Find everything involved with SaaS funding, from the types of funding to navigating the investment process (with first-hand lessons and insight from SaaS VCs).
Securing SaaS funding can be exciting but nerve-racking – understandably, it may be the starting point for significant growth.
Whether it’s deciding which type of funding to pursue, knowing where to find investors, or even navigating the whole process, it’s bound to make anyone feel uneasy.
Securing SaaS funding is one of the quickest ways to scale your business. Regardless of which element you’re unsure of, we’ve broken it down into sections so you can follow along and learn more.
In this article:
- Types of SaaS funding
- Other ways you can fund your SaaS business
- When should you start looking for SaaS funding
- The SaaS funding rounds explained
- Navigating the investment process
- What do investors look for in a SaaS startup
Types of SaaS funding
Angel investors
An angel investor provides funding to businesses, usually in exchange for ownership equity or royalties. Typically, angel investors are people who have found business success before or are looking for business investments as a side venture.
Angel networks are popular, too. These groups consist of 10 people or more, and as a group, they decide which businesses to invest in.
Pros:
- No repayment is required. Angel investors focus on ownership stakes or royalties.
- More likely to take risks. Angels are less risk-averse and are aware of the possibilities.
- Support and guidance. Angels are usually seasoned investors or entrepreneurs so they have insights, contacts, and guidance that can help your business grow.
Cons:
- Loss in equity. You may have to lose equity in your company, which equates to a loss of full control. Investors usually seek between 10% – 25% in exchange for funding.
- High expectations. Angel investors will want to see a significant return on their investment. After all, they’re in business to earn money.
- Not as clear-cut. Angel investments are much less formal and an official agreement might not be decided on in writing.
Venture capital
A venture capitalist (VC) is a private investor who provides funding to companies with unique products that have a wide appeal.
They invest in businesses in exchange for an equity stake. The companies they choose tend to have huge growth potential but are too risky for traditional banks to lend money to.
Pros:
- Less risk averse than traditional methods.
- Like angel investors, venture capitalists don’t require fixed repayments.
- Networking. The opportunities to learn from experienced people are endless when a venture capitalist gets involved.
Cons:
- High pressure. Venture capitalists demand quick growth and have huge expectations after investing their time and money.
- A lot of focus on growth. Venture capitalists can pile on the pressure to make decisions you might not fully want to make as they’re mostly concerned with growth projections.
- Giving up equity. Again, venture capitalists are similar to angel investors in the sense that they usually invest in exchange for equity. This means you’ll be giving up some stake in the company.
Incubators and accelerators
Incubators and accelerators are designed for early fundraising rounds and are heavily focused on mentorship. They provide support and entrepreneurial training through one-to-ones with a mentor, workshops, and group classes.
Usually, an incubator or accelerator program will include a group of startups or individuals with keen ideas so a community-like feeling naturally forms.
Pros:
- Mentorship. Founders have access to knowledgeable mentors in business who are there to answer questions and provide guidance.
- Structured program. These are set-up programs that have extensive itineraries covering workshops, seminars, and boot camps.
- Creditability. Getting accepted into a well-known program can add credibility to your SaaS startup and get your name out there.
Cons:
- Time commitment. This method isn’t just funding-related; it’s about building your skills and network, so the programs can be time-consuming.
- Competitive programs. There’s only a set number of opportunities in these programs and once you’re in you’ll have to compete for attention.
- Equity. For giving their support, this type of funding requires an equity stake in the company.
Revenue-based financing
Revenue-based financing is a growth investment structure with different mechanics, provisions, and return profiles than either equity or traditional lending products. It’s a debt instrument that is paid back by sharing in a company’s revenue.
In an interview with Miguel Fernández, the CEO and co-founder of Capchase explained how revenue-based financing means you can really plan ahead.
“You’re going to know exactly how much you’re gonna be paying back and how much money you can draw to continue to invest.”
Pros:
- Retain more control. Revenue-based financing investors don’t usually take equity, so there’s no ownership dilution for founders.
- No large payments. The monthly repayments are based on a percentage of the monthly revenue so it’s not an overwhelming lump sum amount.
- Quicker than other methods. RBF investors can provide funding in as little as four weeks.
Cons:
- Revenue is required. This makes revenue-based financing an impossible option for pre-revenue start-ups.
- Smaller amounts of funding. Other investors are more well-known for handing out huge piles of cash, while that’s not quite the case for revenue-based investing.
