Step-by-Step Guide to Gain Funding For Your SaaS Startup
SaaS solutions are among the fastest-growing segments in the IT industry. SaaS firms are enormously promising due to their recurring income, flexible development methodologies, and ability to build market share without exposing customers to significant expenses.
Moreover, with remote work, the need for SaaS has been increasing by the day and will keep growing due to the work from home/hybrid model adopted by organisations worldwide.
Funding is critical for SaaS firms, and it’s not always easy to get an investor to invest in your business. Well, success doesn’t always come easy or without hurdles.
This article discusses the different stages of acquiring funds for your SaaS firm and the different investors available to help you grow the business. Keep reading for more.
Should You Be Raising Funds?
There is no clear ‘yes’ or ‘no’ answer for this; however, we recommend you consider your business stage and decide.
Table of Contents
Stages of the Fundraising Life-Cycle
Pre-seed Age
Pre-seed is suitable for new and upcoming SaaS firms. However, if you are an early-stage entrepreneur seeking finance, you may require assistance in producing a functional prototype or bringing your product to market. This necessitates a minor investment of roughly $1 million or less.
Obtaining pre-seed finance can be pretty tricky. Investors typically prefer well-developed product concepts and a solid foundation to be confident in investing in an early-stage firm.
Seed Age
Once an idea surpasses the concept stage in the Funding Life Cycle, the next stage of a new venture is known as the “Seed Stage”. During this early stage, entrepreneurs approach different types of investors to find financial support for their concept or product.
The seed stage is often considered the first official equity fundraising round, with software and SaaS startups typically having to raise between $100,000 and $2 million.
Your company’s valuation should be higher when compared to the pre-seed round to be eligible for investment.
The Seed age has further divided into three series based on the amount/level of funding you should apply.
series A
When your SaaS or Software company has started to generate profit, and you want to expand your business, the Series A fundraising stage becomes a possibility. At this point, you can use the funds to improve existing company processes.
While the size of this capital fluctuates, firms roughly raise around $10 million. To attract investors, you’ll have to improve your company model and demonstrate its ability to endure future cash flow variations.
Series B
Series B fundraising is an equity-based investment in which you sell shares of your firm to investors in exchange for money. This capital functions as a financial infusion to help your business expand.
SaaS startups seeking Series B investment should have a reasonable valuation of around $10 million. Furthermore, you must demonstrate that your product is profitable and have KPIs to indicate that your company can compete at a specific level.
Series C
Series C is the final fundraising step since this stage is all about vigorous growth.
Your SaaS or software firm should be making enough profit to scale so that investors receive fewer shares. Your company should be well-established to handle low investment risk to be eligible for Series C finance.
Series C Startups raised an average of $103 million in 2019, an increase from $48 million in 2012.
Finding the Right Investor
The legal, logical and practical needs differ for each financing ecosystem. Therefore, before you decide on the type of investor for your business, why not research and find the right investor?
Here is a list of the most common SaaS startup funding options.
Angel Investors
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
If your company is in its early development phase, angel investors are more likely to invest in your business. In general, these investors seek out new firms with the potential for rapid revenue growth in the first three to seven years.
Pros
- Since angel investors are self-employed, they might get more intimately interested in your company. They frequently provide mentoring opportunities, and therefore you will be able to contact them for business advice.
- Building a one-on-one connection with your investor opens up the possibility of a steady funding stream.
- Angel investors are more likely to take chances when compared to other investors since they don’t have to answer any board members.
Cons
- Angel investment can be costly, and they anticipate a return of up to 10 times their initial investment within the first five to seven years.
- Since angel investors invest alone, there aren’t enough mechanisms to monitor their requests. Due to this liberty, angel investors may take advantage of business owners.
Startup Incubators and Accelerators
An Incubator is a firm that fosters early-stage businesses by offering resources, funds, and professional advice to get started.
A business accelerator is a program that gives developing companies access to mentorship, investors and other support that help them become stable, self-sufficient businesses.
Companies that use business accelerators are typically unicorn stage start-ups that have moved beyond the earliest stages of getting established.
Pros
- Accelerators and incubators boost believability — acceptance into an incubator or accelerator programme signals to your competition that your company can expand quickly.
Cons
- Since incubators and accelerators are pretty popular, getting accepted into these programmes can be challenging.
- In exchange for their services, most accelerators seek around 2-10% of the stock in your company.
- These programmes cost you money in the form of a monthly charge or equity; however, they do not guarantee greater capital.
Venture Capital
Venture capital firms collect funds by soliciting contributions from a group of partners to their investment fund. They receive cash from limited partners and invest in privately-held businesses with valuations ranging between $5 million to $15 million. To obtain VC, you must demonstrate that your company has the potential to develop significantly.
