Ep. 178 - Why SaaS Founders Give Up Too Much Too Soon

Guest: Rob Belcher, Managing Director at SaaS Capital

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SaaS founders often think equity is the only path to growth—but giving up ownership isn’t the only option.

In this episode, Rob Belcher, Managing Director at SaaS Capital, joins host Ken Lempit to break down how growth debt works, what investors really look for in valuations, and how B2B SaaS leaders can finance smart without losing control.

Key insights from this episode:

• Why growth debt can fund SaaS expansion without heavy dilution
• The financing ladder every founder should understand—from angels to private equity
• How valuation multiples are shifting and what drives them higher
• The role of clean contracts, retention, and growth rate in exit outcomes
• Why AI is creating a “priced for perfection” split in SaaS valuations

If you’re a B2B SaaS CMO or CRO navigating fundraising, growth efficiency, or exit strategy, this episode will help you sharpen your playbook.

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Transcript

[00:00:09] Ken Lempit: Welcome to Sass Backwards, a podcast that helps SaaS and AI CEOs and go to market leaders accelerate growth and enhance profitability. Our guest today is Rob Belcher, Managing Director at SaaS Capital, which provides growth debt designed for B2B SaaS companies. This debt is designed to provide a significant source of funding, deployment flexibility, and a lower cost of capital without the loss of control associated with selling equity.

Hey Rob, welcome to the podcast.

[00:00:42] Rob Belcher: Hey Ken, thanks for having me.

[00:00:43] Ken Lempit: It's exciting. You know, the finance end of the business, something I find really fascinating. I know it's important to many of our listeners, but before we dig into financing for SaaS, could you tell us a little bit more about yourself and your company.

[00:00:59] Rob Belcher: Yeah, sure. Yeah. Well, thanks for having me on. You cover a great breadth of topics and excited to contribute, hopefully a little bit, to one in the financing space. So, happy to chat with you today and look forward to the conversation. So, SaaS Capital, as you mentioned in the intro, Is what it says on the tin.

We provide capital to SaaS companies. We are a lender only. We don't do equity. We provide growth debt to software companies. These are usually fairly early stage growth stage companies, 3 million of ARR and up, and we provide 2 to 10 million of debt to those folks,

as a relatively non dilutive way to fund your business. And we'll talk about this or the options, or we may talk about this. We'll see what you want to talk about, Ken. But, um, I am prepared to talk about anything, under the sun for SaaS financing. And so, these are companies that usually want to, , grow from that sort of single digit million to 10 million of ARR

stage with minimal dilution and then go on to do something bigger and better when they hit 10, 15 or 20 of ARR. So we're just one of the options out there. I'm a managing director and CEO of SaaS Capital. So it's a, we're a small shop. We have four partners and we work with companies based all over the US, Canada, UK, or Ireland.

[00:02:12] Ken Lempit: and how did you get into this business?

[00:02:15] Rob Belcher: That's a great question. Not to start with sort of, you know, where I went to elementary school or whatever, but I'll try and keep it short. I started my career as a natural gas analyst, actually, in the energy industry, doing supply, demand, and pricing forecasting for commodities for natural gas, oil, power, coal, and loved it.

I'm from Denver. My family is all in the oil and gas business. I studied natural resource economics in undergrad. This was sort of the whole thing. I was doing a lot of economic consulting and economic modeling and wanted more accounting knowledge, so I did an MBA and came out to the University of Washington here in Seattle and did my MBA at the University of Washington, thinking I'd go right back into the energy industry.

Lo and behold, there's very little energy industry in Washington and in Seattle, but there's a lot of tech and there's a lot of VC. And so during my internships and things like that, during my MBA program, I learned about and networked and, and met a lot of folks in VC and finance and in, startups.

And while I was interning at a VC we funded and founded a company called Lighter Capital, which the goal was to use a royalty model. to fund startups. So a royalty debt structure. And royalties are how oil and gas wells are all drilled. So I was very familiar with the economics and the model and the structure for royalties.

