Thanks to Covid 19, job security is a myth. The pandemic gave rise to an employment crisis, with many countries showing employees working just 1/10th of their pre-pandemic hours. The last couple of years have seen a spike in entrepreneurship and innovation worldwide, with an increase partially due to the lockdown. We have seen an increase in the number of SaaS products being used too. While it is costly to develop, deploy and market software especially during the early stage of a startup, securing funding can be important for the survival of SaaS companies. So how do you secure SaaS funding? Here are some of the best options you could consider to take your SaaS Business to the next level. Read on!
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Questions to Consider Before Looking for SaaS Funding
The funding universe is quite complex. Knowing who you should get startup funding from and what funding you need is essential. To make the right choice for your SaaS firm, you need to ask a couple of questions.
At What Stage Is Your Startup?
At which stage is your SaaS company operating? That will determine the kind of funding they should pursue. Here are the stages –
Pre Seed Startup Stage
This stage is reserved for the smallest of the SaaS companies. Early-stage startups that are looking for this kind of funding may want assistance in developing a working prototype or getting their product to market. Getting pre-seed funding is very competitive. Investors usually look for well-developed product ideas and a solid founding team to give them the confidence required to invest in early-stage startups.
Seed Startup Stage
This stage is commonly seen as the first equity funding stage with software and SaaS companies required to raise between $100000 and $2 million. You require capital to help you meet your product development needs, expand the team and begin to turn a profit at this early stage. To qualify for funding your firm should more or less double in valuation post the pre-seed round.
Series A – Revenue Generation
The Series A funding stage is an option when your SaaS firm has started generating revenue and you’re looking at expansion. At this stage, optimizing existing business processes is paramount. The scale of this funding varies, with businesses raising around $10 million on average. Attracting investors requires you to develop your business model further and show proof that it can withstand future cash flow fluctuations.
Series B – Equity-Based Funding
Series B funding is a kind of equity-based funding wherein you sell your shares in your company to investors in return for capital which acts as a cash injection to boost growth. SaaS companies looking for Series B funding require strong valuations of around $10 million. Your monetization strategy must succeed and you need to show that your product is profitable and you have metrics in place to prove your business can compete at some level.
Series C – Final Stage Funding
The focus on this stage is aggressive expansion, as this is the final funding stage. In 2019, Series C startups raised an average of $103 million, up from $48 million in 2012. Your SaaS or software firm should be generating sufficient capital for scaling so investors have less equity. To qualify for funding your firm needs to be established enough so investment risk is low.
Preparing for the SaaS Funding Journey
After determining the SaaS startup funding stage that your company is in, it is time to get ready for your funding journey. Here are some tips –
Budget Your Time
Only with time and consistent effort can you secure startup funding. You may go through multiple pitching rounds as well as reworking sessions, so plan in advance accordingly.
Prepare Documentation
If you want to secure SaaS startup funding, you have to be organized. Your business plan, pitch decks, and financial projections should all be prepared. It is useful to update any legal documentation like the articles of incorporation – the set of documents that a company must file with the government to prove its existence.
Plan Effectively
You will require a detailed business plan of how you plan to use your startup funding to grow your SaaS company.
Don’t Ignore Your Business
Ensure that your business does not suffer as you’re looking for funding because any decline in growth could discourage future investors.
Grow Your Business
Attempt to grow your business as much as possible before you start hunting for startup funding.
Looking for SaaS Funding?
As the funding ecosystem varies, so do the different legal, logistical, and practical requirements. You have to understand these properly before choosing the best option. Take time out to do in-depth research and save time and money in the long run. Here are some of the most popular startup funding options –
VC or Venture Capital
VC firms raise money by asking a group of partners to contribute towards an investment fund usually aimed at startups with promising growth potential. This is not to be confused with PE or Private Equity. Both raise capital from limited partner (LP) investors and invest in privately-owned firms. However, there are some differences in how VC and private equity firms conduct business like the firms they invest in, the levels of funds they provide, and the amount of equity required for their investment. VC usually generates less than 50% of the firm’s equity.
VCs prefer to spread smaller amounts of money over more businesses because of the financial risk of early-stage startup investment. VC is the preferred private market funding for startups. Forbes says that VC funding is usually between $1 million and $5 million. VCs require company valuations ranging from $5 million to $15 million for Series A funding. In order to secure VC funding, you must prove your business has the potential to grow substantially. VCs always want to see metrics that indicate the value of SaaS firms so be prepared for some tough questions.
Pros
- A lot of capital since VCs have deep pockets. On average, a VC firm manages around $207 million in venture capital for its investors annually.
- VC offers credibility and social proof of your SaaS venture’s value. If a VC backs you, it sends a message to the industry that not only is your product viable, potential customers can trust your product.
- Securing follow-on investments becomes easier. If a VC funds you for one funding stage and reaches targets, they’ll have more faith that future funding may secure a similar outcome.
