Although the financial markets have risen in recent weeks, there are still many business software companies trading at a low level. It is common for losses of more than 50% in the past year. Just a few are Okta, Twilio, and DocuSign.
This has also put a huge strain on startup funding. During the second quarter, venture capitalists (VCs) closed 24% fewer deals quarter on quarter, according to PitchBook. And the IPO market is experiencing its worst year in a decade, further hurting seed funding.
“VCs are definitely becoming more selective,” said Muddu Sudhakar, the CEO and founder of Aisera. “The bar is now much higher.”
As for his own company, Sudhakar was able to raise $90 million in a Series D round. The lead was Goldman Sachs and other investors including True Ventures, Zoom and Khosla Ventures.
It helped that Aisera has a unique platform that uses predictive AI to manage customer service, IT and sales. The technology has proven effective in reducing operating costs.
Also read: 5 Best VCs for Data Startups
Getting financed in a down market
So what are some other business software startups that have been able to break through today’s tough environment? What are the success factors in the current markets?
Let’s take a look at some success stories.
CleverTap: AI-Based User Engagement
“The best way to attract investors is to build a growing and sustainable business,” said Sunil Thomas, co-founder and executive chairman of CleverTap. “Focus on unit economy, growth, cash efficiency and profitability.”
The strategy has worked out well for him. In August, CleverTap announced Series D financing for $105 million. Leading the deal was CDPQ, who wrote a check for $75 million. Other investors were Tiger Global and Sequoia India.
CleverTap software uses artificial intelligence (AI) and machine learning (ML) to engage and retain users. Since its launch six years ago, the company has built a customer base of 1,200 brands.
“The overall financing environment has gone back to basics,” Thomas said. “There is certainly funding available for great ideas – in the early stages – and sustainable companies in the growth phase.”
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airSlate: Document Automation
airSlate raised $51.5 million in June. The lead investors were G Squared and UiPath. The valuation of the round came in at $1.25 billion.
Founded in 2008, AirSlate has created an automation platform that enables electronic signatures, PDF editing, document management and workflow solutions. There are over 100 million users.
“So what attracts investors?” said Borya Shakhnovich, CEO of airSlate. “Simply put, financial data that speaks for itself. This means breaking through early in the company’s journey, achieving impressive sales figures and showing customer base growth.
“Touting solid financial data for venture capital interests may sound painstakingly intuitive, but it’s not always that simple,” Shakhnovich added. “I often compare investors to shoes – there are many to choose from, and some fit better than others. Many founders feel that their goal is to win every investor over, but that is not always possible. Many investors demand brand recognition and a solid customer base over financial stability.The best approach is to stand behind the strength of your organization and identify like-minded investors.”
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Tropic: Purchasing Analysis
Earlier this year, Tropic raised $40 million in a Series A round led by Insight Partners. The company’s software ensures better purchasing. Keep in mind that the average company pays 30% too much for software.
Some of the clients are Vimeo, Zapier and Qualtrics. The company manages more than $300 million in expenses.
“At Tropic, we have a unique vantage point because we can see how companies really perform based on the purchasing behavior of hundreds of companies,” said Dave Campbell, CEO and co-founder of Tropic. “We’re driving these purchases, giving us visibility into who’s performing well, who’s churning, and who’s struggling to get a grip.”
Campbell points out the following lessons for companies getting financing:
- They offer something that thrives in a downturn, such as cost-cutting and efficiency-enhancing approaches.
- They emphasize retention over growth. Companies that collect now are in the 120% NRR (Net Revenue Retention) range, even if they only grow 50% year-over-year. 300% growth at 50% NRR will not attract investors.
- They have strong efficiency. Sales efficiency of more than 1 and CAC (Customer Acquisition Cost) payback time of less than 12 months.
- They power a mission-critical service. Nice-to-haves are out.
- They are willing to discount their valuation.
Lightning AI
In June, Lightning AI announced a $40 million Series B financing. The leader was Coatue and other investors were Index, Bain, First Minute Capital and the Chainsmokers’ Mantis VC.
The company has an open source platform to build AI models. It has been downloaded and used more than 22 million times since 2019 by 10,000 organizations around the world.
“These latest changes in the financing environment have made it more important than ever for companies to be explicit about how they create value for their users and customers,” said William Falcon, CEO and co-founder of Lightning AI. “We expect an increasing focus on the ability to synthesize what a company does into clear and well-articulated value propositions and a greater focus on efficient growth supported by a strong unit economy.”
Falcon emphasizes that founders need to find investors that fit the company’s vision. Admittedly, in a harsh financing environment, it can be difficult to say “no” to a multimillion-dollar offer. But for the long-term outlook, this may be the way to go.
“While there is no shortage of MLOps products today, it was important to us from the outset that we found investors who understood that Lightning AI is not simply building another machine learning platform, but that we are building the foundational platform that supports the machine learning space will unite,” said Valk.
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