In a previous post, we described how much VC money SaaSCo founders should raise for working capital or growth capital, and how they might use that money to grow their business. Like most things related to building a SaaSCo, the answer to both is largely about timing.
Just-in-time financing for SaaS
When you're just beginning to build your business, venture capital equity or debt is your best bet to get the funding you need. But as your business grows, it’s important to realize there are less costly, more efficient funding options. Think of venture capital funding rounds as the building blocks of a more comprehensive, dynamic financing strategy that, in later stages, should include just-in-time funding.
Before we describe what just-in-time financing is,, let’s first review the 4main SaaS financing options available to SaaS company founders.
1. Static funding, or upfront capital
With static funding, the goal is to get as much cash as you possibly can during discrete funding events. This financing model provides one large sum of upfront cash per funding event. The problem is, you usually don’t actually need it all, at least not right away. And whether it be through interest or by giving away shares of your company, you will pay for the cash you don’t need.
2. Venture equity
This is the most familiar version of financing for SaaS companies, yet it is also the most elusive and the most costly. If your company doesn’t show promise of becoming a unicorn, you’re unlikely to even get a meeting with a VC, let alone walk away with a term sheet. But if you do somehow pull off a round of equity funding, you will do so at the expense of ownership in your business.
The dilution required to secure VC funding also compounds over multiple rounds. If you give away 10% to 20% of your equity each round, by the time you reach an exit 7 or 10 years down the road, the average team of founders owns less than 15% of their company. Therefore, while equity funding is a good option at the very beginning stages of your business, it is not the only option and it will end up costing you dearly if deployed long-term.
3. Venture debt
This option will spare you dilution but will cost you cold, hard cash, usually in the form of 6% to 12% interest. The warrants and transaction costs from venture debt will also add up fast, and your lender will impose a number of covenants and operational constraints on your business. And, to throw salt in your interest-paying wounds, if you experiencesome form of liquidation event such as an acquisition, your venture debt will get paid first, potentially leaving you and other owners of the company with nothing.
Overall, it’s better to avoid venture debt whenever possible and find a debt or equity financing alternative.
4. Merchant cash advance
This model is based on your monthly recurring revenue (MRR) and it pays in recurring installments. Getting a merchant cash advance means finding a lending institution willing to front the MRR (usually 2x to 4x) in return for a percentage of your net monthly revenue. This model can work well for e-commerce businesses; but for SaaS companies with long conversion cycles and fluctuating conversion metrics, it’s very hard to calculate how much this type of SaaS financing will cost you. And if your company is rapidly growing, the more revenue you makethe more you will pay.
When to use which type of funding for startup financing or growth capital
At Capchase, we recommend SaaS founders pursue an initial round of VC funding as startup funding to get the business off the ground. Call this pre-product/market fit (PMF). But it is imperative that you only obtain as much capital as you truly need at that stage of your business. Once you achieve PMF and have that oh-so-valuable recurring revenue on the books, it’s time to tap into that, when you need it. This is programmatic funding—also called just-in-time financing—and it’s especially useful to leverage this equity financing alternative as you continue to grow.
Programmatic funding: only the cash you need, as you need it
Unlike static funding, programmatic funding happens in recurring installments and is designed to align to the dynamic nature of your business. It requires exceptional algorithmic modeling and data analysis. However, if done correctly, this on-demand business funding strategy can lead your SaaS company to a much stronger financial position.
When to use each type of funding for startup financing or growth capital
At Capchase, we recommend SaaS founders pursue an initial round of VC funding to get their business off the ground during thepre-product/market fit stage. But it is imperative that you only obtain as much capital as you truly need at this stage of your business’s growth. Once you achieve product market fit (PMF) and have that oh-so-valuable recurring revenue on the books, it’s time to expand to new forms of financing. This is where programmatic funding—also called just-in-time funding—comes in.It’s especially useful to leverage this equity financing alternative as you continue to grow.
Programmatic funding aka just-in-time financing: only the cash you need, as you need it
Unlike static funding, just-in-time funding happens in recurring installments and is designed to align to the dynamic nature of your business. It requires exceptional algorithmic modeling and data analysis. If done correctly, this on-demand business funding strategy can lead your SaaS company to a much stronger financial position.
Just-in-time financing from Capchase
With the Capchase model of programmatic funding, or just-in-time funding, we help you determine exactly how much capital you need.. Then the system deploys that funding only when you need it.
Benefits of our just-in-time funding include:
- Unlike revenue-based financing, which charges a percent off your top line each month, Capchase charges a fixed percentage on each contract you finance.
- With a fixed percentage fee and a fixed duration for repayment, you won’t get dinged for growing your business as you might with the revenue-based financing model.
- Compared to static funding’s typical ROI of 1.5x to 3x the cost of capital, your ROI with programmatic funding is usually between 8x and 11x. That’s because with programmatic funding, every dollar you deploy is being used to generate returns.
- Programmatic funding results in reduced dilution when this strategy is layered atop the initial round of venture capital/equity funding (more below).
- Programmatic funding is automated, so it’s efficient, streamlined, and easy.
- Get working capital on demand to bridge cash flow gaps, or to use for marketing or growth funding..
- Say goodbye to long receivables time lines, pesky credit applications, toe-tapping vendors or partners on the payables end, and cookie cutter financial solutions.
- To prescribe programmatic funding, Capchase reads your business model and has a clear understanding of your cash inflows and outflows. As it prescribes the right amount of working capital needed month by month, every SaaS financing dollar is put to work immediately.
An alternative funding strategy as dynamic as your business
Since just-in-time funding only works once you have signed customer contracts and committed recurring revenue on the books, you will initially need to get capital from another source until that happens. This is why an early VC round for startup funding makes sense to invest in PMF, build your team, and acquire those initial customers.
But once your business is post-PMF and experiencing high growth, your business funding needs and options change. Rather than go back for more rounds of VC funding for SaaS financing—which will cost you more cash or further dilute your ownership–programmatic funding is an ideal choice.
With this combined strategy to funding, founders typically see about half the dilution as those who pursue a pure equity approach. What’s more, your stronger financial metrics typically mean a much higher valuation down the road because you’ve spared yourself dilution and you’ve grown more efficiently.
The bottom line is that your SaaS business is dynamic and recurring by nature. You need a business funding strategy that matches it.
Ready to learn what a just-in-time funding strategy can do for your SaaS business? Join the non-dilution revolution with Capchase today. Set up an account and let’s get started!
