Capital Planning for Early Stage SaaS Founders
What is capital planning, why you should care and how your investors think about it. For Series A SaaS founders.
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Why do you care?
As a SaaS founder immersed in navigating your company through the early growth stages, everything seems to be progressing smoothly. Your team is diligently addressing challenges and pursuing deals, often disregarding the need for polished spreadsheets, flawless systems, or comprehensive playbooks. The focus is simply on growth. However, once you secure your Seed or Series A funding, your investors will inevitably mandate, "You need to prepare a budget (or a financial plan, or a strategy)!" The question arises: Why do I care?
This guidebook is the first part of a series on planning from the vantage point of board members and active investors. They are tips learned from guiding several SaaS companies through their formal planning cycles.
Reasons to care
“In the process of preparing for battle I have always found that plans are useless but planning is indispensable.”
Team alignment. The capital planning process, which includes budget preparation and strategy formation, serves to create alignment with your team and help leaders in your business understand its key drivers. Documenting strategic decisions and translating the laundry list of objectives into its fundamental elements can help your team agree and focus on a set of goals. This extends to your board and helps align your priorities with theirs.
Framework for quantifying decisions. Business actions also need to be measurable and quantifiable. We believe that every great founder needs to deeply understand their P&L in order to run the business. Budget preparation forces you to think in terms of ROI on your actions.
Getting deliberate on capital allocation. While you're focused on hitting next week and next month's performance targets, you want to make sure you're allocating a portion of your spend, headcount and attention to investments on second and third horizon opportunities to set the business up for long term success.
Dress rehearsal for maturity. Consider it a dress rehearsal for maturity. As you shift from the Seed/Series A phase to a growth stage, it's essential to cultivate institutional rigour and capability within your team. Experience has shown that by the time you reach Series B, investment partners are keen to see evidence that your team can not only devise a sound strategy but also execute it with reliability.
What is a capital plan
When we talk about capital plan in this guide we are referring generally to the more specific and tactical components of strategy as well as the preparation of a budget.
Strategy
“A set of objectives, policies and plans that, taken together, define the scope of the enterprise and its approach to survival and success.”
The capital plan typically starts with reference to a medium term business strategy which seeks to map out where the business is oriented over the next three years. The strategy can be formulated with the input of the founders, broader executive team and investors / advisors who aim to find the right balance between business expectations and reality.
The conversations that feed into the fabled strategy may happen formally at a strategy offsite or informally but generally takes the form of an agreed framework and set of objectives to strive towards over three years.
The point is to tease out a number of issues that inform the initial ‘envelope’ of inputs that create a budget.
What are your expectations around growth?
What are your other key stakeholder’s expectations around growth?
What is the market telling us about things like financing and buyer behaviour?
What are your objectives?
How much are you willing to spend?
The answers to these questions form the first set of inputs for your financial model. Below is an example hierarchy of goals that are informed by these initial conversations and paints the picture of a typical company that is seeking to maximise market ARR growth and market expansion while managing burn to a certain level. Note that this is an example hierarchy for a single year short-term plan.
The inputs almost always have to reference a burn and growth target. The value is in starting the conversations around what’s more important with respect to the current stage of business. Is revenue growth or customer growth more important? Is revenue growth or preserving productivity and cash burn more important? ARR in existing markets vs new markets?
Note this hierarchy is focussed more on financial objectives as they contain the outcomes that are assessed by investors and relevant at a ‘board level.’ The objectives you communicate to your team when trying to deliver a revenue outcome will sit a level or two below with leading indicators such as pipeline, registrations or engagement. See example of operational framework here: Amplitude North Star Framework
Budget
The budget is a model that brings together the objectives of the company and attempts to map out the required resource allocation for each function and productivity required to achieve them.
The goal of the budget is to confirm where the business is going to spend its money, what growth it’s aiming for and the implications on its cash balance. We see different approaches to budgeting modelling that depend heavily on the stage and sophistication of the business. This is a longer topic we will cover separately, for now we’ve shared some helpful resources on budget modelling below.
I personally like budgets to break down the atomic assumptions which drive the revenue forecast (such as sales people, number of leads and conversion rates). Even if sometimes the data is limited and there’s variability, an approach which helps you stress test the level of required activity at the base level is preferred.
The budget can crystallise opportunity costs and ensure dollars are spent on the areas with a best chance of ROI. For example, what is the real impact of spending more on R&D vs on sales? Can we translate R&D investment into a more attractive ROI than additional sales team members?
“Thinking about the budget in terms of ROI and payback on investment was some great feedback we got from EVP. I’d urge founders to add this to their thinking. Consider your spend based on when and how a dollar can be created or what end metric can be moved, be it conversion, lead generation or onboarding.” - Henry Innis
Here are a some good resources on budget model preparation:
Piecing it together
As you navigate the journey from Series A to B, the complexity of your business will naturally increase. It's at this juncture that you'll likely recruit a financial expert—be it a Head of Finance, CFO, or similarly experienced individual—to help manage this complexity. Their primary role will be to act as a conduit between you, the founder, and the management team, meticulously capturing the operational details and translating them into a comprehensive budget.
The management team works with finance to produce their laundry list of requirements that they believe will enable them to hit their targets. These might include:
Number of new heads needed to hit targets
New tools required to be more productive
In the case of marketing, likely spend required to generate leads
Other large buckets of cost such as contractors
VP of sales might say: “to hit $4m of new ARR this year I think we need to double our AE count to 10 and increase our lead volumes by 1.5x.”
Here is where the finance team earns its stripes by grounding the asks in reality. Is that a productive use of resources? What other costs are incurred to support 10 AEs? What is the quota per rep and how does that track to what we did last year? Do we need to hire sales operations now? What else do we need to increase our lead volumes?
I view the finance function as a balancing force, one that rigorously challenges each department's proposals, aligning them more closely with practical expectations. A prudent finance professional might adopt a conservative stance—playing the 'devil's advocate' to a founder's optimism—to better manage the risks of underachievement.
If your org doesn’t have this muscle yet internally, which is common at this stage, we’d suggest you lean on your investors to play that role and provide oversight for a short while.
Investor perspectives + cheat sheet
At the end of and during this whole process you’ll get feedback from your board about how the plan is looking and feeling. Understanding how your investors are thinking about it will give you the foresight to prepare and consider elements of your budget in the right way.
