Unfundable Sales Models

Introduction

Over the past few days, I have conducted multiple sessions with some slices of my network around the complex topic of product-market fit. Many folks contacted me seeking more answers on GTM models and what VCs prefer, what makes the company investible and why some of you had multiple rejections, etc. There are several varying factors around those, but here are a few patterns I discerned based on the questions and themes that came in. Please consider these the no-go zones in general, but there are no rigid rules across the board given investing is based on an array of different theses.

While a business model can be replicated from what others are doing, pricing typically cannot be copied (unless the product is commoditizing fast or has many established competitors) and value-driven pricing will also help establish a unique PMF that others may eventually mimic through differentiated products or pricing.

Complex sales with high CAC

VCs generally seek companies with rapid customer acquisition and scalability potential, SaaS sales models involving long evaluation periods, multiple decision-makers, or complicated integration requirements may be seen as hindrances to scalable growth. However, high-value and sticky products e.g., new-age databases, cybersecurity, Web3, etc. are also considered attractive with the product being priced right and margins can exceed CAC, typically CLTV (Customer Lifetime Value) must be shown as 3-5x of CAC across all deals. Selling via hand-to-hand combat is considered okay for very early-stage companies still finding their product-market fit, provided the team can sell at value-oriented price points.

Lack of clear monetization strategies

Investors expect SaaS companies to have a well-defined monetization strategy in place, companies lacking clarity on pricing, packaging, revenue generation, and monetization will face funding challenges. VCs seek confidence in the startup's ability to effectively monetize the product and generate sustainable revenue growth. Pricing determines what you can and cannot do with your company. More on the pricing topic to come in a separate article.

The professional services overhang

Selling intangibles like skills, outcomes, future customizations, scope, deliverables, milestones, etc. differs greatly from selling a tangible product creating value. In professional services, one sells intangibles using sales decks and deploys the classical “solution selling” technique using artifacts like sales decks, custom collaterals, etc. This technique adds huge CAC and breaks down at places where pre-conditioned relationships do not exist. Solution sellers also alter product roadmaps, accept custom product requests, and add frequent discount pricing to win business, adding to the un-scalability factor.

SaaS product selling is standardized and tangible leveraging techniques like “gap selling”, self-service trials, automated onboarding, and digital marketing to attract and convert leads at scale. Solution sellers also typically discount pricing and sell at different price points to different customers breaking the product value alignments before they can be demonstrated. Seasoned VCs can catch the solution-selling mindset quickly and will identify a CAC raiser walking away from funding these businesses.

Concluding Thoughts

While the above-mentioned are common patterns in the industry, these preferences may vary among VCs, and what one VC may dislike, another may find acceptable. Ultimately, VCs evaluate sales models based on their potential for scalability, profitability, their own ability to add value, and the startup’s ability to generate sustainable revenue growth. Startups should tailor their sales strategies to align with their target market, industry dynamics, and the expectations of potential investors.