficient are the efforts to acquire new clients and follow the engagement of customers with new developments.

 

High Conversion Rates:

Reflecting strong product appeal and effective sales processes.

 

Pricing Strategy: Adjusting pricing can directly impact revenue. SaaS companies often experiment with different pricing tiers to optimize revenue and customer acquisition.

 

Sales Approach:

Given the enterprise profile of the end customers in a B2B SaaS model, high-touch sales are the most typical sales model in B2B SaaS. High-touch SaaS sales involve a personalized approach with direct interactions with sales representatives, who conduct customized pitches, demonstrations, and negotiations. Dedicated account managers offer ongoing support, addressing evolving customer needs. The sales cycle is often longer due to the complexity of solutions and the need for customization and integration. These efforts come with rewards, these kinds of contracts tend to have larger tickets and tend to be stickier if the company is providing value.

 

Investor Expectations:

‘Good’ Investors often look for high growth rates and are willing to accept short-term burn in anticipation of long-term profitability. Effective management of customer acquisition costs and churn is crucial for meeting these expectations.

 

Healthy Cap Table:

A well-structured capitalization table ensures balanced founder ownership and incentives among different shareholders.