And so I joined that company and helped grow it very early stage. I was my first technical employee, like the third person working on the business, to sort of 10/15 employees very early to develop that royalty financing structure that led to sort of this, my career for the last 15 years of lending money to software companies.

[00:03:49] Ken Lempit: That's a really interesting background that I think for, you know, people listening who are earlier in their career, you know, there's a lot of zigs and zags, right? As you, you think you're going to do one thing. And then something comes across your screen and all of a sudden you're going in a different direction.

[00:04:05] Rob Belcher: 100 percent I think to listeners who are, yeah, earlier in their career stay flexible, be serendipitous. It's a long game. Don't burn bridges. Yeah, I think there's a lot. You never know what's going to come your way. So I, my, my career has been anything but straightforward for sure.

[00:04:20] Ken Lempit: Hey, same here, I totally get it. And some of the most successful people you might ever meet would tell you a similar story. You know, so always be open to the doors that open in front of you. But let's let's dig in a little bit into the business that you're in and how you work with SaaS companies.

I think maybe we should start by setting the table about what are the options to finance these younger SaaS companies, you know, the 3 to 15 million Dollar firm. There's a fair amount of options there for founders and CEOs, and they, they have pros and cons. So let's dig into those so that we can drive the episode.

[00:05:01] Rob Belcher: Yeah, sure. It's a great starting point. And been thinking about it a little bit recently because there's always shifts in the market. The market's a moving animal. Never stay still for long. But I was thinking that the options they've stayed relatively similar since about 2012. So Lighter Capital when I, started working on that, there was a huge shift in a big step forward evolutionarily. in options for software companies, options for tech companies, after the great financial crisis. The banks shut down, essentially, the underwriting tightened significantly, even the venture lenders, like Silicon Valley Bank and Bridge Bank, Comerica Square One, all entrenched.

And there was a boom, both what I would consider on the supply and demand side. So, It was a heyday for creating and starting software companies. Cloud computing was really booming, and it was easier than ever to go start a software company. You didn't have to go buy closets full of servers. You could go, AWS was becoming a thing, and you could go just start some instances of AWS, and off you're running.

And so at the same time, you had technology becoming more accessible on the finance side, and so folks like Lighter Capital and some others were using technology to try and underwrite and develop underwriting models, investment models that could be more scalable, quicker, more nimble respond to a company, use more data inputs and things like this.

So there was a big shift and a lot more options that became available 2009 to 2012. And since then there's been very few sort of evolutionary steps like there was then, but obviously all of the options, which I'll talk about here in a second, have flowed and floated through time based on interest rates equity, IPO markets valuations, the whole deal.

So the market has shifted, options available to software companies have been about the same for a while, and those are certainly self funding. Full on bootstrapping, just using your own credit cards any savings from prior jobs, exits, if you had any, things like that. Friends and family is sort of the next one I think of, and that is exactly what it is.

It's usually pretty small, hundreds of thousands of dollars of investment. Angel investment is sort of the next stage up in sort of formality. and size, but still usually kind of less than a million bucks. Some angel rounds, especially in Silicon Valley get big, but most of them are fairly small. And then truly VCs.

And so venture capital firms, everyone's pretty familiar with at this point. They have certainly gotten up market. A true series A used to be sort of 1 to 3 million also now series A's can be over a hundred million, depending on what you're working on. But a VC is an option and that obviously always invest in equity.

And then private equity. This is maybe where there's been some development over the last 10 years or so. Private equity historically are things like KKR, and you may be familiar with like Barbarians at the Gate, RJR Nabisco in the 80s, like buying big established companies that are running for cash, make some cost cuts.

