Originally published on 3/22/21
You’re a SaaS founder and you’ve just raised startup funding or growth capital from a reputable VC. We tip our hats to you—that is no small feat in any times, and particularly in the lingering COVID environment.
As you discovered (or are about to, if you are embarking on a VC pursuit), raising venture capital takes a lot of time and attention. The equity funding process can take many months to complete (not particularly a form of founder-friendly SaaS financing when you’re building a team, working out your product rollout, and more). And with it, comes the issue of dilutive startup funding. UGH.
VCs like the SaaS vertical for startup financing. SaaS companies offer long-term, predictable recurring revenue (who doesn’t love that?). They make decisions based on your business model, sales and marketing plan, and exit strategy.
On the SaaS founder side of the fundraising process, you make two important decisions:
Let’s unpack each of those in turn. We will leave the choice of your VC investor(s) aside — it’s easier to just work with hard numbers.
Typically, the decision of how much venture capital to raise is driven by your P&L /cash flow model and things you want to prove out—or hypotheses to test—by the time next fundraise comes around (e.g., series B if you just raised A). Here’s how a VC funding transaction may go, factoring in the “how much” and the “what for” elements.
Let’s also assume:
What if I told you that instead of $6.5M, you could afford to raise only half the amount and keep about 8% of your company as a result? Sounds pretty good, right?
As a SaaS founder, part of the reason for the first VC raise was to close the infamous cash gap Miguel wrote about in our previous blog post. This cash flow deficit resulted from cash lagging product investments and customer acquisition at your SaaSCo. Effectively, half of the dilution came about because of inability to recycle cash locked up in your business.
What’s the alternative funding source? Your recurring revenue. Your SaaS could be (gradually) unlocking up to $3M in cash from your monthly and quarterly paying customers. This amount could grow further to $5M+ assuming you keep on growing at a healthy rate.
Breaking it down: In practice, your VC investors give you $3M which means around seven months of runway. The other seven months of runway comes from unlocking cash tied up in your operations, while you keep 8% of the business. At Capchase, we enable SaaS founders to extend the runway by up to 50–60%. (And we hope you don’t have to fundraise from VCs again.)
You are working hard to grow your SaaS company into a large and successful business. You need growth capital funding; but selling equity to fund your business is the most expensive type of financing. Therefore, you should only use it to invest in true growth engines of your SaaSCo—your talented team that will turbocharge your business many times over in two areas:
Depending on the type of SaaS product you are selling, the payback can vary from a few months to several years when calculated on gross/contribution margin basis. This is before accounting for payment terms and the often-yawning gap between bookings and cash. Time for another funding solution.
Unfortunately, conventional thinking is to just go for that next VC raise. And many SaaS founders lack appropriate alternative funding options. Until now, this has meant that founders sold more of their equity to fund … working capital. (Can you see how this is not a founder-friendly option?)
There’s a better way to get additional startup funding or growth capital for your SaaSco.
With Capchase, you get to focus your VC dollars on the stuff that truly matters for your SaaS company’s success—developing amazing products and bringing them to market.
When it’s time for SaaS founders to raise more money, you may decide to go for round B or C and raise more venture capital. However, SaaS founders have an alternative to dilutive equity funding. With Capchase, you can support your raise with our non-dilutive SaaS funding solution.
It takes some time for us to get to know your business and fully scale into a high addressable multiple of ARR. We advise founders to get in touch right after they raise equity, or even better, think of Capchase as complementary to their VC funding round. The sooner we start working with your SaaSCo, the faster we can scale and the better the cost of financing we can propose.
Don’t take our word for it; read our customer stories to learn how Capchase is helping SaaS founders fund their companies with non-dilutive financing. Come join our non-dilutive revolution.
Learn more about programmatic fund: Capchase.com/Grow