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Jul 13, 2023

Raising Capital & Positioning in Procurement Technology with PeakSpan Capital

Originally posted

Part 1: Raising Capital in Procurement Technology with PeakSpan Capital

The procurement technology market is quickly becoming crowded.
Although consumer demand remains high, new joiners to the market need to ensure their fundraising efforts stand out.

According to Insights’ 2023 ProcureCon CPO Report, technology has consistently been named as one of the top three barriers to building a more mature procurement operation.

As a result, one of the top three focus areas for CPOs – over the next 12 months – is technology implementation or transformation (cited by 39% of respondents), and an impressive 49% of respondents said their CPOs have led initiatives to acquire, implement, or adopt new technologies in the past 12 months.

But, such high demand is fuelling an increasingly saturated marketplace. As a result, for new procurement technology companies looking to enter the space, successfully gaining investment is set to become more challenging than ever before.

Jack Freeman is a Partner at PeakSpan Capital, with over ten years of experience in the fields of B2B SaaS investing, investment banking, growth-stage software, supply chain and procurement. Alongside this, he has been on the boards of over 20 growth-stage B2B SaaS companies.

In the first part of this two-part blog series, we’ll be hearing Freeman’s insights into how companies can successfully manage the investment process.  

Targeting the right investor

Although you might automatically think that any investor is a good investor, in reality, the situation is not this straightforward.

It is critical that you target (and then proceed with) an investor that is fully equipped to support your company’s growth, that you can trust in, and offers a strong match to your company’s size, value proposition and future projections.

As such, selecting the right investor requires you to consider:

  • People
  • Alignment
  • Referenceability
  • Credibility
  • Thesis
  • Valuation and terms
  • Reserves
  • Time horizons

In addition to these factors, determining the ‘right’ investor is largely dependent on the recipient’s annual recurring revenue (ARR).

Freeman outlines the best-fit investors for each ARR stage as follows:

  • Pre-revenue – friends and family, angels, industry-relevant high-net worth individuals, corporate VCs, accelerators and corporate accelerators
  • <$1mn ARR – seed-stage VCs, industry-specific VCs, corporate VCs and your customers. Look for similar companies that share similar themes
  • <$1mn – $5mn ARR – industry-specific VCs, institutional VCs, “early” growth equity. Look for similar companies that share similar themes
  • $5mn – $10mn ARR – institutional VCs and traditional growth equity. Adopt a B2B focus, looking for similar companies that share similar themes
  • $10mn+ ARR – growth equity and private equity, checking for the right size fit and implementing a value creation strategy
What do investors look for?

Taking the perspective of the investor, it is also important for you to understand what they are looking for. That way, you can frame your pitch deck around the elements of your business that are the most likely to generate successful investment.

According to Freeman, the key points that a potential investor will be looking for are:

  • A unique thesis
  • For you to clearly outline, ‘Why you?’
  • A unique strategy
  • A clear and evidenced market opportunity
  • Competitive positioning

Freeman also stresses that there is an art to selling to an investor:

“Having a unique perspective goes a long way. ‘Why you? Have you lived through the pain in an operator role? Do you have the network? It’s important to be really clear about why you are well positioned… what’s your unique take on those markets, and why are you best positioned to attack them?
Having too broad a vision confuses investors… so, be very narrow and specific about what your vision is and what you’re attacking. It goes part and parcel with a lack of thoughtful positioning. Positioning is super important – at PeakSpan, we have operating advisors dedicated to helping our companies with positioning, because it’s hard, especially because there are more and more vendors out there. So, you need to position yourself; have a unique spot in the landscape and really stick to that and build upon it.”  – Jack Freeman, Partner, PeakSpan Capital

When it comes to your pitch, you need to work to:

  • Create competitive tension
  • Lay out clear timing guidelines
  • Meet with impressive executives
  • Strike the right balance between formal and casual
  • Invest in the right relationships
  • Create clear term sheet expectations
“For the pitch deck, make sure you’re hitting the basics upfront. State in plain English what you do. State your thesis. Why is your company interesting? What’s the problem statement and what’s your solution? What’s your value proposition? – Jack Freeman, Partner, PeakSpan Capital

You also need to build a proper data room, which provides a comprehensive answer to any potential questions that they may have (before they ask them). This should include:

  • Framing churn
  • Consumption based pricing
  • Framing sales efficiency
  • Cleanly formatted financials
  • Revenue x customer x month
  • SaaS KPIs
  • Projections (with / without drivers)
  • Sales rep performance
  • Customer testimonials and case studies
  • Market reports and research
Creating your pitch deck

Inevitably, the pitch deck will form the crux of your proposition. Its contents need to not only articulate your company’s unique value and market positioning, but also clearly outline how and why your brand will prove to be a success (over all your competitors).