And run it for cash. And that's your dividend out your return. And that's the play there was to buy the company and make cash dividends. with SaaS the PE firms dipped their toe into that same model and they have sort of changed their thesis over time where they'd go from, we only buy profitable companies, first off, they only buy companies, usually majority ownership or a full outright.

ownership. And they've, they have innovated and changed their investment thesis between buying and running for cash profitable businesses to more of a growth focus. We're going for the exit value return and so more of a VC type play. So they've kind of changed their tune a little bit. And then, add into that, Family offices who historically have just been buying bonds and stocks in the public market, and they're just all about wealth retention for their clients, for their wealthy families, have gotten more aggressive and more involved maybe over the last five to seven years, and are doing more direct investing, more private equity like.

So that's something we've seen more. In the sort of later stage. That's sort of larger comp 5 to 10 million plus of ARR. And then big breath, last thing is debt. And so that's where we fit. And that has like I said we've seen a big innovation in 2009 to 12. of usually smaller lenders, so they're doing more of that angel friends and family size, 50k to 500k, but in an automated fashion using software and technology to quickly underwrite your business.

They'll connect to your QuickBooks, they'll connect to your bank account with software and underwrite you and send you a check. All the way up to Silicon Valley Bank, Bridge Bank, those guys are still around, they're still doing deals. They've obviously had some ups and downs. And they'll do anything from 5 million to 500 million, right?

And we're in the middle. We can kind of consider ourselves a Goldilocks. We are more flexible. We offer more money, but we're more expensive than a bank, but we're far less expensive. Than equity and we don't take a board seat and we don't have all that control and things like that.

So folks like us and there are more this was again an innovation in sort of 2012 a boom of sort of funds doing specialty finance like ourselves that are lending as a fund. And that's where we sit.

[00:10:04] Ken Lempit: I think it's worth just going back a little bit into the private equity evolution. For those that might be seeking those kinds of investors, they're fashioning themselves as growth equity, right? They're using those words. So if you're on the hunt for a private equity partner that is interested in growing a business.

That's how many of them are characterizing themselves or that aspect of their businesses. So as a lender, And we didn't really talk about this in our prep, but I'm kind of curious is your end result that you package these loans up for resale, do they end up securitized?

[00:10:43] Rob Belcher: It's a great question. Very great question. So Ken's getting at

this is a strategy that was very lucrative ahead of the great financial crisis and kind of led to some of the confusion around what am I buying actually in the marketplace that became overvalued and led to the great financial crisis.

It was packaging up loans as a pool and then selling it off to someone else who actually holds them. And this comes up, borrowers often ask this because they want to know, Who's gonna hold my debt actually in the end of the day. Right. Who's my actual partner here? We are a committed fund.

We are actually structured like a VC or a private equity fund. We have 120 some odd investors who have put in anywhere from a hundred grand to 10 million into our fund. And we just, we lend that money out and we hold it. We hold all of our debt. We do not securitize, we don't resell. We hold and manage all of our own loans.

[00:11:27] Ken Lempit: So that's a far more stable business model, right? You're in control of the whole process. And I guess when you need more dough, you just have to raise another round, right?

[00:11:36] Rob Belcher: That's, we think so. So the founder of SaaS Capital, he retired a couple of years ago, but he actually started the business in 2007, ahead of the financial crisis and raised equity for the operations of the business and then borrowed money from Wells Fargo to lend out. And it was a great idea at the time.

And it was not a great idea in 2009 when Wells Fargo said no thanks and took all the money away. So we think, and then he raised a committed fund. And so we think the committed fund is a great structure. It's harder to raise. Obviously, we've made relationships with over 100 people over time. It's just like raising a VC or private equity round.

It takes a lot of work. But once it's committed, it's a great structure for both us we have consistency and we know we, we have a runway to go deploy capital and our borrowers know there's always money there. We're stable. We're not going to get our funding. We've had competitors in the market who have had that sort of spread lender.

It's called a spread lender structure and they've had their funding pulled. And there's lots, I could, oh man, spread lenders charge really high interest rates because that's how they make money is just on the spread between what they pay the lender and then what they make.

