SaaS Financing: Profitable Funding Options That Can Work Wonders for Founders

It's 2022, and SaaS start-ups are booming, so why get left behind? Here's everything you need to learn the ropes of SaaS capital raising and more!

Be it Zoom, Slack, or Dropbox- SaaS (software as a service) companies are accelerating at an undeniable pace. This is indicated by a projected annual growth rate of nearly 17% expected in 2022 in the SaaS space.

If you're a founder who's looking for SaaS financing options and are baffled by the plethora of alternatives available in the market, fear not.

In this article, we'll be walking you through the different SaaS capital raising options that you, as a B2B SaaS founder, can leverage to scale your business. Let’s get right to it!

But first, what is SaaS financing?

SaaS (software as a service) financing refers to the different ways SaaS startups can get money to scale their growth and revenue.

SaaS companies differ from other business models in that they offer software as a service on the cloud. Businesses then pay a monthly fee to access this software via the internet.

Such a subscription-based model makes SaaS financing largely regulated by the Monthly Revenue Rate (MRR). By virtue of MRR being the key metric for most SaaS companies, SaaS financing options like revenue-based financing make for a decent option.

Having briefly touched upon the basics, let us now dig into the different financing options that founders can leverage to fuel their growth.

B2B SaaS funding options you should know of in 2022

Fundraising is primarily of three kinds: equity, debt, and alternative financing options. Each comes with its set of pros and cons. We suggest you choose your funding option based on your company stage, future financial plans, and other metrics.

Subscription-Based Financing: to the rescue

Owing to their business model, many SaaS start-ups these days are turning to non-dilutive financing options to raise SaaS capital. Traditional banks hesitate to offer loans to SaaS companies without collaterals or bank sheets, while equity-based financing remains a long-term risk.

In the middle of such B2B SaaS funding options, retaining complete ownership while getting fast, flexible cash is one of the biggest upsides of the revenue-based financing model.

Let's take for example BridgeUp, a revenue trading platform apt for SaaS companies. Any company with a predictable, recurring revenue stream can raise funds through BridgeUp. The best part? All of this SaaS capital fundraising can be done within a week's time.

Angel Investors: More than just equity

Angel investors (private investors/seed investors) are individuals who have surplus cash, usually exchanging it for equity to fund a business. They're individuals who believe in the company's vision at times when other investors would be hesitant to, like at the seeding stage.

Venture Capital: Walking on thin ice

Venture Capital is a SaaS private equity financing option wherein capital is exchanged for equity to fund companies that seem promising in the long run. VCs come at the cost of giving up equity and decision-making control, but they may be a good decision if you're willing to snowball.

Venture Debts: Non-Dilutive Funding

Venture debts are loans given to VC-backed companies. They differ from traditional bank loans in that founders do not have to secure collateral, and cash is injected depending on the growth potential of the company.

How does SaaS financing work in 2022

Equity-Based SaaS Financing

Equity-based funding is dilutive, that is, you have to give up your company shares to receive capital. Entrepreneurs opt for this when they are either pre-revenue or have high operating costs.

Accelerators, angel investors, venture capital, private equity, corporate venture capital, family offices, and public markets- all these invest in equity-based SaaS capital raising.

The most significant advantage is that equity financers can typically issue larger checks. It could be a viable choice for a fast-growing firm in need of a large infusion of capital.

Debt-Based SaaS Financing

In general, loans are secured against tangible assets of the company. However, most SaaS companies do not have much in terms of physical assets as collateral. Whereas lenders frequently require borrowers to post collateral in the form of warrants, which assign equity in the event of borrower default.

The main advantage of debt-based financing over equity financing is that it allows the company to raise more money without having to sell additional shares of stock. But, to compensate for the greater risk involved with providing SaaS debt financing, lenders may often demand higher interest rates.

Revenue-Based SaaS financing

Some SaaS organizations may not want to dilute equity or pay high-interest rates. In such cases, Revenue-based financing can be of aid here. This method of non-dilutive fundraising entails payments under SaaS revenue financing made on a monthly basis, where the SaaS company promises a percentage of its gross income to the lender. This is paid off every month until the amount equals 4-5 times the initial investment.

A SaaS company that has consistent revenue streams could benefit from this. Because owners do not pay interest or give up equity and the payments are a percentage of income rather than a set amount every month, it is affordable and allows full ownership to be maintained; even during lean financial times.

10 key SaaS financing metrics that every founder should keep track of 

When you approach investors for SaaS capital, they will want to see good numbers to estimate your worth. This is where SaaS financing metrics come in handy. They basically allow you to assess your company's performance and how you will sustain its growth in the near future.

For the uninitiated, the term "SaaS finance" is used to describe the various financial frameworks, strategies, and operational Key Performance Indicators (KPIs) that are the building blocks of the success of subscription-based software firms. Listed below are a few key metrics crucial to B2B SaaS funding:

1. Monthly Recurring Revenue

The monthly revenue that a SaaS company expects is its MRR. MRR tracking helps understand how many users will be subscribed to your SaaS business at any given time, and this should ideally be positive. A positive growth rate means that your business is acquiring customers at a reasonable rate and not too many are canceling your services. ARR, that is Annual Recurring Revenue, gives you a long-term view of the same.

