Bootstrapping is challenging. I have huge respect for SaaS founders that manage to pull together the working capital to pull it off. Bootstrapping requires reliance on revenue the company generates. Therefore, owners must be disciplined with cash management and balancing revenue with expenses down to the dollar. Very few SaaS companies manage to bootstrap all the way.
This becomes even more challenging during times such as the current downturn, which has affected millions of SMBs and enterprises, across the US and globally
Does venture capital make business funding sense?
Bootstrapping is as non-dilutive as it gets for startup funding and working capital. But for SaaS founders, there’s a huge advantage in partnering with a good venture capitalist (VC) early on. Sure, you need startup funding, but money is the least important thing they bring. A good early-stage VC will help you with subsequent financing and growth capital, product-market fit, and setting up the company’s structure to enable scale.
Good news: VC money will help you to invest early on in product without having to worry so much on traction. This means that the desired “SaaS hockey stick” growth model can turn out steeper than when bootstrapping.
Bad news: It comes at a steep cost. Dilution. You have sold a large part of your business to an investor and acquired a “boss” in the process.
A good investor will help you to multiply the value of the pie, and your slice will get bigger, faster than if you kept the whole pie to yourself. The slice you sell through venture capital can become extremely valuable; that’s why the cost of raising VC money is the highest you will ever pay. To get the highest return, that money is best spent in product development, attracting “10x” talent, and acquiring customers.
But dilution is not always the solution.
Other necessary expenses, like investment in software, infrastructure and working capital can be covered with much cheaper sources: non-dilutive funding solutions.
Let’s look at the four most common non-dilutive funding solutions.
Dilution is tough and you decide you only want to dilute yourself a bit, so you choose the venture debt (or venture leasing) route. But the long venture debt process is eerily similar to getting VC capital. After several meetings and rounds of pitches, you get a term sheet. After negotiating terms for several weeks, you end up getting only 2-4 times your monthly recurring revenue (MRR). This doesn’t affect your runway much, but the price appears reasonable.
However, when you add legal fees, opening fees, and the equity warrant, venture debt is not only ineffective, it’s also very expensive. On top of that, there are senior claims to your assets in the event of a default—so neither you nor your investors will see a dollar until they are paid in full.
Factoring solves cash flow problems.
Let’s say you sell a service to a customer with net 30 payment terms. You invest time and talent, deploy the service, and then must wait 30 days to get paid. If you do this with too many customers, you can run out of cash before the money comes in. That’s why factoring was invented. A factoring company buys an issued invoice from you at a discount and gets paid (in full) by your customer.
You get most of the money quickly, which is great. But your customer suddenly gets an email from an unknown party saying that now, to pay for your services, they (customer) must redirect the funds to the factoring company. This may signal that you are running out of cash (big concern for your customers). Plus, you give up an ongoing opportunity to build relationships with your customers, and factoring feels like debt collection to them (yuck).
It’s also operationally burdensome, as you need to factor each invoice you issue-- not the best use of your time or your mind-space.
A revenue-based finance provider looks at your performance and loans you 2–4x your MRR. There’s a fixed return on those loans, so until they are paid in full, they take a fixed percentage from your monthly top line. Revenue-based financing is particularly well-suited to e-commerce companies. They get a sum of cash, invest it all in marketing, and collect at the end of the funnel. If you have long conversion cycles and unclear conversion metrics, it’s very hard to calculate how much you're going to pay. If your SaaSCo is growing fast, you end up paying a lot. Imagine paying back 2.5x in just a few months.
So, you don’t want to sell equity and you don’t want to take on debt. The other financing products are clearly not meant for SaaS. So what’s a SaaS founder to do? Why not look around and see what’s new?
SaaS revenue-based financing — Capchase 🚀
There’s something new on the block, and it’s not dilutive and it’s not debt-- it’s Capchase. 👋🏾
With Capchase, there’s no waiting for months to be paid by customers, and no cash flow gaps to bridge. No venture capital that eats up your equity, and no discounted payments on your invoices. Here're our solutions for SaaS companies:
- Providing business funding and growth capital that lets you keep your full stake in the business
- Leveraging your annual recurring revenue (ARR)
- Providing a year’s worth of growth capital within 48 hours
- Scaling with your ARR – so the faster you grow, the more upfront funding you can count on
You don’t need to renegotiate terms to get extensions. You don’t have to negotiate to get your customers to pay upfront. If your competitor forces upfront payment and you offer flexible payment terms, guess who’s getting the customer-- it won’t be the company that forces their customer to set aside a big lump of cash for a service they will use throughout a year-- it will be you.