The short answer is “as much as you need”. The more tactical answer is “as much as you can raise cheaply”. The latter is a pragmatic view. Raise more than you need when times are good. Just because you raise it does not mean you need to spend it – capital efficiency is always good!

In this post I look at what VC are saying SaaS ventures need to raise to get to scale and profitability. But I’ll also look at what VC are doing – what SaaS deals they are funding currently. I look at the capital efficiency drivers, what you can do to reduce your need for capital. And finally, I show you which VC are active in SaaS today.

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What Are VC Saying?

The answer according to Bruce Cleveland of Interwest is about $40m.

Take that seriously. Cleveland is a SaaS specialist with serious operational experience who has done his research on this subject. But as he points out, the details matter. There are two points of caution:

1. This is looking in the rear view mirror at ventures funded some time ago that did an IPO in 2007 or earlier. It is a different world today – less capital available and less need for capital.
2. VC are happy with models that require a lot of capital. Capital is what they have to offer and if you need a lot they are in the driving seat.

Lets look at the operational details, the capital efficiency drivers, in a minute. First, lets see what VC are actually funding today.

What Are VC Doing?

We looked at the Series A round for 17 SaaS ventures that closed after January 2007:

• Clarizen
• Maxplore
• Loopfuse
• Jive Software
• SlideRocket
• Elastra
• Syncplicity
• SocialCast
• AriaSystems
• Lavante
• Lithium Technologies
• Maxplore
• PivotLink
• SmartTurn
• Zuberance
• InsideView
• Bill.com

These 17 ventures raised $90.25 million total, an average of $5.3 million. That sounds like the “old normal” $5 million Series A. You can see how you would get to $40 million for a venture that is getting traction and can do a series of larger rounds at higher valuations. Lets say, a) $5 million; b) $10 million; c) $25 million; and total: $40m.

If the C round is pre IPO, everybody does well. But that is the old normal. The new normal is different. First, those 17 deals had two outliers: Jive raised $15 million and Bill.com raised $17 million.

Now let’s start with a later date. If we filter by Series A deals that were done after the market meltdown in Q4 2008, the average more than halves to $2.55 million. Those five deals are:

• Maxplore
• Loopfuse
• Syncplicity
• Zuberance
• SocialCast

Capital Efficiency Drivers

There are two numbers to obsess over.

1. How much does it cost to acquire customers? Cleveland defines this as CAC/ACV, or Customer Acquisition Cost divided by Annual Contract Value. If this is less than one you are in good shape. You can take this further. If you can get your customers to pre-pay for the year and your CAC/ACV is less than one, you can self-finance growth at least on the marketing side. Charging annually rather than monthly will slow down growth but that would be a small price to pay for controlling your own destiny. In some markets, customers will pre-pay in return for a discount and that is certainly the cheapest capital you will ever get.

2. How much do you need to spend per customer on infrastructure? The SaaS pioneers made a big play out of having their own data centers. When SaaS/Cloud was new, this was essential. Today you will be courted by lots of big, deep-pocketed, credible cloud vendors selling PaaS, IaaS and HaaS on a pay-as-you-go basis. The pay-as-you-go basis means you don’t spend precious capex on infrastrucure.

But more important is the total ICC or Infrastructure Cost per Customer. If this is low enough you can afford to be more creative with your freemium strategies – which will reduce your CAC/ACV if done right. In other words, your R&D guys had better pay attention to performance engineering from the get go. The days of throwing sloppy code out there and covering your mistakes with huge dollops of cash later are probably over.

Who You Gonna Call? SaaS Funders!

You need capital to build a SaaS venture. You can self-finance using the cash flow from another business. (Typically a professional services business as this requires no capital.) This is what both 37 Signals and Zoho/Advent did. But that is still capital, it is just your own capital!

If you have a small niche, you might need very little capital as it is easy to reach your market. Which is a good thing as no VC will fund a small niche. If you are have a venture that is in that rare magic quadrant that is both viral and monetizable… well you are one lucky dude!

For SaaS ventures that are going after a big market and have normal marketing characteristics, VC (probably preceded by Angel) is the conventional route. If you do decide to raise VC for your SaaS venture, it is better to go to a SaaS specialist.

We know this is not an exhaustive list. It is not meant to be. We have seen many VCs do one or two SaaS deals. We want to highlight the VCs that have done more than that, and that have an active focus on SaaS (a section on their site, a partner focused on SaaS, some interesting research, etc.). These are the ones that made that cut:

• Bay Partners
• Benchmark
• Bessemer
• Emergence
• HummerWinblad
• Interwest
• Northbridge
• TrueVentures
• Venrock

What you really need to know is, who is funding SaaS ventures right now. Here is the much shorter list of VC that have done two or more SaaS A Series deals since the start of 2007:

• Emergence
• TrueVentures
• HummerWinblad
• Venrock

OK, let’s make a really fine filter. Who has done SaaS A Series deals since the market meltdown in Q4 2008? That list is down to two firms:

• Emergence
• TrueVentures

In raising money, relationships matter – a lot. So if you know a VC that is not yet active in SaaS, call them. If your venture puts them on the SaaS map, they will love you. For most VC that like Internet or software like SaaS, the business model attractions are screamingly obvious.

