Securing SaaS Startup Funding
SaaS Startup Funding
2020 and 2021 saw a rise in entrepreneurship and innovation worldwide,
with an increase due in part to the recent economic downturn. From starting software companies as a way
of boosting income, to feeling that the time was finally right to launch a Software or SaaS product,
there is a range of reasons for this recent increase in startups. But whatever the reason, it's critical
to know the risks.
It's expensive to develop, deploy, and market software, especially at the early stage of a startup, so
securing Startup funding can be critical for survival for SaaS companies.
So how can you go about securing SaaS Startup funding for your SaaS software development company? We
took a look at the options.
1. At Which Stage Is Your Startup?
The stage at which SaaS companies are operating helps determine the kind
of funding they should chase. We briefly outline the stages below:
According to Profitwell, this will require a small capital investment of around $1 million or less. Getting
pre-seed funding is highly competitive. Investors will be looking for well-developed product ideas and
solid founding teams to give them the confidence they need to invest in early-stage startups.
2. Questions To Consider Before Looking for SaaS Startup Funding
The funding ecosystem is complicated. Knowing who you should get startup SaaS funding from and precisely what funding you need is essential. To make the right choice for your SaaS, you need to do some housekeeping first.
Ready To Start Looking for SaaS Funding?
Here are Your Options
The various funding ecosystems have different legal, logistical, and practical requirements. You need to
understand these thoroughly before choosing the best option. Taking time to do in-depth research is
imperative and saves time and money in the long run.
We've put together a list of some of the most popular Startup funding options for SaaS software
development company, taking a closer look at the pros and cons:
Angel Investors
Angel investors are usually individuals (rather than a fund or
firm) that
personally invest in your business. You give up an equity stake in exchange for the funding.
It's expensive to develop, deploy, and market software, especially at the early stage of a startup, so
securing Startup funding can be critical for survival for SaaS companies.
So how can you go about securing SaaS Startup funding for you SaaS software development company? We took
a look at the options.
Pros:
As angel investors are free agents, they can become more personally
involved in your business. They tend to offer mentorship opportunities, so you should be able to
approach them for business guidance.
Building a one-on-one relationship with your investors creates an opportunity for a stable funding
stream. Showing your angels that they can trust you with their investment will make them more open to
future funding.
Angel investors are more open to risks than other investors. They don't have board members to answer to,
which also means you can expect quicker decision-making.
Cons:
Angel investment can be expensive. When they invest considerable
capital,
their return-on-investment (ROI) expectations might be as high as 10 times their initial investment
within five to seven years.
As angels usually invest alone, there aren't many oversight mechanisms for their requests. This autonomy
means that angels could take advantage of business founders.
The availability, energy, and expertise of angels vary, so it's worth doing your homework on them first.
Accelerators and Incubators
Incubators are physical spaces that offer a combination of office
space, funding, and expertise. These spaces are mostly rented'' in exchange for monthly
membership
fees or, less frequently, equity.
Incubators can provide extra services like training, network access, and specialist equipment to help
businesses get started. As such, they're best suited for the seed stage.
An accelerator is a business program that's usually run with private funds. Forbes reports that
accelerators usually offer seed money in exchange for business equity, with investments ranging between
$10,000 and $120,000.
These programs offer support to Startups for a fixed period in the later stage of scaling. They act as
accelerated growth mentors by providing access to investors, financing, and education.
Pros:
Both are used by some of the brightest minds in the business.
These networks can offer much support to other entrepreneurs.
Both are used by some of the brightest minds in the business. These networks can offer much support to
other entrepreneurs.
Both improve credibility. If you're accepted into an incubator or accelerator program, it tells your
competitors that there's potential for your business to scale rapidly.
Cons:
The popularity of incubators and accelerators means it's hard to get
accepted into a program.
According to Holloway, most accelerators require 2-10% equity in your business in exchange for their
services.
