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Here’s a comprehensive guide on SaaS funding entailing funding options, the right time to approach investors, how to impress them, and a few other key components.
In order to scale your SaaS business and push it towards growth, the right funding at the right time is vital. Securing funding for your SaaS business can be exciting but equally tedious. With fast-growing companies bagging an average of $9.5 million in series A funding, the SaaS startup scenario is growing at an exponential rate.
In fact, the overall revenue for SaaS companies is projected to grow by 17%, giving birth to an $85 billion market. The plethora of funding options available makes it necessary to be smart about the funding option you choose for your company. Hence, you need to know when and where to turn to cash injections to help your business take off and move forward efficiently.
Also, with funding types diversifying, you must consider the best option for your business. With so many funding options available, choosing the right one that caters to the needs of your particular SaaS business can be tricky. Do you want a straight-shooting venture capitalist to back you? Or one that is slightly more sympathetic towards your mission? Or maybe you should consider an incubator. Navigating this maze of funding options can be a bit confusing.
Regardless, the blind pursuit of funding without a plan can leave you empty hands, or worse, a funding plan that is detrimental to your company’s growth. Hence, you must research your options well and choose what’s best for you and your company. In this article, we will break down all the different funding options, and provide you with a comprehensive guide entailing the right time to approach investors, how to impress them, and a few other key components of SaaS funding. Here is everything you need to know about SaaS funding.
The easiest answer to the above question would be, “Whenever you are ready.” It is somewhat difficult to determine when exactly is the ideal point for acquiring funding during the growth of your SaaS company. But still, let us break down a few cases wherein acquiring funding for your SaaS startup could be beneficial.
In this situation, getting funding is of the essence to bring your idea to life. There is a chance that you might have passed this stage already, but fret not! Be ready with a proper plan to allocate your funds to dazzle potential investors.
Before initiating plans to grow your MVP, you must calculate your cash runways first. Depending upon how much extra cash you need, you can decide what funding method you should choose. You can then fund the business by yourself, use customer funding, bootstrap it on your own, based on the company’s revenue model, business costs, and team size.
This is the stage where you need funding to move forward. Formulate a proper funding plan and decide how much equity you might be willing to give up as you secure funding (if any).
Obtaining funding too early or too late can be an issue for your company’s growth. So try and refine your current technology stack with your available resources. Opt for funding if your idea can’t be developed or iterated further without further funding.
A one-size-fits-all solution for SaaS startup funding is a distant dream. Based on investment amount, structure, and expectations, you need to decide what SaaS funding would be ideal for pushing your company’s growth. Here are five types of SaaS funding options for you to choose from.
Revenue-based funding is a major step away from exponential early funding. For a much more gradual growth and greater control over your company’s operations, always opt for revenue funding, as are a lot of recent SaaS startups.
First, the loan provider will assess your business account and confirm its ability to bring in revenue constantly. Once that is done, they will disburse a loan to your business, tied to its revenue stream. The maximum loan amount, interest rate, and repayment tenure will be decided based on your company’s Monthly Recurring Revenue (MRR).
This loan uses your MRR as a collateral base instead of assets or profits. This is much more suitable for a SaaS business and is also known as the MRR line. The only condition with an MRR line is to pay back the loan with exponential growth. No loss of equity or ownership will occur whatsoever.
Venture capitalists are ideal for companies with good growth potential or a strong track record of recent growth. It is a high volume funding, with expectations of a large payout once the company starts to soar. Being funded by a VC is usually a sign that the company is projected to multiply its revenue and grow exponentially in the coming few months or years. It is one of the most prestigious funding sources for SaaS companies today.
But strap in because venture capitalists’ funding comes with its own set of expectations and added pressure. This is a lot less for other less meteoric startup funding methods. Since the investment amount will be considerably larger, you will have to cut out a larger stake of your company and hand it over to the investors, along with a certain amount of control over your business. Also, investors will hold higher expectations of significant returns, with no room for failure or experimentation.
Incubators and accelerators are ideal for funding startups of both ends of the scale spectrum. The best option for very early or seed-stage startups would be to opt for incubators. Not only funding, but incubators also offer assistance by means of training, experience, expertise, etc. In essence, an incubator makes founder-centric investments following an open-ended structure.
On the other hand, accelerators give later-stage startups access to funding for scaling up their operations. They are often run by private funds. Instead of focusing around founders for an indefinite period, accelerators provide fixed-term funding or ‘cohorts.’ This funding usually comes with an added cocktail of mentorship and training. The five stages of accelerator funding are awareness, application, program, demo day, and post-demo day.
Instead of a firm or a fund, Angel investors are single investments made by a single individual. In case you are a startup looking for your first big investment, then Angel investors are the way to go. Angel investors usually invest in the seed phase of the company, but in recent times, they have decidedly started investing in later funding rounds as well.
For your company to be successfully funded by an angel investor, it is crucial that your company’s mission is aligned and runs parallel to the investor’s own priorities and experience.
Pre-seed refers to a small starting investment for startups in their initial stages. This usually involves an investment amount of less than $1 million. This funding is usually used to nail the preliminary target (e.g., developing a working prototype, getting to market, etc.). To stand a chance at acquiring pre-seed, you need a good founding team and a well-worked-out idea for your product.
Seed funding is the first massive funding the company receives. The volume of funding might vary based on the source of funding. For example, an angel investor might invest a lot less as compared to a venture capitalist. You can push your product through the development phase, expand your team, and begin generating revenue with seed money. The valuation of your company in its seed phase will be double that during the pre-seed phase.
With series A funding, the investment amount is more likely to hit the $10 million mark. Series A funding is ushered in once your company has started generating revenue and has established key performance indicators (KPI) necessary for growth. A developed business model capable of sustaining cash flows is of the essence when it comes to acquiring series A funding.
With series B funding, you can expect investment amounts almost twice the size of series A funding. Investment amounts with series B funding are usually north of $20 million. This investment round is usually carried out by venture capitalists, given that angel investors have left the game by now.
You will be only considered for series B funding once your monetization strategy and fundamental KPIs are iron-clad and strong. This investment round will help you meet all market demand levels and cater to new markets.
If your company has made it to series C funding, congratulations are in order. With investment amounts hovering around $50 million, banks and hedge funds will try and take on VCs to provide you with investment capital. By this time, your company should have hit the $100 million evaluation mark, reducing risk for investors multiple folds.29
So here it is, everything you need to know about SaaS funding. The key lies in being patient and smart about your funding options and going with the one that best suits your company’s mindset and vision. Get your company funded by the right investor at the right time for optimum revenue yield.
Shivani is a talented CS manager with the skillsets to elicit, scope and manage end-to-end B2B SaaS project delivery. She has a keen interest in depicting her learnings in customer success by writing resourceful blogs and articles.
Published 8 Feb 2022, Updated 4 Aug 2022
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