To this aim, Freeman recommends that your pitch deck includes answers to all the following questions:

The basics
  • What do you do?
  • What is your thesis / mission statement?

And, as the core message of your pitch deck, Freeman stresses that this information should be written in concise, plain English.

Why your company?
  • What are your problems and solution statements?
  • Why is your startup unique? What makes it a winning idea?
  • What is the value proposition?
  • What compelling reason are you using to convince people to buy?
Your approach
  • What makes your approach unique and successful?
  • How is the market segmented, and what segment do you play in?
  • What is your ideal customer profile (ICP)?
  • How do you reach your ICP? (And, when they learn about your service, why will they care?)
  • How are you positioned to win your ICP?
  • What is your use of proceeds? How do you turn $Xmn of capital invested into $Ymn of ARR?
  • What are the specific programmes and initiatives that you use, which have been proven to work?
Why this market?
  • What are the market statistics that support your thesis, problem and solution statements?
  • What is at stake? What is the market opportunity, and why now?
  • What is your positioning relative to your competition? Why are you uniquely positioned to win?
Proof points
  • What are your existing customer-level proof points? (including early traction, ROI and quotes)
  • What is your revenue scale?
  • What is your growth rate?
  • What is your gross margin?
  • What is your capital efficiency?
  • What are your retention metrics?
  • What is your sales efficiency?
“Investors are most commonly looking at evidence of traction which they derive from historical financial performance. But this can be very short-sighted. We all know historical performance is not a prediction of future performance, and that is even more true for growth companies where the baseline situation is not the same; for example, historical performance can be a reflection of founder selling whereas future selling is a function of scaling a sales team” – Chirag Shah, Executive Chairman at Simfoni, a PeakSpan portfolio company.
“The best investors focus more on understanding the market potential; i.e. what is the competitor landscape, how will the product requirements evolve over time and what are the unfair advantages that the target company possesses in order to be a leader in the future.”

Part 2: Positioning in Procurement Technology with PeakSpan Capital

As the procurement technology market becomes increasingly crowded, new joiners need to establish strong and clear positioning for their solution.
The procurement technology sector is one which is in extremely high demand.

Fuelled by the COVID pandemic and numerous other geopolitical challenges, companies across the world are turning to digital solutions to improve their resilience to these newly exposed risks.

Figures show that 78% of procurement leaders invested in a minimum of three digital procurement solutions from 2020 – 22. According to a recent Interos report, many organisations faced three major supply chain events within the last 12 months, where disruption cost an average of $199mn in annual revenue loss.  So, this trend shows no sign of slowing.

What’s more, it’s interesting to see an emerging trend of businesses looking beyond the largest, most obvious players in the solutions market.

According to recent CPO Compass research, 59% of procurement functions have a “best-of-breed approach” to their technology adoption.

So, for new procurement technology companies looking to enter the space, if they can successfully differentiate themselves from competitors, there’s the scope for huge successes.

Jack Freeman is a Partner at PeakSpan, with over ten years of experience in the fields of B2B SaaS investing, investment banking, growth-stage software, supply chain and procurement. Alongside this, he has been on the boards of over 20 growth-stage B2B SaaS companies.

In the first part of this two-part blog series, Freeman shared his insights into how companies can successfully manage the investment process.

In this second part, Freeman outlines how companies can approach positioning in the procurement sphere, successfully raise capital, and manage key relationships.