And we are more incentivized for long term partnership. And these are sort of pros and cons, like I wouldn't say one is necessarily better than the other, just it's different and it's because of this. We have warrants in all of our loans because

we're committed longer, we stay with you for longer and our money is committed.

And so we have that equity upside and we can wait for that return and charge a lower interest rate today. Because we're not making that spread as our revenue. We have committed fees on the fund and that kind of thing. I kind of diverged there a little bit. Sorry for the ramble, but if you're looking at debt, it's worth asking your lender, how are you structured? How do you make your money? And to understand their incentive and like you said, Ken, are they selling off the loans? Are they holding them? Good questions

[00:13:21] Ken Lempit: I think it's important for borrowers, they can have a long term relationship with you, and, you know, if they want to do subsequent financing rounds, they can have conversations with you about, you know, your interest in helping them or the implications on their contracts with you, right?

[00:13:36] Rob Belcher: And some folks might just want to pay a higher rate and not have a warrant and that's fine. So there's there's pros and cons to both but something to be aware of. It's a great great point.

[00:13:44] Ken Lempit: why don't we talk briefly, you know, we had planned to talk like about when different kinds of financing are appropriate. And you went through the whole range, right? From, from you know, my credit cards to my family to angel and venture. So maybe if we could just kind of climb the ladder a little bit in terms of , when these different options are appropriate, because you're not appropriate for a firm that's pre revenue as an example.

[00:14:09] Rob Belcher: Yeah, debt is hard for for pre revenue company because there's nothing there's no asset. There's how are you going to pay us back? Our underwriting is very much tied to revenue and cash coming in the door You don't have to be profitable and a lot of lenders that lend to software companies including the banks silicon valley bank. They have a different structure, but they also allow burn and let you, let you burn and be negative.

And that's fine. But you didn't need to have revenue and customers and things, but so early on, equity is the only thing you've got. The only thing you have to sell is equity. And then as you get customers and revenue, you have revenue as a collateral bucket And you can borrow off of that. You can also raise more money if the growth rate in revenue is very strong.

You can sell more equity and raise more at VC. There, like I said, there are some small lent, not small ticket lenders that will lend to you when you're very early stage, say 500 K of revenue a year. You could borrow sort of. You know, 50k to 250k. That's something to consider too with debt.

With equity, it's uncapped how much you can raise. It just depends on valuation, right? So you could be a pre revenue company and raise a hundred million dollars. With debt, there's always going to be a cap to it based on the lender's underwriting criteria and what they're willing to lend. We lend about four to eight times monthly revenue.

So if you're a 3 million company and you really need 9 million bucks, That's not us, right? That's equity. Like that's, you need more money than you have collateral, in our view, but you might have value that you can sell equity for. Other lenders have different criteria. The banks tend to lend against equity you've, you've raised.

So you could be pre revenue, but you're raising 7 million of equity, so they'll lend 3 million, right? They'll lend sort of half of that amount. So something else to consider is sort of what their collateral is that they view. Banks, it tends to be equity you've raised. For us, it's revenue. And so anyway, so we're, we're a good fit for the middle stage.

Banks tend to be a little bit later stage after you've raised some equity and then private equity, they really start to get involved about 10 million of ARR and up some dip as low as five, but, and the banks truly want to see pretty significant five to five plus million of equity raised and fairly fresh.

We refinance out debt that is in a business where the equity is two or three years old and they've burned most of it and there's not a lot of cash on the balance sheet. That's where we, we tend to fund those companies. Banks will fund fresh equity runs.

[00:16:29] Ken Lempit: What do you see as, the CEOs coming to you? You know, are they usually pretty educated on your product already? Or are they, information gathering first? You know, where do you, what do you see in these CEOs and do they have reasonable expectations for the most part?