Whether it be in the form of a monthly fee or equity, these programs will cost you. However, they can't
guarantee increased capital.
Venture Capital
Venture capital (VC) firms raise money by asking a group of
partners to
contribute to their investment fund, usually investing in Startups with promising growth potential.
Sometimes confused with Private Equity (PE), both raise capital from limited partner (LP) investors and
invest in privately-owned companies.
However, there are significant differences in how venture capital and private equity firms conduct
business, such as the companies they invest in, the levels of money they provide, and the amount of
equity they want for their investment.
Venture Capital usually generates less than 50% of the company's equity. The financial risk of
early-stage startup investment means VCs prefer to spread smaller amounts of money over more businesses.
This makes Venture Capital the preferred private market funding for SaaS Startups.
According to Forbes, venture capital funding is usually between $1 million and $5 million.
Venture
capitalists require company valuations ranging from $5 million to $15 million for series a funding. To
secure VC funding, you'll have to prove your business has the potential to grow substantially. Venture
capitalists will want to see metrics that indicate the value of SaaS companies, so be prepared to answer
a few tough questions.
Pros:
Ample capital, as venture capitalists tend to have deep pockets. On
average, a venture capitalist firm manages about $207 million in venture capital for its investors
annually.
Venture capital offers credibility and social proof of your SaaS venture's value. If a venture
capitalist backs you, it sends a message to your industry that your product isn't only viable but
valuable and that potential customers can trust your product.
Securing a follow-on investment becomes easier. If a venture capital funds you for one funding stage and
reaches your targets, they'll have more faith that further funding will secure a similar outcome
Cons:
Venture capitalists might request equity or board seats in your SaaS
company in exchange for funding. This means you'll be relinquishing a portion of control over your
business.
You'll be required to provide water-tight metrics that prove you're performing well. Note that doing due
diligence to check your metrics might take time, delaying getting the funding you need.
As a venture capitalist will have a vested interest in your business, they might want a say in running
things, leading to conflict.
Crowdfunding
Crowdfunding is an excellent option for gaining startup funding if your software, digital product, or
SaaS business is at an early stage. Rather than more traditional funding methods that rely on financing
from one institution such as banks, crowdfunding is a numbers game, gathering small investments from a
more comprehensive source of people.
As a venture capitalist will have a vested interest in your business, they might want a say in running
things, leading to conflict.
Crowdfunding campaigns are usually conducted through online platforms, removing the need for
founders to spend time on traditional pitches face-to-face meetings. It's a great way to raise money and
interest by creating campaigns and having people donate to your cause on various platforms.
There are a few different types of crowdfunding available, depending on your particular business,
product, and long-term goals.
Reward-based crowdfunding is the one that most people will recognize. In return for a set of
fixed donation amounts, investors are usually given a range of offers. These can be in the form of early
access or reduced “early bird” prices to products and services or additional bundled benefits that might
not be offered to those who buy into the product at a later date.
Equity crowdfunding most resembles the other forms of gaining investment as it involves giving up
a portion of your business in return for investment rather than pre-selling a product. As with other
forms of equity investment, the Startup's success helps determine each investor's stake value.
Debt (or loan-based) is a lot like getting a loan, except rather than going through a bank, you receive
the investment from a series of backers who lend you the money you need to help you get up and running.
These backers finance your Startup on the basis that you return their investment plus a fixed rate of
interest by an agreed time. This is often referred to as P2P (peer-to-peer) lending.
Pros:
It's an accessible and fast way to raise money, especially for
early-stage startups. You're in control - you decide what, how, and where you crowdfund.
Democratizes investment challenging the big company status quo while providing a level of transparency.
This strategy is continually evolving and offers new flexibility that traditional options don't.
Cons:
It requires knowledge of available platforms.
Crowdfunding regulations restrict the number of investors you can have and the capital you can raise.
Platforms come with facilitation and payment processing fees, and those costs all add up.
You don't get expert guidance available with other options.