Introduction
Turning an idea into a successful SaaS company involves more than a big idea. It requires a skilled team, understanding of the market, targeted marketing, and most importantly, access to the correct type of SaaS funding.
Whether you’re an early-stage founder or an established entrepreneur in the SaaS space, choosing the right financing option can be difficult. The number of options is overwhelming. There are several elements that a SaaS business should consider while looking for funding sources.
This comprehensive SaaS Funding Guide will discuss
- The major funding options for startups
- The stages where you could raise financing
- The best time to secure funding
- The metrics all investors consider
- Which financing option is right for you
Let’s dive in!
Today’s Vast Array of Funding Options For SaaS
SaaS funding options are continuously evolving and diversifying, which is great news for startup founders, but can also be overwhelming due to the number of funding avenues. SaaS businesses have more financing options than ever before, but making the right choice is a key step towards sustainable, long-term business growth. Here are some of the best funding options for SaaS businesses:
- Angel Investors
This is one of the traditional SaaS funding options where independent or informal investors provide capital to startups, particularly in the early stages of their development. Angel investors finance your SaaS businesses in return for ownership equity, convertible debt, or a simple agreement for future equity (SAFE).
In general, angel investors make relatively small investments in early-stage businesses. However, they often bring more than just capital to the table. Angel investors also offer valuable advice, mentorship, and connections that can help startups grow and succeed. This funding option is ideal for startups that are moving away from bootstrapping or self-funding in the early stages. Companies that seek angel investors should be sure to have a unique value proposition, a strong management team, and a scalable business model that’s ready for growth.
- Incubators and Accelerators
Incubators provide support and resources to early-stage startups to help them grow. These are founder-focused investments and aim to help entrepreneurs:
- Refine their business ideas through workshops, one-on-one counseling, and business advice.
- Develop prototypes and power early-stage product foundations.
- Create a solid foundation for future growth through mentorships, learning opportunities, and networking opportunities.
Accelerators, like incubators, support early-stage startups. However, they operate on a more structured and time-limited basis. Accelerators aim to fast-track the growth of startups, preparing them for scale rapidly. Like incubators, accelerators can offer access to experienced founders, business advice and resources, and mentorship. Both incubators and accelerators take equity in exchange for the resources and assistance they offer.
- Venture Capital
Venture capitalists offer more money in comparison to other funding options, alongside valuable advice, mentorship, and networking opportunities. The world of venture capital has grown exponentially over the past decade and continues to rise. However, it comes at a steep cost – dilution that costs around 25% to 50% of equity, leading to loss of ownership and control for the Saas company founder.
Individual venture capital firms receive more than 1,000 proposals a year and are mostly interested in businesses that require an investment of at least $250,000.
– Money Crashers
VCs generally look for SaaS companies with proof of product and market fit that has generated strong initial traction in their target markets.
- Venture Debt
Venture debt, also known as venture financing, is a type of debt financing for high-growth, asset-light companies. It’s an excellent option for SaaS companies with solid cash flows and a clear path to profitability. Venture debt lenders can buy equity in your business anytime, which means that if things don’t go well, they can exit with a part of your equity.
For companies with a strong foundation, venture debt can be a strong choice.
- Revenue-based financing
This type of SaaS funding option provides a SaaS business with capital in exchange for a percentage of its future revenue. In this arrangement, companies must make regular payments to pay an investor's principal.
Revenue-based financing is similar to a loan. But instead of paying interest and principal, the business pays back a percentage of its revenue until the investment is repaid. Unlike traditional loans that require fixed monthly payments, revenue-based financing adjusts to your business flow, guaranteeing manageable repayments even if business challenges arise.
This option is gaining popularity over many SaaS funding types since it allows founders to access capital without giving up equity or taking on excessive debt. Revenue-based financing is a versatile and sustainable funding solution for SaaS businesses with predictable and steady revenue streams.
- Revenue-based financing with Capchase
If you’re a SaaS founder who doesn’t want to take on debt or dilute equity, there’s a non-dilutive, non-debt funding option for you – Capchase.
Capchase helps B2B SaaS companies secure investment capital, transforming their monthly subscriptions into upfront cash. Capchase simplifies revenue-based financing by allowing you to draw funds when needed, with repayment terms that make sense for your business.
The Capchase product suite includes two powerful SaaS financing tools:
- Capchase Grow: non-dilutive funding that scales with you, leveraging ARR to get upfront growth capital without sacrificing equity.
- Capchase Pay: offer flex payment terms to your customers and receive full ACV upfront so you have cash to power growth – no more cash flow gaps to bridge.
- Crowdfunding
Crowdfunding can potentially provide SaaS startups with capital acquisition and market validation. Through crowdfunding, SaaS founders can raise funds directly from consumers and supporters. Founders should remain mindful that successful crowdfunding campaigns can be a lot of work and may not always be successful. They require careful planning, an enticing pitch, and often, a compelling story or vision to attract backers.
- Equity Financing
With equity financing, investors or venture capital firms can become partners in your business. Besides providing capital to the founders, they also gain access to the SaaS startup’s critical company-building skills to help it grow. However, raising capital through equity financing is quite expensive and time-consuming. You must give up a considerable profit and more than half of your business ownership.
The Stages Of SaaS Funding
The stage you’re at in your business growth highly impacts your funding choice. Where does your business land?
- Pre-Seed
At this fundraising stage, venture capitalists or other equity finance sources are usually not an option. At this stage, the organization is still in its infancy and just getting started. In many situations, much of the business funding during this phase comes directly from founders, family, or friends.
