Raising a Series B round in Canada

Chief Financial Officer at Coconut Software, Matt Petrow has always had a knack for numbers. In 2021, he led his team through a very successful $28 million Series B financing round.

In his recent interview with Float, Matt shares his experience raising new rounds of capital, walking us through how each round is different. Matt also provides advice to others who are planning to do the same, along with valuable insight on choosing the right investors.

Q: For those who are not familiar with Coconut Software, can you give us an introduction to the company and its mission?

A: Coconut Software helps financial institutions enhance and improve how they connect with their customers. Our core product is a digital scheduling solution that makes it really easy and frictionless for customers to connect with an advisor, primarily at their bank or credit union. We also have a digital queuing solution, which helps to manage in-branch traffic. We recently rolled out a video banking platform as well. I like to describe it as kind of like a Zoom or Microsoft Teams. However, it’s built with features that are specific to the needs of financial institutions and their requirements to complete transactions with customers – like mortgages and setting up accounts.

Q: Tell us a bit about your Series B raise and how that came together. Why did that start and when did it start? 

A: We raised a $28 million Series B in September 2021. We completed a new three-year plan as a team and aligned on hitting some aggressive growth targets and wanting to capitalize on some trends in the market. Of course, doing that was going to require a lot of investment, scaling up the team, and bringing on new resources. While putting the plan together, we realized that we needed more capital. This was the motivation behind wanting to raise and accelerate growth. Initially, it was planned for Q1 2022 but looking ahead, we had seen a correction was likely coming down the pipeline, along with forecasts of rising interest rates. So we actually decided to do it six months early, which in hindsight ended up being a really good decision.

Q: What were the key areas of the business you wanted to invest in? 

A: There were two pillars of growth behind our plan. First, we wanted to accelerate our growth and penetration in the U.S. financial market – accounting for 95% of the financial institution market in North America. Second, we wanted to introduce more products to our platform and enable our team to sell more to existing customers. With that, the major areas we were looking to invest in were growing our sales team and building our marketing team and resources to fuel our go-to-market strategy. We also wanted to focus more on hiring and investing in our product and engineering teams as well as our senior leaders. 

Q: What happens next? How did you think about that timeline and what are the key milestones that you worked through before going to investors?

A: Our first biggest milestone was building out our plan and aligning around what we wanted to accomplish over the next three years. Once we built that out, converted it to a model, and understood the resources we needed and what it looked like from a financial perspective, we then needed to determine how much we wanted to raise and the best time to do it. From there, it was time to get alignment from our investors and the board because they play such a key part in a transaction like this. After that, we focused on the process of talking with investors. Our mindset at Coconut is that we build relationships with potential investors and potential partners early in the process so we can prove that we can deliver on what we commit to. We had a favourable network of investors already and it was just a matter of connecting with them and sharing key information and data to start the diligence and evaluation processes. After that, we collected offers and evaluated them to ensure they aligned with our terms. 

Q: How many funds or investors did you approach initially? 

A: A couple years after our last round in 2019, we had many conversations with investors, but I’d say we narrowed it down to a group of 10 to 15 that we were really interested in. We reconnected with them and shared the information and discussed what a potential partnership could look like. 

Q: How involved were your Series A investors in the process and how did you bring them along to make the right decision for the business and all the stakeholders involved?

A: They’re definitely highly involved in the process. They’re part of the approval of the transaction so obviously there’s a lot of work that needs to be done to ensure they’re aligned as a team and on board with the plan. They were very involved in the three-year plan we created and we ensured they had input and that there was buy-in. We also consulted with them when making decisions on who to work with, considering if offers were presented competitively, and analyzing if terms made sense. 

Q: What was the criteria or philosophy that you took when picking the right partner? What would you suggest for people that might be looking at financing? 

A: Some of the things we talk about as a team are looking for an investor who has expertise in our space. We’re a B2B SaaS company so having investors who have experience and success in our business model was key for us. Other things to consider are whether or not they are connected to the customer base you’re selling into and if they have connections to potential customers. As well, some investors will offer in-house resources such as recruiting. Given the competitive state of the talent market today, that’s a really valuable resource if you can have that help. 

The most important thing that often gets overlooked is making sure that your investor is someone you enjoy spending time with. It’s almost like a marriage. There’s a lot of calls and you’ll be working through the ups and downs, so it needs to be someone that you’re going to partner well with. 

Q: What are potential investors looking for in a company in a Series B round compared to a Series A?

A: I think it’s really about showing that you’ve learned more and refined your operations since that last raise. They’ll want evidence that there’s a repeatable go-to-market process in place. Assumedly, your revenue would have grown from the last year and that helps but they’re going to want to dig into more of the underlying “how” factor. Another thing is looking at what your customer base has done over time. Are they leaving or are they continuing to buy your products? This shows there’s value in the problem that you’re solving and that you know how to meet the needs of your customers.

