Entrepreneur and investor Naval Ravikant once said, "Solve via iteration. Then get paid via repetition."
That is perhaps the closest quote we have, shedding light on what the SaaS business model is. Lately, the popularity of SaaS startup funding has skyrocketed - thanks to its versatile development model, enormous potential for recurring income, and capability for escalating market share without exposing clients to high up-front costs.
Furthermore, Gartner projects the SaaS space being worth nearly $170 billion as of 2022 - a number that is a testament to our dependence on SaaS technology to make it through our work day. It is no surprise, then, that investors are actively seeking opportunities for B2B SaaS funding.
In this article, we walk you through everything a SaaS founder needs to know to raise SaaS capital successfully. Without further ado, let’s get right to it!
SaaS (Software as a Service) companies are based on the premise that their clients pay a monthly charge to access a piece of software easily accessible via the internet.
This cloud-based technology relieves customers of hosting their own IT infrastructure, letting SaaS companies swiftly bring in new updates and scale rapidly.
Once established, these SaaS startups tend to go into a hyper-growth phase. Clients start adopting the software, and this calls for an extensive expansion of data capabilities, storage, bandwidth, maintenance, and more. Naturally, this is only possible if there is enough SaaS capital for growth.
SaaS financing at such a stage is crucial so that founders can focus on building a minimum viable product (MVP) without any financial restrictions.
Furthermore, hiring good programmers, UI/UX designers, developers, product development, and market research - all of these can scale extensively with SaaS financing, thus making the startup more credible.
Choosing the right B2B SaaS funding can thus prepare your company for long-term success and prevent any financial roadblocks hindering your growth.
Simply put, SaaS startup funding should be done whenever the need arises. The idea of funding is to make monetary assistance available when a company needs it the most, and that alone should be your cue.
Nonetheless, 3 common scenarios necessitate SaaS financing:
Let's say the concept for a Minimum Viable Product (MVP) is ready, but you cannot substantiate it without SaaS funding. At this stage, founders should have a proper framework for where they will be allocating money to make the idea tangible and procure SaaS capital.
Investors often hesitate to put their money in companies with an MVP that's not viable. Founders can evaluate their need for funds at this stage depending on their team size, revenue model, operations, and more.
If achieving your next business milestone seems onerous without capital, it's time to chalk out a funding plan and approach investors.
SaaS funding can be done through venture capitalist firms, angel investors, incubators, accelerators, crowdfunding, loans, or revenue-based financing.
Venture capital firms are an excellent SaaS financing option for companies that can prove their business strategy in numbers. Be aware, though, that while VC funding allows for huge sums of money, the cost you pay for it is in terms of loss of equity and no independent decision-making.
Moreover, getting quality VC investments is difficult and needs time - time that could otherwise be spent on improving your product or focussing on scaling your business.
Angel investors are individuals who assist startups in the seeding stage, usually in exchange for equity or debt. While the amount may be less than VC funding, angel investing allows for more flexibility, networking, and rewarding mentorship.
But again, the loss of control and equity, to some extent, calls for choosing an angel investor only after careful consideration.
For SaaS founders in the early stages, applying to accelerators and incubators can catalyze their business growth.
Accelerators are short-term programs that accelerate the growth of companies that already have a Minimum Viable Product (MVP). Incubators, on the other hand, incubate early-stage companies and help them develop a business model.
If accepted, these places provide a high-yielding environment with solid industry connections, mentorship, and, eventually, seed funding for promising companies.
Revenue-Based Financing is the best option to consider to raise SaaS capital since it allows you to trade future revenue for upfront cash.
Recurring income is at the very core of a SaaS business model, and for businesses with consistent review streams, BridgeUp and other RBF platforms can enable instant funding (as fast as within 24 hours) based on your monthly recurring revenue.
No more time crunch; owners get the cash without any company shares being forfeited!
SaaS start-ups may go through many stages in the fundraising lifecycle, namely pre-seed, seed funding, Series A, B, C, D, and IPO.