The pre-seed funding stage is a make-or-break moment, but with the right funding, it can power startups to create a minimum viable product and reach a certain base level of operations.
- Seed
Seed funding can help bring a SaaS startup's ideas to life. This stage marks the first significant investment a SaaS company obtains. Funds raised at this stage can vary from a few thousand to several million dollars. The purpose of seed funding is to infuse the initial influx of capital into the business, supporting further product development and GTM efforts.
- Series A
Series A funding typically happens when you’ve already achieved positive recurring revenue and set yourself up for future business growth. Growth financing at this stage can help support:
- Process optimization
- Hiring and team development
- Market position and value proposition refinement
Securing Series A funding is challenging, as it requires establishing a valuation that reflects the company's value and pricing.
- Series B
Businesses with a sizable user base and substantial monthly revenue are eligible for Series B funding. When your monetization plan is effective, and your fundamental KPIs are promising, it's the ideal time to explore Series B funding. In most successful Series B investment rounds, both new and existing backers contribute additional funds.
Your investors will now try to provide you with a large cash infusion so that you can expand and reach new market segments and fulfill the demand levels in your industry.
- Series C
If you make it to Series C, it’s a great sign that your product, value, and market share are all doing well. At this point, many companies generally seek additional financing to scale for exponential growth at this stage. You might want to fund expansion into new geographies, develop new products, and grow vertically or horizontally. The typical Series C funding round is above $50 million.
Perfect Timing For Your SaaS Fund-Raising Moves
The ideal timing to raise SaaS funding depends on several factors, and it's not a one-size-fits-all approach. Raising funds early may be advantageous for a startup with a disruptive idea that requires significant initial research, development, and market validation investment. Comparatively, a company with a proven track record of revenue generation and market traction may choose to raise funds at Series B, C, or later rounds.
You should consider raising SaaS capital at a stage when you need additional funding to execute key growth plans or achieve your business objectives.
Remember: Fundraising is a continuous process, not a one-time event. You’re likely to go through several financing rounds before your company becomes a self-sustaining enterprise.
SaaS Growth Metrics That Draw Investors
Whether you’re looking to raise funds through VCs, angel investors, or even revenue-based financing, you must focus on the metrics investors look for before investing in your SaaS company.
- Monthly Recurring Revenue (MRR): This metric indicates revenue growth for SaaS organizations. It's a crucial statistic. Companies with steady and predictable MRR growth over time are highly prized by investors.
- Annual Recurring Revenue (ARR): ARR provides a longer-term, more comprehensive picture of the company's prospective revenue. Investors prefer companies with high customer retention and strong annual revenue growth.
- Average revenue per user (ARPU): ARPU measures how much your customer base is contributing to your revenue on average. A growing ARPU is indicative of a growing business.
- Customer Acquisition Cost (CAC): CAC measures the cost of gaining new customers. CAC is a crucial indicator to assess how well a business does its sales and marketing. Investors look out for companies with a low CAC relative to their customer lifetime value. See how to lower CAC with Capchase.
- Churn rate: Churn refers to the rate at which customers discontinue using a company's products or services. Low customer turnover rates indicate a company's strong product-market fit and long-term customer retention.
Which Funding Option is Right for You?
There's no definitive answer to this question. Choosing the right funding source depends upon several factors. To discover the financing option that suits you the best, consider answering the below questions:
- What stage is your business in?
- How much capital do you require?
- Are you willing to dilute equity?
- How much control are you ready to give up?
- What's your risk tolerance?
- What's your timeline for funding?
- Are you ready to provide collateral?
- What's your creditworthiness?
If you have long conversion cycles, don't want to dilute equity, don't prefer high-interest debt, and need funds quickly and easily, non-dilutive funding from Capchase could be the ideal choice for your company.
Capchase offers revenue-based financing to qualifying businesses in under 48 hours. With Capchase, you needn’t worry about the constraints of withdrawing capital and growing the amount of funding you have while you scale ARR.
Our platform uses leading-edge tech to determine the suitable threshold for every borrower. The evaluation criteria include growth goals, anticipated revenue, and past business performance. Because of all the due diligence associated with this discovery, Capchase will never overextend on capital or offer hard-to-repay terms. Our goal is to work with you to power growth, not against you.
If you’re wondering if your business is eligible, check out our basic eligibility requirements:
- Three or more months of runway on hand
- $250,000–$1 million annual recurring revenue (ARR)
- Six months of available revenue history
Final Thoughts
Growth financing serves as the essential companion for every stage of your business. Whether you're just lifting off, launching your product, or expanding into different demographics – each funding option has different pros and cons at various growth milestones.
Remember raising capital can be tedious, even for leading SaaS companies. Take the time to understand the startup fundraising landscape before getting started. We hope that this SaaS funding guide will help you formulate an effective strategy before reaching out to investors and financing partners.
Want to find the right moment to raise funds? Try our runway calculator to see how Capchase can help fuel your growth.
FAQs
1. What do VCs look for when funding SaaS companies?
Venture capitalists scrutinize the below metrics when funding SaaS companies:
- Recurring revenue and growth: MRR and ARR
- Customer acquisition costs (CAC)
- Lifetime value of your customer (LTV)
- Churn rate
2. What is the right time to start fundraising for my SaaS?
Consider raising SaaS capital when you need resources to execute your growth further. Typically, the right time for every SaaS company differs. Consider the market conditions, growth stage, and business objectives before raising funds for your SaaS company.