- Monthly payments. Unlike angel investors and venture capitalists, this form of funding requires money to be repaid rather than equities.
Other ways you can fund your SaaS business
Bootstrapping
Bootstrapping is where the business is funded with your own money and the income from the company’s sales. Sometimes, money from family and friends can be included in that too.
It means no venture capital investment or external fundraising has taken place.
Pros:
- Complete control. There will be no external investors or lenders looking to make decisions.
- Equity retention. You don’t have to give up any equity, so founders can retain 100% ownership.
- Quicker to make decisions. With no external stakeholders to consult, you can make decisions quickly without needing approval.
Cons:
- Lack of resources. Due to limited funds, the ability to invest in growth, talent acquisition, and technology can take longer.
- Personal financial risk. When bootstrapping, entrepreneurs could have to use their savings or take on personal debt.
- No network. Bootstrapping can sometimes feel lonely as there aren’t invested mentors to provide strategic advice.
Crowdfunding
Crowdfunding is fundraising raised by a large number of individuals, usually through an online platform – like JustGiving, GoFundMe, and Kickstarter.
This is where members of the public can support your goals and business.
Pros:
- Access to capital. There’s much wider possibilities as it’s open to all people.
- Exposure. This is a public method of raising money, with some campaigns able to gain media interest.
- Customer engagement. Customers can contribute to the fundraising.
Cons:
- Uncertainty. There’s no knowing if you’ll reach the fundraising goal.
- Public facing. When crowdfunding, ideas have to be shared with the public including business ideas and how you plan to spend the financial resources.
- Time-consuming. It takes time and commitment to prepare, launch, and manage a crowdfunding campaign.
When should you start looking for SaaS funding?
To be frank, there isn’t a ‘right’ time to start looking for SaaS funding. It’s completely dependent on your business and future goals.
However, it can take time to find an investor(s) and go through the typical processes so as soon as you feel the strain of needing a cash injection, begin looking. At this stage, you’ve likely seen growth in the business but may feel it’s stagnating or slowing as you need more resources.
When you do start looking for funding, you should feel confident that your product has been refined as much as possible with what you have.
To see where your business stands in comparison to the SaaS industry, consider overlapping your metrics with ChartMogul’s Benchmarks feature. This will give you insight into other businesses, timelines, and opportunities.
The SaaS funding rounds explained
There are numerous SaaS funding rounds. These are almost like markers as they refer to the number of times a startup has gone to the market to raise capital. The time between each ranges depending on the business and its growth.
Pre-seed
This is the first round of investment and involves generating enough funds to launch operations, test the idea, and refine the value proposition.
Again, there isn’t a rule on when a company should venture into pre-seed funding but you should be able to demonstrate the potential for a product-market fit. At this stage, you likely have a basic version of your product that can show early signs of traction and a strong founding team to work on it.
Not all companies at this stage have started acquiring customers, but if you are generating sales and gaining rapport this will increase your chances of securing pre-seed funding.
Pre-seed investors include family and friends, angel investors, incubators and accelerators.
Seed
The seed stage is where ideas can become reality, as the investment is used to launch products, hire more staff, or gain more traction. It’s also about beginning to scale sales.
At this point, investors will want to understand your monthly recurring revenue and initial growth projections.
Seed investors include family and friends, angel investors, accelerators, syndicate groups, and VC firms that specialize in this stage.
Series A
Series A funding is one of the first steps from being a young startup to scaling up. This is where the investor profile starts to change slightly as more sophisticated and traditional investors could become interested from this point forward.
Metrics-wise, you’ll want to focus on your revenue run rate, gross margin percentage, customer lifetime value, and customer acquisition cost.
Series B
Series B funding helps your company meet consumer demand and build upon the success seen in previous rounds. At this point, the business strategy should be thorough and optimized for the audience and product.
The cash injection seen in Series B is used most commonly for scaling operations, planning for acquisitions, or expanding the team into new markets.
Series C+
Whether the company is looking to go through strategic acquisitions or at the early stages of preparing for public listing, Series C can help make this possible.
The money is usually given by hedge funds, investment banks, private equity firms, or other large investors. By this point, there’s likely not much risk involved as the company can prove itself as being successful through metrics and experience.
This doesn’t have to be a one-time funding round, as there can be multiple beyond this stage – especially for those looking to build valuations ahead of an IPO.
Navigating the investment process
Identifying potential investors
SaaS businesses are attractive to investors due to the recurring revenue model and being an asset-light model in a high-growth space. That doesn’t mean it’s an easy and stress-free process, though.
