Denice R. Preston
Investors have been pumping money into SaaS companies. However, raising funds is complex. This guide to locating the most suitable financing options can aid you in finding hidden treasures in this challenging landscape.
Authors are vetted experts in their fields and write on topics in which they have demonstrated experience. All our content is peer reviewed and validated by Toptal experts in the same area.
Julio holds over a quarter of a century of diverse expertise as an experienced finance vice president for multinational companies across various sectors. In the last five years, he’s been focusing on helping entrepreneurs of early or mid-stage SaaS and e-commerce businesses find funds that will help them develop their businesses. Julio’s expertise includes financial modeling and planning and business plan development. He also has experience in the valuation of the company, fundraising, as well as strategic management.
Slack, Zoom, and DocuSign are only a few of the numerous SaaS businesses that have become well-known. The messaging platform of Slack, Zoom’s video-conferencing system, and DocuSign’s signature digital services are the glue that has held most of the world’s workforce to one another during the COVID-19 epidemic. The remarkable success of these businesses has prompted investors in venture capital (VC) and other investors to invest massive amounts of cash into SaaS companies in the hope of being in the early stages of the next biggest thing.
SaaS, which is software as a service, does not mean a specific kind of software but more to its business structure and process of delivery. SaaS providers offer access to software that is located in a cloud-based server and accessible on the internet by way of an annual or monthly subscription. Cloud-based software allows the providers to release upgrades and new features quickly, scale up distribution speedily, and free customers from the expense of hosting their software on servers. Subscriptions enable customers to spread their costs over a long period and provide predictable and steady income streams for SaaS businesses and their shareholders.
Mistakes to Avoid
One of the biggest mistakes is to target the wrong type of investor for your business’s stage of development. For instance, you were seeking VC funding with a minimal viable product (MVP) with no tangible market share. Other possible issues could be investing too much or not enough capital, using small amounts of money for unintended purposes, or, most importantly, offering too much equity at the beginning and letting go of what you’ve put into making. The problem of equity diluting is a significant concern for SaaS companies, as constant revenue allows access to other financing options, such as revenue-based loans, which are more advanced than other companies.
I’ve observed that most early-stage businesses would benefit from more information on what, when, and where to get capital. In this post, I present an overview of the funding landscape to help startup companies and their founders better understand the process. In the beginning, I outline the typical rounds of funding and the way they should be aligned with the level of growth. Then, I outline the different types of investors and identify the most open to every stage. I aim to give you a roadmap to help you identify the best financing for your business, regardless of the location it is in right now.
Targeting the Right Investors at Each Stage in the Fundraising Life Cycle
The quantity of capital available is increasing, and the number of investors is growing because private equity, hedge funds, and sovereign wealth funds are beginning to compete with traditional venture capital companies for investments in startup companies, especially private SaaS businesses. The revenue streams that are recurring and the low capital requirements of the SaaS business model make it more attractive to conventional institutional investors.
The level of interest from investors in the field has grown since 2010 and has also increased the complex nature of the SaaS market for fundraising. With a more extensive investor base and greater flexibility in the financing choices, a thorough understanding of the market and a well-thought-out plan on the best approach to this issue are more essential than ever.
Since the past few years, a rising quantity of young-stage investors (from accelerators and angels as well as VCs) have chosen to adopt the Social Impact approach, investing in businesses with a positive environmental and social impact and a financial gain. There is a belief that you must be a world-saving organization to draw this type of investment. Still, it’s worth examining whether your company falls under a specific impact-related directive. For SaaS businesses, this mandate can be as easy as expanding access to underserved geographical areas or demographics, such as a financial technology company with a product that improves economic access.
Stages of the Fundraising Life Cycle
Different kinds of investors are willing to offer funding for startups at various phases of the fundraising cycle. Knowing the position of your business in this process and what the investors can offer and demand to receive in return can help you understand and analyze the various options. The following graphic gives a broad overview of the different phases, but remember that the lines separating these general categories may be a bit fuzzy.
Seed Stage
The seed fund is the initial significant investment a company receives. At the very least, at this point, investors will require the existence of an MVP or prototype. Still, initial evidence of the product’s market fit and a beginning of traction on the market will assist your case. The more guarantees you can give that you can provide, the more likely investors are to lend capital to aid the further development of the product and the growth of your business.
At this stage, the most important metrics include:
The Total addressable market (TAM) is an indicator of growth potential.
Customer Acquisition Cost (CAC) Amount: The cost of acquiring new customers.
Customer long-term value (CLTV) (CLTV): The total value of customers during their time with the company.
The most frequently-repeated but essential mistake that I have seen businesses make at this point is estimating the wrong size of their TAM, as it can be described as one of the “make-or-break” metrics at this point. A mistake in the calculation will undermine the validity of any estimates for your business’s future growth and profits.
Angel Investors
It is a broad classification that includes people who invest relatively little in businesses still in the early stages. Investors from this group could invest in a specific project and form what is commonly known as an angel group. They are typically professionals who have earned money by launching successful companies or are experts in the same area as your company. In this case, they could be able to give you helpful advice as well as capital. However, angel investors may be wealthy people who are looking to invest in startups but aren’t able to provide prior experience or expertise in the business.
In addition, they will be keen to evaluate how significant your business’s market potential is, the viability of your business plan, the quality staff has, and also the possibility of being successful in securing future rounds of funding. Angel investment may take as equity or a convertible note, or even a straightforward arrangement for the future of capital ( SAFE). AngelList, F6S, Investor List, Gust, and Indiegogo are the best resources to find angel investors.