The case for and against procurement technology

Freeman asserts that it’s important to understand the pros and cons of being within the procurement technology industry. That way, you can position yourself more successfully and avoid common mistakes.To that aim, the case for investing in developing new procurement technology includes:

  • Procurement is now an enterprise-wide initiative
  • B2B payments is a largely untapped opportunity, worth around $200tn
  • Procurement is still in the early innings of proper digitisation
  • Advancements – like APIs, big data, workflow automation – all favour digitisation
  • There is the opportunity to converge with other categories, like spend management and payment evolution
  • Companies across the world are prioritising recession resilience (for which procurement technology will play a huge role)

However, the potential cases against procurement technology include:

  • It’s an increasingly crowded space
  • Some may argue that the big ‘winners’ have already been established
  • Or, if successful, there’s the difficulty of supporting $1bn+ outcomes
  • Due to long sales cycles, selling into procurement is hard
  • User adoption is extremely difficult
Winning procurement positioning

Considering the points above, how can businesses adopt winning procurement positioning?

Freeman recommends that, when shaping their approach, procurement technology companies consider all of the following themes.

Key market themes:
  • Digital transformation
  • B2B payments
  • Supply chain crisis
  • The need for greater visibility
  • Sustainability
  • Corporate social responsibility and ESG
  • Compliance and security
  • Customer size
  • Vertical
  • Spend type
  • Suite vs best-in-breed point solutions
Key tech themes
  • Extensibility
  • Workflows
  • Embedded
  • Data and AI
  • UX
Raising capital

Freeman lists the most common missteps in raising capital as:

  1. Setting unrealistic goals and expectations
  2. Having too broad a vision
  3. Lacking thoughtful positioning
  4. Presenting an unfocused ICP
  5. Missing clear differentiation
  6. Misalignment on round size
  7. Targeting the wrong investor(s)
  8. Lacking the “how”
  9. Lacking investor due diligence

These errors commonly cause businesses to fall short at this step. So, to maximise the likelihood of successfully raising capital, Freeman urges businesses to carefully avoid these pitfalls.

How much capital should you raise?

A notoriously difficult question to answer, Freeman advises businesses to consider the following factors, when determining how much capital they need to raise.

  • Macroeconomics
  • Sector dynamics
  • Competitive intensity within your industry and niche
  • Cash need and desired runway
  • Whether it is primary or secondary capital
  • Your valuation
  • Your terms
  • Your confidence
  • Your goals
“Confidence – I think this is a cool one to think about. If I was an ultra, ultra confident founder, and I knew my startup was going to grow from one to five million in revenue next year. I wouldn’t raise any more than I needed because I would rather raise more capital at a much higher price when five million in scale in order to limit dilution. The reverse argument is that no one knows the future and generally raising more than you need is the safe bet.
Thinking hard about your goals and how much capital you want to raise to achieve those goals is not talked about enough. Especially with venture capital firms dictating the amount. In my view, the COMPANY should always dictate the amount based on need.” – Jack Freeman, Partner, PeakSpan Capital
Managing relationships

Finally, remember that investors are salespeople – it’s the investors’ job to get you interested in taking their money.

As Freeman explains, from the investors’ perspective, there are little downsides for them in showing high interest in your venture. After all, the more relationships investors can maintain, the more options they have down the road. This is particularly true with larger firms and with junior employees.

“Make sure you like the person – that’s the most important thing, especially if they’re going to join your board. In terms of alignment, the people matter the most. I’m shocked at how little this point is brought forward.
Talk about the future – are we aligned? Are we going after the same vision? Does the VC want a unicorn-like outcome? And are you ok selling for £200mn in three years? Making sure you’re aligning the vision and strategy is super, super important.” – Jack Freeman, Partner, PeakSpan Capital

So, when it comes to building and managing an investor relationship, consider the following points:

  • Does your POC have influence?
  • What is their meeting attendance? Are they always late or making excuses to rearrange?
  • What timelines are they proposing to you? Are there extensive delays, or a generally low level of urgency?
  • What is their body language like during your meetings?
  • Who is selling to who?
  • What is happening in the market?
  • How do you interpret their data requests?

These questions will prove key in ascertaining just how invested your investor actually is in your idea. If you notice them consistently lacking in these areas, then it might be worth reframing this partnership.

“Relationship tenure really matters. If you can manage to have ongoing relationship development with investors – that doesn’t crush your productivity – I think it’s smart” – Chirag Shah, Executive Chairman at Simfoni, a PeakSpan portfolio company.
That’s why you have to qualify really quickly and decide, here are the top three to five investors that want to lead my series A. Let me check in with them every couple of months, let me send them the company newsletter – then, if you’ve known them for two years, that’s going to make your life a whole lot easier when the time comes to raise.”