When you set up a SaaS business, it is not technology that will be your bigger concern; it will be funding. How does one decide what kind of funding they need and at what juncture? How does one find investors and what kind so that the finding is done right? Those are the questions that could keep you up at night and rightly so. Nothing good comes without research. And it is research that is your homework before you can get the formula right. The struggle is real, I can tell you that.
So, I am going to help you do the homework and focus on three very important aspects here, that are, one: what kind of SaaS funding you can choose from; two: when do you need funding; three: what kind of investors can help you at what stage.
Let’s roll then.
What Kind of Saas Funding can your Choose from?
One may become a victim to the fallacy that all kinds of SaaS businesses to could go with any kind of funding. So, pull up before that though tempts you and learn how all fundings are different and how different criteria decide what finding is apt for your Saas company.
1. Venture Capitalist Funding
This concept of funding happens to be the most attractive source of SaaS business finding. If you succeed in procuring Vc funding, it implies that you have great growth potential.
Fledgling companies are the ones that venture capital is meant to cater to. When a venture capital firm decides to fund you, it will be based on either how much future potential they see in you or if you have a telling track record of recent business growth. It means a promising, larger, better payout for the venture capitalists later.
Nevertheless, it is likely that you cede a good stake to the investors, and subsequently a fair amount of control too. The expectations on RIO are high and there is no room for failure.
2. Incubator/Accelerator Funding
As the name suggests, incubators and accelerators work to boost the growth of startups that are a very early stage (pre-seed). There will be an investment in your business not only in terms of finance, but also in terms of assistance like training, experienced advice, expertise, and a great network. In short, there will be almost everything you need in your early stages.
While incubators will lend founders the required help for an indefinite period of time until the desired growth has been achieved, accelerators will focus around “cohorts” or teams with funding opportunities for a fixed term. Accelerators, however, are more structured than open-ended (unlike incubators).
3. Revenue-Based Finance & MRR Lines
This kind of funding focuses on gradual growth that helps in retaining a better control over operations. Such finding is released based on the assessment business’s accounts to determine whether it will bring consistent revenues. And the amount of loan and the rate of interest on the loan will be calculated on the basis of the business’s monthly recurring revenue (MRR). This loan is tied to overall revenue.
It is better because for a SaaS business is very unlikely to have its assets calculated in numbers and to show large profits as a young company. Revenue-based finance or MRR line can be the best direct-funding model for SaaS businesses. You don’t lose any ownership but you only get financial assistance.
4. Angel Investor Funding
An angel investor is an individual rather than a firm, and is considered ideal for startups that are looking for a big investment (especially at the seed stage).
It is usually an effective kind of investment when company’s goal and the angel investor’s priorities and expertise are complementing. There is lesser transfer of ownership involved more often than not because the angel investor’s stake will usually be in the shape of ownership equity or convertible debt.
Now that you already know what your major choices are in regards to the kinds of funding, let’s move ahead to know the right time to get funded.
When Do you Need Funding?
It may sound weird at first, but the fact is that there is no ideal time during the growth curve. Whenever you feel you are ready for the funding is perhaps the right time for funding.
Waiting too long for funding can result in very sluggish growth and sometimes none at all. The need for funding should be, well, foreseen. Waiting to a point where you can no longer progress without finding can be adverse, in fact, fatal. From retarded growth to being eaten up by a competitor, anything could spell your doom.
However, too much too soon isn’t a great thing either. An unclear strategy but more than ample funds could lead to some serious situations like overwhelming rates of interest and expectations from investors and super costly product that doesn’t yield real revenue.
So, when do you invest? Investment consultation can be a great idea. If you are not keen on consultation yet, take note that once you are close to developing your SaaS technology, product idea/iteration/development and/or infrastructure as much as you could, and are about to reach a point where no more will be possible without the extra investment, it is time to start seeking funding. Be prepared with foresight.
What Kind of Investors can Help you?
The kind of investor you should choose actually depends on the stage of business you are in. Here are the funding stages that you need to know of.
Idea: So, it’s just the idea as of now; the idea of a product. That is all. There’s no revenue. All you are focused on right now is the pain points of the target audience and the solutions to them. No investors are involved at this stage.
Pre-seed: If your research is done and you are ready to develop a product, you are in the pre-seed stage. This is where you need funding. It is usually so that friends and family becomes your early stage investors, but well, you could find incubators or accelerators to help you. If you are lucky, and have a great startup idea, you may even find a good angel investor.
Seed: You’re ready with a POc (Proof of Concept) or even an MVP (Minimum Viable Product). You already have the feedback from initial users but you may or may not be earning a revenue. But you need to develop a full product. So, this is a stage where you could interest an angel investors or even early venture capitalist.
Round A: By this time, you have developed a decent product which has also gained some traction in the market. It is possible that you have some inflow of revenue now. At this stage, you should be looking at venture capitalists since they are likely to find this as a good stage for investment.
Round B: For funding at this stage, you should be looking venture capitalist funding since your funding needs will be high up. And it will be easier to get since will have been generating revenue by now and the product should have gained better traction.
Round C: You’re there, established in the market. You shouldn’t be needing any sort of new funding now.
So, ready to get funded?