They often create or own less than half of the company’s equity. In addition, venture capitalists prefer to distribute smaller sums of money over a more significant number of enterprises due to the financial risk of early-stage startup investment. According to Forbes, venture capital financing typically ranges between $1 million to $5 million.
Pros
- Company financing provides legitimacy and societal validation for your SaaS venture. Venture capitalist investing in your business is proof that your product is feasible, practical, and reliable to your industry.
- It becomes easier to get a follow-up investment.
Cons
- Venture capitalists can demand stock or board seats in your SaaS firm in exchange for money.
- You’ll be expected to produce hermetic metrics that demonstrate your success.
- Since venture investor has a vested interest in your company, they may demand a voice in how the firm is being operated.
Non-traditional Venture Capital Investors
Startups, particularly SaaS startups, are seeing increased interest from unconventional VC investors such as private equity, hedge funds, mutual funds, and sovereign wealth funds.
This is because they are frequently ready to deploy more significant quantities of cash more quickly than traditional VC companies and are less price-sensitive due to their lower return requirements.
Pros
- Non-traditional VCs offer more capital with lower return requirements.
Cons
- They primarily focus on companies that are already well-established.
Revenue-based Financing (RBF)
In exchange for investment, revenue-based financing requires SaaS firms to disclose a percentage of their projected income each month. The repayment amount is decided based on the borrower’s monthly recurring income rather than a predetermined sum.
Pros
- There is no interest rate with revenue-based financing
- You get to keep your startup’s ownership and management
- Revenue-based financiers share your commitment to growth
Cons
- Since this form of financing is revenue-based, pre-revenue startups are generally not a fit.
- Investors in RBF deals will not provide capital worth more than 3 to 4 months of a company’s MRR. However, RBF investors may choose to offer follow-on rounds as a company grows, providing entrepreneurs access to more capital over time.
- RBF requires monthly payments, unlike equity financing.
Partner Financing
In partner finance, you and the partner share the company’s loss, earnings, and ownership (s). This is probably one of the best options if the other partner is from the same industry or is interested in what your company does.
Pros
- When you have a business partner, you have a person—or multiple people—who can help you with all the business tasks. The partners can divide tasks, meaning the job will get done faster, and the partners might be able to tackle more than if they worked alone.
- Partners can bring skills and knowledge to your business that you lack. You might know a lot about your business’s product or service but not know how to run a business. You can bring on a partner who is skilled at running a business.
- If two people share the financial load, it will lower the financial burden. Instead of paying for everything yourself, your partner can split the cost, and you can avoid incurring debt.
Cons
- You cannot make independent decisions when you’re in a partnership. You must work with your partner to make decisions or run all decisions by your partner.
- Depending on how many partners you have, your share of the profits can get fairly small.
- While being taxed individually is a pro, it’s also a con. Generally, business taxes have lower rates than individual taxes. Since the taxes are passed through to you and your partner(s), you might collectively pay more than you would if you paid business taxes.
Bank Loans
Business loans provide business owners with financing either as a lump-sum payment or credit line. In exchange for this funding, your business agrees to repay the money it borrows over time, plus interest and fees.
Bank loans are considered the riskier type of finance. Before you are approved for a loan, you must provide a personal guarantee.
Pros
- Unlike investors, a bank will never interfere with running your business, and you retain complete control over your business.
- Business loans have fixed returns, meaning that you will pay the same amount of money back to the bank no matter how big or small the profits are.
Cons
- Many bank loans secure loans against an asset owned by the business. The risk is that the lender can seize the asset if you fail to make the repayments.
- There are many strict rules and conditions that banks have in place when it comes to approving or rejecting business loan applications. Not all businesses will meet the eligibility criteria laid out by the banks.
Mistakes to Avoid While Raising Funding
For many entrepreneurs, raising capital is an intimidating and exhaustive process. However, unfortunately, statistically low success rates are usually no contributor to the fundamental optimism that raising capital requires.
Hence, we bundled some common mistakes that emerged from years of representing start- and scale-up ventures.
- Don’t underestimate the process of raising capital for your business. The process is time-consuming and might be stressful, often paired with rejection.
- Don’t avoid redundant work. You will have to go through the pitches, business plans and financial projections over and over before you meet potential investors.
- Don’t lose sight of your business to work on fundraising. Any neglect that might lead to a decline in your business’s growth will be visible and discourage investors from investing.
Key Takeaways
SaaS funding is available for every step of your business’ growth journey — from getting it off the ground to expanding your business worldwide. In addition, several funding options may be suitable for you at various times. Therefore, be ready to use a range of funding types as your business grows!
Lastly, remember that no matter which route you go, do not underestimate the amount of work you will need to put in when trying to raise funds. Getting funding can be time-consuming and lengthy, so be ready to put some time away from growing your business.
