Getting financing for your SaaS startup can be a tricky task. It has to be customised depending on your business’s specific circumstances. Types of SaaS funding differ in terms of the typical investment amount, structures and associated requirements. In this article, we are presenting you with four main ways to raise money for your SaaS.
After bootstrapping for a few months, angel investors are usually the first port of call for early-stage startups. Business angels are often bringing an initial cash injection in exchange for a portion of capital in the form of equity or convertible debt. This means a relative loss of control for the founders.
However, aside from money, many angel investors bring significant experience, expertise and networks. All of these are invaluable for the development of a startup. This is what is called “smart money”.
Once a SaaS startup has managed to take off the ground, Venture capital is a funding option that becomes available. Venture capital (or “VC”) is provided by investment firms or funds whose business is to invest in the most promising startups. This is currently the most sought-after type of funding, with large fundraises making headlines.
Securing VC funding is a positive market signal and helps confirm the prospects of the business. However, it also comes with downsides:
- Only startups that have either a high growth potential or a strong enough track record of recent growth usually qualify. This is because the Venture Capital firms are expecting very large pay-outs further down the line.
- Return on investment expectations are extremely high, which means pressure on startup founders to be successful quickly
- Founders end up having to dilute their equity in the business, sometimes significantly. This results in a material loss of control.
Startup Incubators and Accelerators
These two types of funding sources involve offering assistance (mentoring, training, networking and other types of supports) to startups at their earliest stage (in the case of incubators) or to help them scale (for accelerators).
Their financial investment is often relatively limited. However, they usually organise events and introductions with their network of investors, which facilitates further funding.
Incubation or acceleration programmes typically last a few months. To be fully beneficial, they involve intense commitment from the founding team. Also worth mentioning: whilst participating in the most prestigious programmes is a positive market signal, not all incubators and accelerators are equal and the results might be disappointing in some cases.
For SaaS startup founders that would rather stay in full control of their company, revenue-based financing is another funding option. The amounts borrowed and repayment rates are conditional on your Monthly Recurring Revenue (MRR).
Revenue-based financing is adapted to SaaS startups as:
- it does not take into account the company’s asset base or profits (both of which are typically irrelevant in young startups).
- there is no dilution for the founders and no personal guarantees.
- time to money is usually much shorter than with other forms of funding (i.e. within days rather than weeks or months).
To get funded, startups have to be post-revenue. Non-financial benefits coming with the funding sources mentioned above are also less common (mentoring, network, operational advice, …).
To conclude, various options exist to get your SaaS startup funded. You can find the best alternative for your company by having a proper understanding of how each of them works, and what they mean for your business and its progress. If you want to discuss your options, don’t hesitate to email us @ [email protected] or review our SaaS funding offering: https://scaleity.com/saas-lp/