[00:16:46] Rob Belcher: Yep. It's a great question. And it's a huge range. I would say so this is sort of the that sort of options available to folks story over the last 10 years. More folks are more educated today. We do get far more calls today. It's like I'm looking for an MRR based credit facility. And we 10 years ago, we never got that call.

So now folks know the terms they know what they're looking for. They might even have had one before. We've even gotten repeat borrowers of CEOs who have sold a business, started a new one. came back to us for another one. So there are far more educated folks. I would also say the second round or third round entrepreneurs who no longer need the advice of a VC.

They just want the money. We'll choose debt this time around as opposed to raising equity. That said, we still get folks who we have to educate. And certainly seven years ago, we were educating the market on using debt for a startup. That was unheard of. Seven, eight, nine years ago. Less of that today.

It still happens. But folks get it, especially if they've been around it before they, and the market that's going on right now. There's a real emphasis on lower burn and growing more efficiently. And so those folks are turning to debt because you can grow sustainably and you don't need to raise equity and dilute yourself.

So we do every once in a while get an entrepreneur who is expecting like mortgage rate level interest rate And that's not the where venture debt pricing is so just so everyone knows. The banks charge about eight to ten percent and so we're far. We're not far above that. We charge about 15 percent. But you can't borrow money for your business at three or four percent that doesn't exist when the US Treasury is borrowing it for you know, that's kind of where the market is these days

[00:18:17] Ken Lempit: But I think that's good insight to give people set some expectations. And part of this I think is related to the valuations of these companies, right? So it's maybe not so much your financing, although there is obviously some correlation between a reasonable valuation and what might be borrowed. But could we get into the valuation conversation?

Because in my experience, this is a place where CEOs, you know, every one of their babies is beautiful, you know. They tend to way overestimate where they fall in the range of current valuations. So, I think we plan to talk a little bit about You know, public companies first and the IPO market and then get into the private market where, you know, we all operate more.

[00:18:59] Rob Belcher: Yes, so that is the name of the game still to this day. Almost nobody we talk to is not thinking about valuation and an eventual exit, right? They're building this business to go sell it, usually. Eventually. It may not be. Some are, we're going to sell it in six months.

Many are, we want to sell it in two to five years, right? That's the thing. So, valuation is top of mind and It's the end goal. And so, yeah, I liked, I always like to start the valuation conversation with the public market, cause it's, it both from a liquidity standpoint of exits and IPOs that fund VCs who then can raise more rounds and funds, and then can fund more startups.

There's sort of that liquidity waterfall that drips all the way down. That's important. And we're sort of in a drought right now. That's changing a little bit. Some IPOs recently, Figma and Mountain have IPO'd and rubric and clavio'd last year. But it's still not the heady days of 2021 or even the stable good days of 2016 to 19.

It's a little dry and the PE firms have not been distributing cash back. They've not been able to exit their positions, exit their companies. And distribute money to LPs to raise subsequent rounds and fund more companies. So it's that waterfall and that liquidity thing is very important.

And another thing to consider as you go out and raise, asking equity investors where they are in their fund, do they have an active fund? Are they fresh with capital? Are they towards the end of a fund, et cetera, something to consider. But so it starts with IPOs in the public market. Public market is around six

times ARR. SaaS companies, if you're not familiar, tend to get valued as a multiple of ARR, as opposed to a multiple of earnings. Most of them are burning cash and are not earning anything. They're mostly negative or break even. That's changed a bit over time as the sector has matured. And so more companies are break even.

This, the rule of 40 you may have heard of is becoming more popular. So that's put a more emphasis on profitability also. But generally speaking, SaaS companies are still not price to earnings rated that's more multiple of ARR. And it's currently at 6.3. this is sorry. So this, this number is based on the SaaS Capital Index, which is our own index.

We track something like 50 public SaaS companies that other than being large and public look and feel about like companies we would lend to, which is to say a B2B software company high retention and usually US, Canada, UK, or Ireland I think we've got like one Tel Aviv company in there or something, but it mostly operates in the US. Anyway, so the median valuation multiple is 6.3 times ARR, which is pretty stable and normal and good. It has been that way for the last two years or so. In 2022 and prior, The median number was in the teens, right? So this was the big SaaS explosion sort of the digital transformation that the pandemic caused.