In Series B, you’ll have a deeper understanding of your market. Obviously, investors want to know that you understand the potential market size but this time around there are more questions digging into that and understanding not just who your competitors are, but how you are winning against them. What things do you do differently and do you clearly understand that? Investors are also eager to know how you’re going to use the funds. Given that it’s a larger amount, there’s more scrutiny in the investment plan. They want you to prove that the business is scalable and that the money being put in is going to scale the business further. This involves looking at things like your profitability and efficiency metrics, customer acquisition costs, and payback ratios. 

Q: What would you recommend to someone who wants to calculate some of those ratios and wants to familiarize themselves with the methodology?

A: Talking with your existing investors is a good way to understand how other investors are going to look at these ratios and the most credible way to calculate them. One metric that I’ve found to have the widest calculation methods is LTV:CAC where some just use their churn ratio to come up with an expected lifetime. This can generate numbers like 15 x LTV:CAC ratio but it’s not believable if you’re a business that’s been operating for five years. To calculate that on the assumption that your customers are going to stay with you for 15 to 20 years just doesn’t make sense and it’s hard to defend that in conversations with investors. So this is an example of knowing where to cap your metrics and tie them back to your business model. You have to build up that rigor ahead of the process as you’re putting your data together, and talk with your team about what makes the most sense in the assumptions you’re applying when presenting these metrics.

Q: From a timeline perspective, how long did it take from start to finish?

A: All in all, the total timeline was about seven to eight months. Typically, it takes three months to do the planning. After that, there was a one and a half to two-month lead process to get buy-in, put the plan and materials together, and refine our story to potential investors. Then we began speaking with investors and doing the preliminary diligence and term sheet, which was probably another one and a half months. Once we signed a term sheet with Class Capital – who ended up leading our Series B – there was about a two-month process to close the transaction. Overall, I’d say the last three months were a real sprint where it felt more like six months of work. 

Q: What’s one piece of advice you would leave based on your whole experience?

A: I think it’s important to be prepared and do as much work as you can before the process begins. Once you get into contact with investors, timelines are tight and requests and conversations move quickly. Having the materials and your story put together is key – ensure that you’re confident in deeply answering their questions. Remember, there’s work to be done probably a year before you even decide to raise to ensure you have the right people, processes and systems in place to support a large fundraise. You’ll want to hire a good team that you’re confident in – one that can help you through the process and ensure that your systems are reliable and generate good data. Then, focus on creating a story that really communicates your company’s value and explains why people should be excited about what you have planned for the future. Investors really like to hear where you’ve been and want to see the success you’ve been having so far. They also want to see that you’re confident in where you’re headed. Another piece of advice as a finance leader – put numbers to that story to give it credibility and make investors even more excited and interested. 

Q: For those wanting to become a CFO, grow into a VP of Finance, or maybe just someone early in their career, how would you suggest they find the right mentor? 

A: In a SaaS company or any fast-growing startup, things move so quickly that there isn’t always the time to make mistakes and learn from them. Having a mentor who’s been there and done that and can give you insight into what worked best for them is a valuable resource to have. It enables you to move a lot quicker and avoid making costly mistakes. There’s many events that provide the opportunity to meet other finance leaders that you can network with, make connections, and bounce ideas from. You can also speak with existing investors and board members. They typically have other portfolio companies that would be further along in their growth story or they might have connections to other leaders from previous portfolio companies. In my case, one of our board members was able to connect me to a mentor who I meet with once a month – he’s been extremely valuable and really helped me in my career development.

Q: Is it safe to say there was a celebration when the transaction closed?
A: Absolutely! Interestingly enough, because we did this raise right through COVID, we met in Toronto where Coconut has an office, and part of our executive team lives there, too. That was the first time we gathered as an executive team since before the pandemic – it was almost two years in the making. So yeah, quite a lot of celebrations and good times were enjoyed.

Welcome to Retained Learnings

Modern. Finance. Leader.

These three words have been rolling around in my brain for months. What does it take to operate a finance department in 2022? Is it any different than 2002?

The answer of course is yes. While finance professionals are known for their logic and reason, they are not immune to change. A new generation of finance leaders is making waves in Canada — rethinking how they build their teams, navigate career paths, implement technology, and steward their companies through the inevitable peaks and valleys they will face.

Retained Learnings was dreamt up as a way to put a spotlight on these forward-thinking finance leaders in Canadian startup and midmarket companies. People like Mark MacLeod, one of Canada’s most interesting finance leaders, and now executive coach, who shares advice from his long and successful career with companies including Shopify and Freshbooks. Or accounting leader Angela Gill, who is brave enough to explore the world of TikTok as a means of reaching new audiences.

This monthly digital publication will also take conversations about Canadian finance operations out of the 1:1 realm into a more public sphere where information is accessible to anyone. Whether you need real-world tips on navigating a migration to NetSuite or insights on how other teams are planning and executing their budget cycles, you can look for it here, or by listening to the Retained Learnings podcast, available on your favourite podcasting platform.

Welcome to the inaugural edition of Retained Learnings. Enjoy reading!

Until next time,

Amrita Gurney