Cons
- You may need to relinquish control of some part of your business. VCs usually request board or equity seats in your SaaS company in exchange for funding.
- You may be required to provide metrics that prove you’re performing well. Doing due diligence to check your metrics might take time, delaying the funding that you need.
- VCs’ presence in the business might lead to conflict if they try to push their weight around while interfering in your business.
Angel Investors
These can be individuals, rather than firms or funds, that personally invest in your business in exchange for an equity stake. Typically, angel investors shell out less capital than venture capitalists. The Angel Capital Association says that these investors may commit between $5000 to $100,000. In comparison, VC firms invest around $2.5 million in the capital. Angel investors are more likely to provide funding for fledgling businesses in the early stages of development. These investors look for innovative firms with the potential of a high revenue turnover within the first 3 to 7 years.
Pros
- Being free agents, Angel Investors can be more personally involved in your business. They sometimes offer mentorship opportunities so you can approach them for business guidance.
- Building a relationship with your investors fosters an environment for a stable funding stream. Show your investors that they can trust you with their investment and they’ll consider investing more.
- Angel investors are less averse to risks. They don’t have board members to answer to which translates into quicker decision-making.
Cons
- Angel investment may turn out expensive. While angel investors invest quite a lot of capital, their ROI expectations may be as much as 10 times their initial investment within 5 to 7 years.
- Angels invest alone so there are not many oversight mechanisms for their requests. This autonomy translates into angels taking advantage of business founders.
- Do your homework on them because their availability, energy, and expertise level vary.
Accelerators and Incubators
Incubators refer to actual physical space offering a combination of office space, funding, and expertise. You can rent these in exchange for monthly membership fees or equity. Incubators provide lots of extra services like training, network access, and specialist equipment so businesses can get started. They’re best suited for the seed stage. Accelerators refer to business programs run with private funds. According to Forbes, accelerators offer seed money in exchange for business equity, with investments ranging between $10000 and $120000. These programs offer support to startups in exchange for a fixed period in the later stage of scaling. They also double up as accelerated growth mentors by providing access to investors, financing, and education.
Pros
- Both are used by some of the brightest minds in the industry. These networks can offer quite a lot of support to other entrepreneurs.
- Both improve credibility. If you are accepted into an incubator or accelerator program, it sends a message to the competition that there’s potential for your business to scale rapidly.
Cons
It’s hard to get accepted into a program because the popularity of incubators and accelerators is very high.- Most accelerators require around 2 to 10% equity in your business in exchange for their services.
- Whether you get charged a monthly fee or equity, these programs will cost you. They don’t come with a guarantee to increase capital.
RBF or Revenue Based Financing
RBF or revenue-based financing is a great way to raise capital. SaaS firms get a loan from a group of investors who obtain a percentage of the firm’s ongoing gross revenue instead of equity, in exchange for these investments. With an RBF, investors can receive a regular share of a business’s income till they reach a predetermined amount.
This amount may be a multiple of the original investment, ranging between 3 to 5 times the original investment amount. A business that raises capital through RBF will be required to make regular payments toward the original investments. This is not the same as debt financing. There’s no interest on the outstanding balance nor are there fixed payment amounts. You receive a loan based on your business’s overall revenue with repayment terms being a percentage of your monthly earnings plus a multiplier of the original investment.
Pros
- Once your loan is repaid the business remains entirely yours, because there’s no equity exchange.
- No future investment returns once you pay back the original loan.
Cons
- This is not useful for pre-revenue startups as the loan provider needs proof of turnover for determining the loan investment.
- There’s no network assistance, mentorship, or financial advice with this kind of funding.
- Monthly payments might be a problem for startups that struggle financially.
Bootstrapping
This deals with building a firm from scratch wherein an entrepreneur begins a company with little to no capital rather than relying on outside investments for promoting growth. A founder could be considered bootstrapping when they attempt to found and build their firm from personal finances and operational earnings. This is in stark contrast to acquiring funds through methods discussed earlier like angel investors or VCs. Instead, bootstrapped founders turn to their own savings, run lean operations or have a quick inventory turnover.
It isn’t uncommon for a firm to take preorders for a product and use the funds raised to build and deliver the said product. A business that bootstraps work with limited sources of financing. Hence, a competent development strategy becomes paramount where all risks are accounted for. Any funds that are available need to be appropriately reallocated to the most crucial parts of the business model.
Pros
- With bootstrapping, there’s an extra incentive to build a SaaS product that generates immediate revenue.
- Full ownership and control of the business remain yours.
- Bootstrapping helps you keep control over the firm and its directions. External funding means external pressures and responsibilities to keep investors happy.
Cons
- Scaling, budgeting, and management of your SaaS business get complex as you aren’t receiving cash injections from other sources.
- There’s no mentorship, expertise, marketing, and other opportunities common with other forms of SaaS startup funding.
- If you overstretch your limited resources, you might go into debt.