So we had people like Snowflake and Datadog trading at 60 times ARR, and even sort of the slow growers were at 10 times and our median was more like 17. Let's come back down to what is historically a pretty normal number around 6.3 times. But what that means is these are big public companies and there's usually a discount for private companies.

So it's an important place to start knowing that a median private company is probably worth more like 4 to 5 times. That said, there are some outliers and we've had some exits in our portfolio that were north of 6 times over the last couple of years, but not many. And so that's sort of the environment we're in right now is sort of a 6 times ARR public multiple.

[00:22:26] Ken Lempit: Well, I think that the question really is, what does a CEO founder team, you know, GTM team have to do to improve what they might get as a valuation. You know, for example, I know one of them is pricing discipline, right? If you have strong price discipline, and you have good contracts in place, and your books are clean, that's really great.

But what else can founders be doing, CEOs be doing?

[00:22:51] Rob Belcher: That is a great point. I would say that the point you just made on clean contracts, clean reporting good documentation and good solid contracts with good paying customers is the right way to think of that is time to close or guarantee to close it and maybe a small multiple increase for having that, you know, like confidence, the confidence in the numbers and all that growth rate.

So valuation model and growth rate is far and away the thing that drives valuation. And so, that is also the area we've seen struggle the most across the board. Growth rates for public companies are slowing and have slowed over the last three years, again, from sort of the heyday of 2021 and two, they also are just bigger.

So the math behind it is challenging. It's just a bigger number to divide by, right? And so the growth rate naturally declines. And that's a little bit true with private companies too, but even our portfolio and prospects are median growth came from 30 down to 20 percent now. And so that's something we're seeing is, and so to get an outsized multiple the goal is to have an outsized growth rate.

So anything over 20, 25 percent as a 5 to 25 million Dollar B2B SaaS company is good and probably warrants a premium to the median number of four to five times. And the higher up the ARR is and the higher the growth rate, obviously the upside to the multiple. Good retention is also important. And then lastly, burn profit close to your order profitability.

Not required, but closer to your order profitability, the better. Sort of rule of 40.

[00:24:23] Ken Lempit: So to put it in the go to market team's vernacular, right, they have to be selling well, right? The selling motion, the marketing and selling motion has to be really strong and has to be demonstrably repeatable.

[00:24:38] Rob Belcher: Repeatable and with customers who are going to stick around. You've got to find your ICP, your ideal customer profile. Be selling to them, prove that there's a market there, that their TAM is good enough, right? It doesn't have to be huge, especially if you're a 20 million ARR company, like you don't need a, you know, whatever it is, trillion dollar TAM, but you need to prove that you can run for several years and grow and become a hundred million dollar ARR company and have that ICP locked down.

So yeah, totally agree.

[00:25:04] Ken Lempit: Well, yeah, and you know, I have, I get to see a lot of these companies and it's always interesting the ones that are more creatures of the founder versus a professionally managed business. You know, if they're idiosyncratic, that's going to work against them, right? So, if their sales organization is not well managed, as an example, that can work against the valuation

[00:25:26] Rob Belcher: So that's a fascinating, so this is a little bit off topic, but it's related is maybe 10 to 20 percent of companies we look at and maybe even fund are founder led, founder sales, founder led sales that are transitioning. And the good news is they know the market really well. They built the product around the need because they were in the industry.

They were a doctor, they were a veterinarian, whatever. And, but yes, transitioning to someone who can build those systems and that kind of thing is really important.

[00:25:54] Ken Lempit: so maybe we should take a look at our last topic, because I think it's the hot topic, is, you know, what does AI mean to these companies? You know, the size of these companies, the pace of growth, their need for capital. obviously we see the overnight successes in the media. I think they're, there's a handful of them that get big fast and they do it all on, you know, whatever founder money they had and they're pretty rare.

