I like screening B2B SaaS startups because I can validate the value proposition from our network.

As a part of my early diligence on whether to reject or accept the deal, I put the company through the following 3 questions:

For me to accept a B2B SaaS startup into my diligence pipeline, I need all the questions to be answered in green.

Are companies used to paying for the product?

If this is a No, then from the startup point of view, a considerable amount of resources - both human and monetary have to be spent on educating the customer on the problem, solution, and value proposition. This education usually comes in the form of:

a) Content marketing via social media, emails, paid advertising

b) Lead generation, inside sales, and sales teams

All of the above costs a lot of money to an early stage startup.

On the flipside, if companies are used to paying for the product, they are already educated on the problem and solution, and the pitch changes from why you need it, to why you need us.

Is the target a cost centre or a revenue centre?

A cost centre is a department that incurs costs without generating revenues, i.e. it relies on the revenues of other departments. The budgets and allocations for a cost centre are always dependent on cost reduction, higher efficiency and maximum ROI.

In comparison, a revenue centre has the control of its own destiny. Better performance can lead to higher cost allocation, leading to a positive cycle. Revenue centres always have the option to allocate expenses towards experiments and new products which they believe can lead to better outcomes i.e. revenues!

Businesses are always more willing to pay for something that makes them more money than something that saves them some money.

Are you providing value or reducing costs?

“Once a cheater, always a cheater” - is a great saying not just for relationships or the justice system, but also for businesses. If your entire pitch to a company is that you can replace an existing vendor at a lower rate, this also means the company will be willing to change to another vendor if it offers a rate lower than yours. This is not sticky revenue.

Sticky revenue comes from the ability of your product to command a premium for the value it provides. If your product can provide valuable data on a certain component of their business which was previously a black box, you have a gold-egg laying duck!

Please allow me to explain the above ‘philosophical gyaan’ by putting it into action. We recently screened a deal which was a B2B SaaS startup monitoring remote workers. Putting it through the framework:

Our thesis:

• Despite the problem being validated - there were numerous alternatives, and in turn competition
• Monitoring employees is done with a view to reduce idle time, track productivity, which is done to rationalize costs than to grow revenues
• From the initial evaluation, although the startup claimed it did not have the technical debt that legacy players carried, it was competing on a pricing differential of upto 50% as compared to peers

Based on the above, we decided to pass on the opportunity.

If you are building a seed stage B2B SaaS startup which businesses are used to paying for in some form or other, are serving a revenue generating piece of the customer, and are focused on providing value, I would love to hear from you! Please reach out to Dhruv or Siddharth for a call!

This post originally appeared here.