2. Churn Rate

The number of customers canceling your SaaS subscription determines the churn rate.

Churn rate= Number of people canceling at a given time/ total number of customers at the start of the given period

A low churn rate indicates that your customers are happy with the SaaS company.

3. Average Revenue Per User

The amount of revenue you generate per user on average is your ARPU.

ARPU= (Monthly) Revenue Rate/ the number of accounts (in that month)

4. Customer Acquisition Cost (CAC)

The cost that your company spends to acquire one customer is your CAC. Naturally, the amount you spend on sales and marketing for one customer should be recovered as soon as possible.

CAC= The money spent on sales and marketing/ number of new customers who signed up within that period

5. Customer Lifetime Value (CLV)

The revenue that each customer brings for the whole time that they use your product is the CLV.

CLV= Average Revenue Per User annually/ Churn Rate

6. Totally Addressable Market (TAM)

TAM is the maximum market size that can be targeted and would purchase your service. The three common methods used to calculate TAM are

a) Top-down: In this method, estimates of the population are based on research and reports from the industry. The top-down analysis uses the process of elimination. It starts with a large target market population whose size is known, further narrowing it to a specific market segment. b) Bottom-up: Bottom-up analysis bases TAM estimations on primary market research. It takes advantage of trustworthy data about a product's current pricing and use. c) Value theory: Value theory is based on how much a customer thinks a product is worth. It is used to figure out TAM when a company is putting new products on the market or trying to sell other products to existing customers.

7. Customer Acquisition Cost (CAC) Payback Rate

CAC payback rate is the time taken for your SaaS company to recover what it spent in acquiring one customer. It's ideal for a business to expect to recover the CAC within 12 months.

CAC payback period = CAC / revenue for the year

8. Gross Margin

Gross margin is the total revenue that you earn after subtracting the cost of goods for your service. A high gross margin means more money for the company.

Gross margin= Total revenue (for a month)- Cost of Goods Sold (for a month)/ Original total revenue

9. Burn Rate

The amount of money your startup is losing every month accounts for the burn rate. In the early stages, the burn rate may be more as R&D, marketing, talent acquisition, engineering, and sales cost a major chunk of capital.

Gross burn rate= Total cash available/Monthly operating expenditure Net burn rate= Total cash available/Monthly operating losses

10. Cost of Goods Sold

Cost of Goods Sold (CoGS) are the costs that a SaaS or software company has to pay to deliver its product or service to a customer. The profit margins of a SaaS company can be improved majorly if the CoGS is reduced.

To sum up these metrics, Bessemer proposed 'the 5 Cs of Cloud Finance' as crucial metrics that a SaaS company should track for fuelled growth. The 5 Cs include: •Committed Monthly Recurring Revenue (MRR), ARR •Cash Flow •Customer Acquisition Cost (CAC) •Customer Lifetime Value (CLTV) •Churn and renewal rates

These metrics help lenders and investors (even founders for that matter), to assess the company's financial health, churn rates, and other financial metrics key to the expansion of any SaaS company.

What are the different stages in SaaS financing

A SaaS company's life cycle primarily has 4 stages:

a) The first stage involves research and development, where the company focuses on developing a product. b) The second stage is when this product has been released and is now sent to wider networks. Early revenue starts pouring in and companies often rely on revenue-based financing to gain SaaS capital for the same. c) By the third stage, the company has a solid user base and is now looking to grow even further in terms of revenue. d) The fourth stage is when companies either exit, continue growing based on reinvestments, or are sold to bigger corporations. It's the ultimate factor in the life cycle of a startup, deciding its future revenue based on that.

Now that we know what a SaaS start-up lifecycle looks like, let's briefly talk about the B2B SaaS funding stages. 

Pre Seed Funding Stage:

Pre-seed funding stage is when founders are bringing the idea to fruition and need capital for the same. Bootstrapping or asking friends and family for SaaS capital are the most common ways a SaaS founder raises capital in this stage.

Seed Funding Stage: 

The seed funding stage is usually backed by investors who believe in the company's vision in the early stages of growth. Angel investors, incubators, crowdfunding, and government loan schemes are some options founders look to in their seed funding stage.

Series A Funding: 

SaaS companies with a history of stable revenue and a potential business strategy can apply for Series A funding. Venture Capital, Venture Debt, and NBFCs are potential investors in Series A funding.

Series B and further:

Series B funding comes after you've scaled well enough, and are looking to expand your operations. The increasing revenues and a high growth rate facilitate funding in this stage- usually by VCs and private equity.

The bottom line

Be it equity, debt, or alternative funding, SaaS financing allows entrepreneurs to carry the day through the entire lifecycle of a SaaS company. If subscription-based financing sounds like a quality funding option to you, feel free to call BridgeUp at +91-9819660287 or drop us a query on this form here.

Related Resources

• Difference between Debt Financing and Equity Financing
• Top 7 differences between angel investors and venture capitalists
• What is an Angel Investor?
• Power of non-dilutive financing
• What is Venture Debt? A complete guide to Venture Debt 2022
• The Ultimate Guide to Non-Equity Capital Funding?