Growing SaaS companies rely heavily on funding. Financial support is crucial to ensuring a company can grow and expand, explore new solutions, and implement innovative technologies. SaaS startups use cash from investors for everything from product development to sales and marketing strategies, hiring requirements, infrastructure, and expansion.
However, as the SaaS market continues to grow, with more than 30,000 companies worldwide, capturing the attention of investors and convincing them to back your brand can be complex. To succeed, you need the right combination of timing and strategy.
Here’s your guide to pursuing SaaS business funding.
The Challenges of Earning SaaS Funding
SaaS funding is a financing option specifically designed to assist companies offering software as a service solutions. The right funding can help companies to boost their revenue and unlock new opportunities. However, accessing SaaS funding does mean overcoming a few specific challenges.
For instance, in the SaaS landscape, the initial startup process can be very cash intensive, as businesses need to invest heavily in R&D to develop their product. Secondly, SaaS is a highly competitive landscape, with many companies working to attract the same target audience.
To successfully earn funding, you need to show investors how you’ll successfully ensure growth, providing insights into your sales, marketing, and development strategies. Additionally, investors supporting SaaS brands come in many different forms, to ensure you’re reaching out at the right time, with the correct data, you’ll need to do a lot of research.
Funding Options for SaaS Companies: The Basics
One of the first steps in successfully securing SaaS funding is knowing what kind of investor or supporter you’re going to attract. Just as you need to know your ideal customer persona when developing a go-to-market strategy, you also need a clear understanding of your target investors, so you can tailor your presentation to their priorities.
The most common types of funding for SaaS startups include:
- Venture capital funding: Venture capitalists offer access to large sums of money, often without the need to pay interest on the cash you access. They can even provide mentorship and networking opportunities to growing companies. However they do require something valuable in return, such as a share of your company. They may also limit your opportunities for experimentation, based on the rules and guidelines they set.
- Angel investors: Often individual investors, rather than firms or funds, angel investors are flexible, and don’t always require you to repay the money they offer. However, they do have high expectations from any SaaS business, you’ll need to demonstrate the clear benefits of your solutions, and validate its profitability. Angel investors can also take a long time to find.
- Revenue-based financing: With revenue-based financing, SaaS companies are required to share a percentage of their future revenue with investors in exchange for initial cash. You keep paying these investors a portion of your income until you pay off what you owe. However, you do need to provide proof of predictable future revenue. On the plus side, you retain full ownership and control over your business.
- Incubators and accelerators: Intended for seed-stage SaaS startups, incubators and investors help to support initial growth. They offer access to money, as well as mentorship and training opportunities. Notably, however, it can be difficult to get into accelerator and incubator programs, due to the high competition in the SaaS market.
Alongside all of these options, SaaS companies can also explore alternative funding options, such as crowdfunding platforms, bootstrapping, and government grants.
When to Pursue SaaS Funding: Mastering Timing
Once you know what kind of funding you’re going to pursue, you should have a slightly better idea of when to start looking for investors. For instance, incubators, and accelerators are generally intended for businesses in the early stages of a new product or service launch.
However, there are other factors that can influence the best time to connect with investors too. For instance, no matter what kind of funding you apply for, you’ll need to ensure you have:
- Clear evidence of market demand: All investors will want to see evidence that your SaaS company has the potential to earn revenue and ensure growth. Conducting market research, so you can demonstrate market demand, and show investors that your chosen niche isn’t already too saturated, can improve your chances of earning investment.
- A minimum viable product: You need an MVP (Minimum Viable Product) to give your investors something to fund. Even if you haven’t been able to develop your MVP yet, due to a lack of funding, you should be able to highlight what it will entail, how much funding you’ll need, and how you’ll be able to deliver value back to your investors.
- A clear need for funding: Most investors won’t be willing to invest in your product if they feel you could already access the finance you need yourself. If you’re not willing to invest in your solution, a funding partner won’t support you. Demonstrating that you have taken every appropriate effort to build your business, but now need extra support should boost your chances of earning investment.
