Founder Passion Versus Investor Fiduciary

I frequently hear investors say they are looking for passionate founders. I think in this instance “passionate” is just a proxy for “driven.” Driven founders work hard, and push through adversity to get to success.

Really, investors are not interested in just any flavor of passion. It’s important to consider whether yours is the type that investors want.

Here are some founder passions that I’ve seen:

  • To make a difference in the world
  • To make money
  • To be TechCrunch famous
  • To build a remarkable internal culture

Investors can also have passions. They might take the form of a thesis on a certain type of business, or a focus around businesses with a particular aim such as environmental responsibility, ending poverty or curing disease.

But VC passions live within strict guide rails of fiduciary duty. As “dual fiduciaries,” VCs represent the interests of their portfolio companies as well as the limited partners in their fund. Limited partners generally have one overriding interest: return on capital. In turn, making money rules the day.

Any of your passions could potentially conflict with your investors’ fiduciary duty. For example:

  • Your passion is to make a difference in the world, and you find an avenue to deliver a greater return at the expense of impact
  • Your passion is to make money, but your odds of a personal return conflict with the VC portfolio model
  • Your passion is to be TechCrunch famous, but there’s another leader out there who is better equipped to take your venture to the next level
  • Your passion is to build a remarkable internal culture, but getting to attractive economics requires trimming perks or headcount

Your term sheet may (or may not) give you the final say in sticking to your passion, but either way, running a business that’s at odds with your investor interests is no fun. Best case, you get your way, your investors turn their attention elsewhere, and you end up with all the overhang of a VC-backed business but none of the value-add. Worst case, you don’t get your way, and you’re dragged along with a business about which you have no passion.

And when you’re tired and the chips are down, which happens often in the early stages, you’re going to need to call on that passion to keep pushing.

So be realistic about the intersection of your passion with investor fiduciary before you take that check.

Sub-Scale SaaS Valuation Model 2: Access a New Type of Customer

Companies acquire sub-scale SaaS for three reasons: (1) to accelerate a roadmap, (2) to access a new type of customer, (3) to avail a new product to existing customers.

This article focuses on #2.

Determining your value when you are being acquired for your customers (or types of customers) depends on the market you’re addressing, and whether your existing product is being factored in the equation.

The two types of customers that are usually pursued via acquisition are either of a new size, or from a new region. SaaS companies often buy their way back in to SMBs, which is counterintuitive since growing SaaS companies can’t seem to ditch their small customers fast enough. I’ll explain that next.

Small, then Large, then Small + Large

Growing B2B SaaS companies follow a somewhat predictable sequence when it comes to target users. At first, the company just wants some sort of traction…any traction really. And small-ticket customers are usually easier for an unknown brand to acquire than large-ticket customers.

The problem with smaller customers is they tend to churn. They pivot, swerve, lack dedicated resources at the controls, run into cash crunches, or flat-out go out of business. So as the B2B SaaS co. gets its footing and starts to think about efficiency, it runs the numbers and realizes that bigger customers pay more and churn less. That begs the almost cliché “move up-market.”

But it’s crowded up-market. Eventually, competition applies pressure on growth and the company looks for new user segments. One obvious place to look is back at small users.

The case for an acquisition to re-enter the SMB space is that the acquirer has lost touch with smaller users. Running an SMB SaaS co. is entirely different than running an Enterprise SaaS co. Acquirers are buying their way into SMB savvy.

Sales Support Billing & Admin
SMB Formulaic Automated, Reactive Low Touch, High Volume
Enterprise Consultative Proactive High Touch, Low Volume

The return to SMB can take the form of moving from service-heavy to self-serve, closed tech to platform, bespoke integrations to an open API. While none of those are overtly SMB-focused, they tend to open access to SMBs.

International Expansion

There are two reasons a company might buy another company to get into a local market: (1) help localizing their product, (2) an in-market sales team.

In the case of the former, valuation will go according to the Accelerate a Roadmap model.

But in my experience, most international acquisitions of sub-scale SaaS are for the local sales team. It’s hard for a company to set-up a sales office overseas. First, they need a competent local manager. Then, that manager needs to hire and train. An acquisition puts the initiative on the fast track.


They key to determining value is whether the acquirer plans to keep your product intact, or plans to use its own product to address your market.

Scenario 1: Your Product Persists

If your product is going to persist beyond a transition period, it is fair for you to look at value as a traditional revenue multiple. At a minimum, there’s a return in your future cash flows. You’re being acquired for your market, and your product will persist, so your customers should stay put.

The way value is determined in this scenario is not entire dissimilar from the way it is determined by an investor during equity financing. A line is drawn into the future based on market and expected growth, and a value is set based on some point in the future. The acquirer is basically investing in your business, they’re just investing in total control.

Scenario 2:  Acquirer Uses its Product to Address Your Market

A situation where an acquirer will wind down your product and address your market with their own is trickier. These are the factors to consider:

Factor 1: Is the acquirer’s product ready for your market?

If you and your team are going to be fitting the acquirer’s product to your market, your value will look like an “acquihire”, plus whatever base of customers can be migrated when the new product is released.

Negotiation Note:
I have tested ‘standards’ for acquihires (e.g. $X/engineer). They don’t work. Truth is, there are too many variables at play to apply standards. How critical is it that the team be a cohesive unit? How rare are the skills on the team? How valuable is the knowledge they acquired while working on their venture? Standards should be tossed to the side and these questions should be answered one by one.

Factor 2: How much of your current base will actually migrate?

The answer is far less than 100%. There is a portion of your current base that has been meaning to cancel anyway, and the news of a change of control will give them their reminder. Add in changes to the product that some will find irritating, and the churn climbs.

Negotiation Note:
During due diligence there’s a good chance you’ll be asked for your customer list. Often it is done with the aim of gauging how many of your customers will be net new to the acquirer. In some cases fulfilling the request isn’t a big deal, but in others, you should try to avoid it. For example, if the acquirer is a direct competitor, knowing your customers isn’t particularly relevant since there shouldn’t be any customer overlap to discount, and can be dangerous if your deal falls through.

An alternative I have used is a list of customers by billings (or whatever other data is requested), with pseudo customer names like Cust1, Cust2. This will give the acquirer what it needs to assess revenue concentration, impending large renewals, and other critical factors to valuation.

Putting it All Together

If your product will stay intact long term:
Value = Current Revenue * Anticipated Growth

If your acquirer will deploy their product to your customers:
Value = Acquihire Value + (% Customers Migrating * Revenue * Anticipated Growth)