But so where does AI fit into the young company growth story and valuations, you know, and how are you looking at AI? Cause it's a, I think a double edged sword.

[00:26:35] Rob Belcher: Yeah. It's a great question. It's a great topic. We're writing a lot about it on our blog. We're thinking about a lot. We're talking to founders and executives about it a lot and it's a lot of uncertainty. I don't have a great, I have some answers. I have some ideas and thoughts and answers, but I don't have, I don't think we know yet everything.

The ones that are seemed, you know, in the, news are sort of the picks and shovels folks selling the data center selling the compute selling the models. We. Have yet to see like a super successful company that is using AI as a product. We in our portfolio and the prospects we've talked to, there's certainly a shift to trying to market everything as an AI company, but that's sort of just nomenclature.

And that's fine. And and so actually, I'm going to try this out on you. We've been thinking about it a lot, how most companies are at least partially AI. At least using AI for R&D and internally, and then more and more, but a smaller percentage are having AI built into their product. So we've been thinking that there's a bit of a migration from software as a service is SaaS to now it's subscription AI and software is our new acronym for SaaS.

Just trying that out. We're still kind of thinking it through, but it seems like most companies are partially AI in addition to partially software these days.

[00:27:49] Ken Lempit: Yeah, so I think you're right. You know, I don't know if too many people know, but I started out as what we now call an engineer. I was a programmer for the first eight years of my career at IBM and Citi. So I have a little bit of feel for what these folks are doing, and I think they fall into two camps.

Either they're building something completely model based. For example, we had a guest on the podcast, a company called Backengine, and they process every bit of the communications of a firm, phone calls, text, slack, almost any way you communicate with customers and prospects and develop insights from that.

So we're all familiar, or many of us are familiar, with tools like Otter, where you record a Zoom call and you can. Generate some insights. Well, imagine if you had that for every sales call and you sort of had a God view of every interaction with prospects. You could do a lot of stuff with that insight and you can't do it manually.

There's no way to do it. So they're applying these tools to new problem solving. I think that's very cool. The other more pure play is people are starting to build on AI platforms. We have a client who's building on Palantir. They're building their entire software product on an AI foundation.

So those guys are more pure play in a way, both of those kinds. You know, the back engine is more of an LLM integration prompting play. And the, the other one is, you know, really building on a large scale platform. So, I, and I think you're right though, the others are saying, Hey, I've got, you know, 3 million lines of code that do a great job.

And I'm going to make sure my data can be used by inquiry tools or, you know, sentiment tools, depending on what, you know, what kind of application it is. So they're, I think they're feathering in or layering on AI capabilities where it will extend or advance the product.

[00:29:46] Rob Belcher: Those are the ones we see the most. We see those, we don't see, and that like, and back to the sort of options, the, those first two that you gave an example of, those are probably like more hockey stick possible opportunities that are probably a better fit for VC or something like that. They're pure play software, you know, it's a true technology play.

We probably wouldn't even see those, and I don't even know that we'd be able to underwrite it, because it's more of a technology play. The folks that have software and customers and are using AI to speed it up, make it more efficient, make it cheaper for them, make it faster, more valuable for the customer, that's sort of the subscription AI software thing that I'm talking about, which is an interesting one.

And I think, just to quickly tie it back to valuations everyone should be very well aware that more than ever, we're seeing a bifurcation of valuation between the hyper growth AI, true AI folks that are maybe hype, but maybe something's there and kind of everybody else, right?

Like I said, there's sort of, it's more efficient, it's faster for most companies. For a few that we've seen in our certainly public or even the private valuations we've seen in the news they're obviously gaining crazy valuations. So it's a pretty split market. And those companies, I will say something we've used the term internally is they're priced for perfection.