Understanding the 5 Rounds of SaaS Funding
If you’re struggling to determine when you should request or pursue SaaS funding, understanding the different “rounds” of funding involved in this landscape can be helpful. Each step of the SaaS company growth journey is different, with unique funding requirements.
The five funding rounds you should be aware of include:
Pre-seed funding:
This is the type of funding that helps SaaS startups to get off the ground initially. It can help you develop a brand, proof of concept, or MVP version of your software.
Many startup founders “bootstrap” this stage, using their own money to get started. During this stage, venture capitalists and equity finance isn’t usually an option, as your business is still in its infancy, so you may need to consider angel investors or incubators.
Seed funding:
Investors in a seed funding stage help to turn the ideas your company has into reality. You can use seed funding to fund a product launch, conduct market research, finance staff hiring, and more.
Since you should already have proof of concept of MVP, you’ll be able to demonstrate the potential value of your business to a wider range of investors.
Series A funding:
During Series A funding, your company will have already started to generate a profit and should be looking to grow and expand.
Series A funding helps you to optimize existing processes and scale your operations. Tracking KPIs, turnover, and customer numbers can help you spot when you’re ready for Series A funding. Just remember, there will be a lot of companies competing for the same financing.
Series B funding:
Investors offer Series B funding to companies that have captured a strong customer base, and already earn a decent amount of revenue. Series B funding is intended to help you meet new levels of demand, whether it’s in new market segments, or your existing niche.
When your fundamental KPIs are promising, it could be a good time to start looking into Series B funding to build on your momentum.
Series C+ funding:
Finally, Series C and beyond funding rounds are intended for SaaS companies that have already achieved significant scale. If your company is on the path to higher growth, but you need a little extra support to move to the next stage, Series C funding could be an option.
You should already have a business valuation of around $100 million, making you less of a risky investment to larger investors.
How to Increase Your Chances of Earning SaaS Funding
As mentioned above, knowing when to pursue investors and funding options is just the first step in driving successful business growth. Many SaaS startups struggle to earn investment, even when they have excellent revenue potential, and unique products to offer.
Here are some quick tips to help boost your chances of SaaS funding success:
Select the Right Funding Option
Choosing the right option for SaaS funding depends on where you are in your projected growth journey, and your current goals. You’ll also need to consider your current assets, the amount of finance you need, and the level of risk you’re willing to take on.
For instance, if you’re in the early stages of your SaaS business journey, working with angel investors and accelerators can be an ideal option. If you’re moving towards periods of growth, it might be worth looking into venture capital and equity funding.
Know What Investors are Looking For
More than anything else, SaaS startups seeking funding need to ensure they understand what their investors are looking for. As mentioned above, different kinds of investors can require different things from the companies they support.
However, most investors will be looking for certain factors, such as a low churn rate (indicating you can retain plenty of customers), high MRR (Monthly recurring revenue growth), and a decent average revenue rate per customer. Some investors will also ask for insights into your customer acquisition costs, and business operational expenses.
Be Prepared
Finally, just as you need to be prepared to handle objections and follow up with opportunities in the sales landscape, you also need to be prepared when seeking out funding. Investors will always be more likely to support companies who can answer their questions and show a low level of risk.
Gather as much data as you can about your potential market size and revenue, your unique selling points compared to your competitors, and your existing assets. Make sure you’re ready to handle any objections an investor might have about working with you.
Pursuing SaaS Funding: The Right Way
Innovative SaaS companies need access to funding for a variety of reasons. Whether you’re just getting started and need help creating your product, or you’re moving into new regions and markets, extra funding will help you to achieve your business goals.
Knowing when to pursue funding, and what kind of investor relationship you should look for is crucial to boosting your chances of success. Learn more about how SaaS startups and other companies can improve their chances of growth with the right support, here at HSE. Our community environment is ideal for learning all about sales, marketing, and business growth.