Let’s briefly explore each of these stages below:
The pre-seed stage is the initial research phase of a start-up, where an idea is transformed into a business. Friends, family, and founders themselves are common investors at this stage where business operations are finally set in motion.
Seed Funding is the first official stage of the SaaS funding lifecycle. At this point, your business must have a minimum viable product (MVP) or some customer traction to gain the interest of potential investors.
Moreover, founders need to have a clear picture of metrics like:
to be able to convince angel investors and early-stage VCs or to acquire revenue-based SaaS financing.
SaaS businesses seek Series A funding when their ability to generate income has already been established in numbers. Equity or debt is exchanged for capital to develop the business further, as verified by a scalable framework for growth presented to investors.
Venture capital, private equity, corporate investors, or revenue-based loans are the usual funding options for Series A B2B SaaS funding.
Are all fundamental Key Performance Indicators (KPIs) in check? That's when businesses generally opt for Series B funding.
The idea is that a substantial customer base has been proven, and now SaaS financing for advanced operations can be procured. Series B funding is usually gained from venture capital, strategic investors, private equity, hedge funds, investment banks, and more.
If founders opt for Series C SaaS startup funding, chances are that the company is highly successful already. The money from Series C may now be used, for example, to cross geographical borders, buy other companies, develop new products or scale the company rapidly.
Companies that continue with Series D SaaS funding do so either because:
An Initial Public Offering (IPO) marks the climax of start-up success: the company's shares can now be available for the public to invest in. IPO is used to raise SaaS funding for further expansion or to allow company owners to cash out their remaining shares for personal gain.
Fundraising is a tedious process, and more so for a SaaS company. We've explained each stage of start-up funding so that founders do not make the mistake of approaching VCs at a stage where their MVP is dubious, and they have no traction. After all, targeting the wrong investors at the wrong stage can prove to be a futile effort.
Other mistakes that SaaS founders must avoid at all costs are giving away a lot of equity in the early stages, using SaaS capital irresponsibly, not researching investors' backgrounds, falsifying company metrics, not having a long-term vision, and raising more or less money than required.
What's more - early equity dilution can cost you a fortune, which is why SaaS financing alternatives like subscription-based financing are better than traditional ones.
Investor choices can make or break your game. Finding the right investor for your startup isn't just about capital; you must ensure that the funding option aligns with your vision.
Listed below are a few ways you can make sure you pick the right investor:
Investors assess and scrutinize your team, product-market fit, background, and how your technology has a competitive edge over others.
As of 2022, some investors also pay attention to the social impact a SaaS company has, for example, whether it is expanding software access to underserved demographics or not.
That said, when we look at numbers, investors mainly close in on these metrics:
The total revenue that your clients generate in any given month is your MRR. This, multiplied by 12, will give you the ARR. Investors expect a positive growth rate from month to month to ensure that the business will expand further.
Churn rate is the number of customers leaving your service in a stipulated time frame. This is expected to be lower, for, the higher the churn rate, the worse it gets.
How much money does acquiring a new customer via sales, marketing, and other efforts cost? That's the CAC. Recovering the CAC faster helps SaaS companies churn profits better.
Net Revenue Retention is another metric where the customer base from a year ago is analyzed and compared to the MRR from then and now.
ARPA is the revenue that the entire customer base brings to the company on average. It is calculated by dividing the company's revenue for a period by the number of accounts for that particular period.
To successfully raise SaaS capital, founders need to focus on charting a positive growth rate by keeping these metrics in mind.
Aside from the ones mentioned above, investors also keep a close watch on the rule of 40 to gauge high-performing SaaS start-ups.
For the uninitiated, the Rule of 40 is a guiding norm in the SaaS space that states that the combined revenue growth rate and profit margin should be equal to or more than 40% for a SaaS company. This acts as a benchmark to draw a comparison and know more about the business’s profitability and future growth potential.
SaaS funding is not a one-time effort but rather, a long, slow and tedious process. Having an effective fundraising strategy will help you navigate the rough terrain of SaaS start-up funding better- and that's what we hope you took away from this article.