There's not much downside to those valuations, right? They're priced very aggressively. And something else to think about if you raise money and you're touting yourselves at an AI company and you raise at a very high valuation today, It leaves very little room, wiggle room, if something doesn't go great for raising future rounds, right?

So, so pricing for perfection today can be good, as long as things keep going up and to the right. That's something to be aware of.

[00:31:28] Ken Lempit: well, sure. I mean, the risk to the founder is a down round and, you know, losing some, most or all of, you know, the founder value in these companies. Right.

[00:31:36] Rob Belcher: right. Yeah, that's

[00:31:37] Ken Lempit: yeah, I just think digging a little bit into the, like this development model or this go to this product model where AI is being used. being added on or integrated into.

I think there's a lot of opportunity there and that many of the firms that have found some product market fit have revenue, you know, have a chance of being a lot stickier as a result because what they're doing is they're saying, hey, I've got a product that is fit for purpose and I'm going to make it better, Sort of like Procter and Gamble, you know, the, the bottle of Tide now has three or four things added onto it. You know, it's got, you know, it smells good. It's got some fragrance like Febreze and then it's got oxy. So it whitens better. And I think the software vendors should be looking at the same way as AI, machine learning, or LLM can create operational efficiencies or inquiry capabilities.

That breathe new life into these products and make them even more, you know, valuable to the customer.

[00:32:34] Rob Belcher: Yeah, and you're is it Backengine is the name of the company? Like, things like that where you're using your own data, you can use the software on your own data and just be so much more insightful or productive with your own processes and data and people is pretty great.

[00:32:50] Ken Lempit: Yeah, it is. Hey, I think this is a great conversation. We could keep going. I'm a SaaS business model geek, and this is one of my favorite topics. I think we should open it up to possible CEOs and CFOs who might want to reach out to you. How can they find you and your firm?

[00:33:07] Rob Belcher: sure. Our company is called SaaS Capital. SaaS Capital. We're on the web, saas-capital.com. My email is rbelcher@saas-capital.com And we'd love to connect with anybody. And thanks for listening in. Ken, thanks for having me on. This is awesome. I love to talk about valuation. Happy to talk options with anybody, anytime scenarios.

We do that all the time, so happy to chat with anybody if you have questions. And we also do some data and valuation work and things like that. You can just go read some of the work there. If you had more interest in some of the things we talked about today.

[00:33:37] Ken Lempit: Yeah, I think talk about burying the lead. You guys do some amazing research on SaaS companies with benchmarks, especially, and for people that it's their first time leading a SaaS organization, a lot of the questions you might have could be answered through benchmarks like yours, or that of KeyBank Capital Markets, Open view now.

I'm not sure exactly who's carrying that forward, but there's a handful of firms publishing some super valuable research and it's all, you know, given away for free. So it's a great service to your marketplace. So,

[00:34:13] Rob Belcher: It helps us inform ourselves. So we know what we're talking about. It helps our borrowers and then yeah, if it's useful for prospects and they learn about us, that's kind of a great extra but yeah, we've actually had folks like with their board deck, it's like, here's the SaaS spending thing and we're, you know, here's the graph and we're within 3 percent on R&D and marketing.

They've actually tuned everything to our benchmarks and stuff. So it's always like, Whoa, people are actually using this. So, glad to hear it's useful. And we'll keep doing it.

[00:34:38] Ken Lempit: Yeah, well, we certainly share it with, you know, our clients and prospects as well. So, even if you don't borrow money from these guys, you got to use their benchmarks. Um, My advertising and demand generation agency for SaaS and AI companies is Austin Lawrence Group. We're on the web at austinlawrence.com. That's with a W. I'm on linkedin/in/kenlempit. I'd love to help out in any way I can. And if you haven't subscribed to the SaaS Backwards podcast, maybe this is your moment. And Rob, I want to say thanks so much for appearing on the podcast.

[00:35:10] Rob Belcher: Thanks again. Thanks for having me.