Photo credit: Mokra
Discuss

One of the things that we’ve been focusing on lately has been building tools to better manage our products and services. It’s amazing what a well designed tool can tell you about your business. When I say “tool”, I’m referring to an application. Whether it be a web app, a desktop app or even a simple spreadsheet, creating a good “tool” that can help you leverage data that you’ve collected, or even help you collect data to analyze is a great thing to have.

For example, our F-MyLife application leverages multiple ad networks to fill it’s inventory. It currently uses the AdWhirl SDK to do this and it worked great for a while; however, our buddies over at MobClix built a much better ad aggregation platform with far more networks and we’ve since moved most of our traffic to MobClix so they can manage it. Since the AppStore is a pain in the ass and getting an update out would have taken weeks, we were able to allocate all of our traffic to MobClix via AdWhirl and MobClix’s new platform was able to handle everything from there. We ran our ads like this for over a month and then we started noticing a dropoff in our revenue. We scrambled to find out what the problem was, but since we were filtering through data from multiple networks, it was nearly impossible to put two and two together.

We decided that in order to analyze all of this data and really see connections between everything, we were going to need to build something. So Shaun spent a few nights working on a web application that pulled in all of our data from all of our networks so it could be analyzed and displayed in a readable format along with some charts. This was a huge life saver. After reviewing the reports that we built for ourselves, we noticed a huge problem with our click-through rates and began working with everyone to resolve them.

Had we not built this tool, we probably would of never known the real cause of the issue. In fact, had we built this tool a month ago, we would of identified the bug earlier and we could have fixed it.

You don't always need to "roll your own solution" though. There are tons of products and services out there designed to fix problems just like yours, you just need to research them and set them up. A similar scenario occurred with our servers. We run FML/TWI & ProTip on Amazon's EC2 infrastructure and we monitor everything with Pingdom. The other night, we had a 6 hour downtime between 2am EDT and 8am EDT. The problem was remedied by a simple lighttpd restart; however, during that time, we lost a lot of revenue. This wasn’t the first time that this happened either! So, yesterday, we setup Scoutapp to keep an eye on our server load and monitor some other metrics (like MySQL). When we woke up, we were greeted with a bunch of alerts from Scoutapp telling us that we had 1 SQL query which was taking an awfully long time to run and bogging down the server. We logged in, identified the query, figured out why it was taking so long to run and remedied the problem by adding an index to one of our tables. Done!

If it weren’t for Scoutapp, we would of had to manually log into each server, every morning and manually check the slow query logs. This is painstaking and given that we’re a small company with hundreds of things in the works at any given time, we don’t have the free time available to check logs. Scoutapp saw a problem, let us know about it, and we fixed it. A tool saved our ass yet again.

This happens over and over in the software development business. After you’re done with the product, and it makes you a little bit of money, you NEED to build or setup tools that can help you manage your new business. If you don’t, you’ll spend all of your time managing your first product instead of working on your next.

Heartbeat was the first tool we built to manage our AppStore products. It’s been a great asset to us and after having had over a year of experience on the AppStore, we’re working on Heartbeat 3.0 which will incorporate all of the knowledge that we’ve gained through the past year.

It seems counter-productive when you’re a small company, but that’s when these little things help the most. You don’t have the time to do it all, so it’s important to automate as much of your business as possible. Services like Pingdom and Scoutapp have helped us maintain uptime on our servers. Others like Sifter and Tender have helped us keep track of bugs and deal with support issues from our customers.

There are a ton of other products and services out there that can help you run your business. If you can’t find one to meet your specific needs, spend some time, and build your own. Trust me, you’ll thank yourself in the long run.

What it does

We all are becoming more and more accustomed to turning to Twitter when we have to look up information. It is only fit, then, that different directories will crop up, giving us a good overview on any concept that we may be interested in. That is exactly what this website does – it collects information on different Twitter businesses, many of which include promotions.

This database can be browsed both alphabetically and by number of followers – the latter will give you something of an idea of the standing of each business. Moreover, the homepage highlights these businesses that have attracted the biggest numbers of followers so far, so that you can always see who are making waves online in a more or less immediate fashion.

Appropriately enough, you can tweet every featured company as links for doing so are provided.

On the other hand, if you want to have your business featured on the site you can do so effortlessly. This process involves setting down tags and so on. Furthermore, you can let twitterers know about any promotions through the site, and draw more attention to your business this way.

In their own words

“Twibs was created by a small group of people with one purpose: Give twitter users a place to find businesses on twitter. We are big believers in the power of twitter to connect customers with businesses. We’re working on making it easy for consumers to find businesses, both local and national. Keep in mind, we’re just getting started, so there may be small glitches and features missing, but don’t worry, we’re working hard for you to keep helping consumers find your business on twitter!”

Why it might be a killer

It is a direct way of knowing which businesses you can count on when it comes to the famed micro-sharing platform.

Some questions

How many businesses are already featured on the site?

Link: http://www.twibs.com
Our Review: http://www.killerstartups.com/Web20/twibs-com-twitter-business-directory