Crowdfunding
Crowdfunding is a great way of getting startup funding if your software, digital product, or SaaS business is at an early stage. Rather than the traditional funding methods relying on financing from one institution, like banks, crowdfunding is numbers game the aim being to gather small investments from a comprehensive source of people.
Crowdfunding campaigns are generally conducted using online platforms. Founders don’t need to spend time on traditional pitches for face-to-face meetings. Crowdfunding is a nice way of raising money and interest by creating campaigns and having people donate to the cause on different platforms. There are different types of crowdfunding, depending on your business, product, and long-term goals.
Reward-based crowdfunding
Reward-based crowdfunding refers to what most people recognize. In return for a set of fixed donation amounts investors are provided with a range of offers. These may be early access or reduced ‘early bird’ prices for products and services, or additional bundled benefits that may not be given to those who buy the product later.
Equity-based crowdfunding
Equity-based crowdfunding refers to the other forms of gaining investments as it involves giving up a part of your business in return for investment instead of pre-selling a product. As is the case with other forms of equity investment, a startup’s success helps determine each investor’s stake value.
Debt-based crowdfunding
Debt-based or loan-based is quite like getting a loan. Except that rather than going through a bank, you get the investment from a series of backers who lend you the money so your firm can get up and running. These backers finance your startup on the condition that you return their investment plus a fixed rate of interest by an agreed time. This is called peer-to-peer lending.
Pros
- This is an accessible and quick way to raise funds, especially for early-stage startups.
- You are in control as you decide what, how, and where you crowdfund.
- This democratizes investment challenging the big company status quo all the while providing a decent level of transparency.
- This strategy is constantly changing, offering new flexibility that traditional methods don’t.
Cons
- You have to have knowledge of available crowdfunding platforms.
- There are some regulations restricting the number of investors you can have and capital that can be raised.
- Platforms come with their own facilitation and payment processing fees with all these costs adding up.
- Expert guidance isn’t available with other options.
Preparing Your SaaS Funding Strategy
After deciding on your SaaS startup funding options, it’s time to approach investors. Individual VC firms receive more than 1000 proposals a year, so there’s more demand than investments available. Investors are also very picky which means you have to make a strong case or risk losing out on investment.
Use These 5 Metrics to Impress Investors
- Low Churn Rates This is essential if you wish to secure SaaS startup funding. Churn rates determine the number of customers that leave your service within a specific time frame. Keep your churn rate low for two reasons. Low churn rates show investors that your customer retention is high, which means steady payments and savings on customer acquisition costs. Keeping a churn rate low helps to maintain a positive growth trajectory. Showing long-term viability will motivate investors to believe in you and your firm and back you’ll.
- Monthly Recurring Revenue or MRR projections showcase a business’s viral growth potential making it an important metric to obtain SaaS startup funding. This metric indicates the health of your customer relationships and gauges how well your product/service fits into the market.
- Customer Acquisition Costs CAC gives investors proof that your model works and that your sales team can meet the demand. You could also show that you’re good at targeting new customers, increasing your chances of bagging more funding.
- Average Revenue Per User or ARPU shows investors how much revenue your customer base generates on average. It gives the investor an idea of how efficient your business model is and increases your chances of getting SaaS startup funding.
- Customer Lifetime Value CLTV refers to the total amount of money a user spends on your product if you keep them as a customer. A high CLTV indicates that you’re constantly serving your customers, providing value.
Approaching Investors
To procure SaaS funding, you have to stand out from your competitors. Here are some tips on approaching potential investors –
- Do your research on investor history in the industry. Which startups have they invested in before? Which project bagged their interest? Learn about other business interests to check whether they’re a good fit for your startup.
- Get an introduction if possible from a mutual connection, asking them to set up a meeting between you and the potential investor. Attending SaaS-related events or connecting on a platform like LinkedIn, the choice is yours. If you communicate via email, attach a well-laid pitch deck.
- You need the perfect pitch alongside a proper business plan.
- The perfect pitch contains
- An executive summary that outlines your firm’s mission statement with a clear description of your company’s products/services.
- A proper company description that outlines your business goals, target market, and solutions you intend to offer them.
- A market analysis highlighting your firm’s strengths and comparing it with that of the competition.
- A clear description of your team, their roles, and responsibilities.
- A marketing plan that shows how you plan to budget for ads, target the right demographic, and successfully promote your product through various channels.
- A sales plan which documents sales reps required along with plans for onboarding more sales staff or outsourcing these services.
- Requests for funding stipulating the investment size you need and how you plan to use the capital once it’s raised.
- Financial projections show the financial goals set for your business based on market research.
Final Thoughts
In conclusion, whichever route you choose for SaaS funding, be prepared to spend time and effort. You may also face a few rejections, with each one resulting in edits of your funding pitch. Look at these as lessons, not failures. You may need to spend time away from your product while prepping one-pagers, pitch and investor decks, business plans, and financial projections- all this before you start having real conversations with potential investors. To read more such informative content, visit SaaSworthy Blog!
