How SaaS founders can extend their runway and increase their VC negotiating power using non dilutive capital

Afshan Qureshi
Afshan Qureshi
Content Marketing Manager
Posted on
April 20, 2022
min read
How SaaS founders can extend their runway and increase their VC negotiating power using non dilutive capital

Raising venture capital (VC) funding is an almost essential part of building a profitable SaaS startup; even if you bootstrap or raise angel funding, there comes a point when raising a serious amount of money to allow you to move toward profitability is essential.

The process of obtaining VC funding isn’t easy; on average, it takes 60-80 days to close a deal once the VC company has the business plan. In that time, huge amounts of paperwork have to pass back-and-forth as the VC company does its due diligence, and you negotiate a term sheet that you both can agree on.

So, is this cumbersome and drawn-out process one that founders just have to accept as part of the process of moving to profitability? While the generally accepted advice is that startups have to wait until they have pushed through Series A and maybe even Series B funding to look at non dilutive options like bank debt, there are a number of ways that SaaS companies in particular can extend their runway in a non dilutive manner. By doing so, they can also put themselves in a stronger negotiating position when it comes to closing the next round of VC funding.

Why your runway is so important - and what else to consider

Understanding your runway when negotiating for any kind of funding is essential. For SaaS businesses, your burn rate can often be easier to understand than for commerce companies, because of the nature of your recurring revenue. The part of the burn rate that relates to R&D, product creation, and other unreliable costs are the areas that you should be funding with your diluted VC funding. 

SaaS businesses often have a separate cashflow problem to burn rate, however. The net burn rate may look acceptable due to the amount of revenue coming in. However, if there is a gap between when you need to spend money and when you receive income (which can often happen when invoices are not paid as soon as they are issued) then the burn rate over a quarter or even a month may be less relevant to your ability to stay afloat than your cashflow. Using VC funding to help with working capital is a quick way to ‘waste’ your diluted capital when there are better options available.

Delay your next round of funding by raising more the first time

On average, startups go 22 months between seed funding and Series A, 24 months between Series A funding and Series B, and 27 months between Series B funding and Series C, according to Fundz.

It makes sense that founders, faced with the idea of having to go through the difficult process of raising VC funding again less than 2 years later, would look to extend the runway in any way they can. The amounts raised are increasing drastically each year; the mean Series A funding round in 2021 was $2.2M, 30% more than in 2020. And by mid-March 2022, the mean Series A funding was already at $26.3M.

On the surface, raising more capital upfront seems like a good way to extend your runway. But because of the dilutive nature of VC funding, this can often mean giving away more of the company as a result. While giving up equity can be worth it when used intentionally, it’s a different matter if a founder feels they have no option but to do so just to keep the potential of the business afloat.

Use non dilutive financing to extend the runway of existing VC funding

If you don’t want to spend equity financing on a cash flow issue, then it’s time to start looking at alternative financing. Banks often won’t lend to early SaaS businesses who are light on assets, despite the fact they have consistent recurring revenue to prove their problem really is just a cashflow one.

That means you might have to look for a lender who understands the SaaS landscape and the metrics that are involved in having a solid business model. 

Capchase works closely with SaaS and recurring revenue businesses, so we’re able to provide financing based on your annual recurring revenue (ARR). By taking a percentage of your ARR, for example, you can fund sales and marketing activities to grow your revenue for the next 3 months.

That specific extension of your runway not only keeps you from needing to raise another VC round so soon, it also can put you in a position to negotiate with a higher ARR when you do so. 

Another huge benefit of working with Capchase is the speed of financing. We connect with your banking and accounting services to obtain all the information we need to provide an offer within days. Once you’re approved, you can start drawing down capital the next day - or wait until you need it and not pay interest in the meantime.

Programmatic financing means you don’t need to focus on a large lump sum

VC funding is all about obtaining a large amount of money to cover a long period of time - often 18 months or more of runway. You’re paying for all of that money with an equity stake in your business. Which means you have to be confident that your business will need the entire amount; the last thing you want is to have it sitting in your bank account for months or even years.

With programmatic financing, we offer companies a specific amount of money (based on ARR) with the flexibility to draw down whenever you need it and only pay for it while you’re using it. This can be a great way to fund cash flow issues or to finance recurring costs (like sales and marketing) on an as-needed basis. Because the amount financed is not a set amount but a percentage of ARR, this pool of available money grows with the business. Unlike lengthy negotiations with VCs or banks, our financing automatically grows with you as you grow in ARR.

This allows you to focus on your growth and put your business in a healthy place when you do decide that another round of VC funding is appropriate.

Financing that is specifically tailored to SaaS businesses is relatively new, and therefore some founders are unsure of how to best use programmatic financing in tandem with their VC money. We have a team of Growth Advisors who will work with you directly to analyze your business health, create the most appropriate (flexible) terms for funding for your business, and support you as you scale and grow your ARR.

“I have never met such a supportive group of people as those who work with us at Capchase. We are so happy with the team and the non-dilutive financing they’ve provided us.”
Maria Gothlin
CRO, Soundtrack Your Brand

The number one reason that startups fail is that they run out of cash tied with a failure to raise new capital. As a SaaS founder, balancing the timing of rounds of equity financing, erratic working capital during periods of fast growth, and persuading traditional lenders that you’re business is stable enough for non-dilutive financing, can be tough.

Learn how much you could extend your runway with Capchase through our runway calculator.