Funding is a vital but often quite challenging part of the growth and development of any SaaS startup.
There’s a number of questions you need to answer:
- When is a good time to start looking for capital?
- What kind of investment is right for your SaaS?
- HOW do you get capital?
- Should you be raising capital at all?
There is no universal answer to this last question. Whether you should raise money or not depends on what you have at the moment. Getting money from other people means saying goodbye to independence and answering to those people. At the very least, it means that the journey you have originally planned for your SaaS in terms of growth and revenue is going to change. But the fact is, a good investor will provide valuable guidance and help you avoid mistakes.
So, if you have decided to start looking for capital, the first step is to prepare.
Prepare Your SaaS for Funding
Raising money for your SaaS can be quite cumbersome and intimidating. It’s not easy to get money, especially from venture capital companies. That is why you need to prepare and position your SaaS startup for funding.
1. Determine Your Target Funders
Before you start looking for capital providers, take some time to do research. Who provides the kind of funding you’re looking for? Do they provide capital for SaaS startups? Which one is the most likely to fund your company? What are their requirements?
2. Prepare Your Documentation
Make sure that all your documentation is in order: your business plan, cash flow projections, plus a brief presentation for prospective funders. Your financial and legal documentation should also be prepared and updated, including the capitalization table, bylaws, and articles of incorporation. Have all the stats for your unit economics available, including CLTV (customer lifetime value) and CAC (customer acquisition costs). Check with a legal counsel to ensure that everything is in good standing.
3. Think About the Amount of Capital You Need
Think about how much capital you need and how you will use it: will you invest it for developing new features, organizing marketing events, expanding, hiring new employees…
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4. Be Specific on How the Capital Will Help Your SaaS Grow
Even though there are different types of investors, they all have a common fear- underperforming. That’s why you need to persuade them that you will be making good decisions with their money. Investors want to know how their money is going to help your SaaS grow. Are you going to focus on hiring top talent? Are you going to invest most of it in marketing? Have a detailed plan in place to demonstrate this.
Different Types of SaaS Startup Funding
VC (Venture Capital) – Is It Right for Your Saas?
Venture Capital funding takes quite a lot of work. Expect to have more than thirty meetings before finding an investor who’s interested in getting involved in your SaaS startup. Be prepared to answer the following questions
- Why should they finance your SaaS?
- Who are your main competitors?
- Why did you choose them to invest in your SaaS?
- What is your growth plan and how are you going to realize it?
- How much capital do you need to execute the plan?
Bear in mind that venture funding comes with an expectancy that your business and team will grow substantially and that their investment will increase by ten times in value. Investors will want to look at specific metrics to check whether you’ve succeeded in making your SaaS more valuable (and, as a result, enabled them to get substantial gains).
Incubators, Angels, and Revenue-Based Financing
If your startup is at an early stage, consider angels over venture capital. Angel investors are not only more likely to invest at earlier stages, but they also tend to be personally involved and will help you network quickly, which will provide you with an opportunity for mentorship. Incubators and accelerator programs also provide training and mentorship and will include you in their network.
RBF (Revenue-Based Financing) is a model where an investor injects capital into your business in return for a percentage of ongoing gross revenues with a monthly markup. In this case, you’re not giving away any equity and once you fully repay the loan, the business stays in your hands.
What to Avoid When Raising Funds
1. Mind the Timing
Raising funds before your SaaS has launched is not a good idea because it leaves you no room to learn and iterate. Dedicate this time to build relationships with investors and gather the necessary information about the investment process.
On the other hand, waiting for too long before raising money is also bad. This will put you in a distressed position and you probably won’t be happy with the deals available.
2. Set Realistic Expectations
If your list of potential investors is too long, they might question your targeting abilities. That doesn’t mean you should target only 2 or 3 people. Settle somewhere between 30 and 50.
Make sure that your investment time window isn’t too small in order to avoid losing steam.
Be careful not to overestimate your SaaS company’s value because you’ll narrow your market.
3. Know When to Get Comfortable
Constant renegotiating can cause deal fatigue, i.e. make the potential investor feel frustrated and irritated. If you can’t get comfortable with a deal, your investor will most likely start doubting their investment.
Be aware that raising money requires a lot of work and is time-consuming. It will most likely put you under lots of stress, especially after facing inevitable rejections. But who said getting rich was easy? The good news is, there’s a number of financing options out there so, if you can dream up a new financing structure, you can probably make it happen.