Carefully weigh up the pros and cons of each type of investor. We’ve analyzed and compared the growth metrics of bootstrapped vs VC-backed SaaS companies from around the world.
Our SaaS Growth Report provides insights from over 2,500 companies. We found that bootstrapped companies with $1M – $30M ARR are quicker to adapt but VC-backed grow faster.
Net Revenue Retention stabilizes with VC-backed companies with $1M – $30M ARR ahead of bootstrappers, but all SaaS startups below $1M ARR were found to retain customers equally across funding models.
This is where you need to decide what’s most important to you and which method would be most beneficial.
Once you’re sure about what you’re looking for, start reaching out to your networks to see if your contacts can help you reach the right people.
Crafting a compelling pitch deck
A huge driving force for securing investment is having proof of success. In the later stages, this is much easier as you should have the data to back up your company. But in all cases, being able to show data has become table stakes as it’s the only way people can see the potential growth trajectory.
At ChartMogul, we spoke with investor Jess Bartos from Salesforce Ventures. She said companies should understand their growth trajectory, net dollar retention, gross margin, rule of 40, and burn multiples.
“High growing cash flows is something all investors are looking for.”
Aside from providing the metrics, which is essential in a pitch deck, Jess explains how you should integrate storytelling into your pitch.
“In the noise of all these numbers, use your numbers to tell a great story.”
This could include a compelling story about the business, where it’s going, and how the company is going to disrupt the market and make a name for itself. Wherever you’re at in business, stay excited about your product and ensure investors feel this passion.
Negotiating deal terms
If you’re at the beginning stages of investment, the process will be less formal than the later stages.
If done with a traditional investor, there will be an investor term sheet that summarizes the deal terms. These are issued as a statement of interest to the start up and provides a good starting point for negotiations. But you should be aware that you’ll usually have to decide within 24-48 hours so knowing what terms you’re requiring is important.
Ahead of speaking with an investor, it’s a good idea to secure an understanding of what you’re happy to go ahead with.
Carefully consider economic rights (business valuation, liquidation preferences, anti-dilution rights, share vesting) and control rights (investor rights and board composition).
Whether you’re in pre-seed or Series C funding, always know the numbers, share non-negotiable standard terms early on, focus on value, and be straightforward when communicating.
What do investors look for in a SaaS startup?
Regardless of which stage you’re at in your SaaS startup, the fundamentals of the business model haven’t changed. This includes determining a strong product-market fit, high growth goals, and a focus on customer retention and churn.
Nailing these elements down will put you in good stead to attract investors. Going beyond the basics, investors focus on different elements.
Product
When considering an early-stage investment, investors are looking for a product that is solving a real problem and has a big enough market for opportunity.
We interviewed a panel of VCs at SaaStock and gleaned insights from Connect Ventures’ managing partner Pietro Bezza. He explains how his team expects more of the product:
“Product must be the answer to every strategic puzzle. It should be the foundation of solving the problem the founders want to tackle, but also it should be the answer for growth, for hiring strategy. And it should be the start of the company but also the growth engine.”
Also, it’s not enough to adequately address the market’s needs. Investors also want to see differentiation. What sets you apart from the competition?
At SaaStock, VCs discussed the technology at the foundation of your product, and also the design.
“Technology is what differentiates from competition. Execution really matters, but you can hire for that. Technology is the only weapon.” – Gil Dibner
Founder
Investors look for founders who have a unique insight into the market or the problem they’re solving.
A ‘Founder-Market fit’ is often highly sought after. This doesn’t mean you need a certain background or education, it’s about having intimate knowledge of the space and the need – as well as an attuned and innovative perspective on how to solve it.
The technology industry moves quickly, with companies needing to be agile in their responses. It’s the founder who needs to make this happen and stay ahead of the curve.
Other qualities?
- Solutions-oriented, not just wanting to build a company or explore an idea.
- ‘Strong opinions, loosely held’: Someone who will fight for what they think, but is also open to other points of view. Someone who will (and wants to) learn.
Vision
As in, have one. Think big — envision your idea after funding, at scale, going global. What kind of impact will your company have on the industry and on the world?
Not only that, but also be able to express this vision pointedly and persuasively. It seems investors don’t hear that enough!
It’s the vision that sells them, because it is this — the big picture — that is enticing. Articulating this during fundraising meetings is just as important as sharing performance metrics and stressing the numbers.
SaaS metrics
Any investor needs to understand the metrics to see the possibilities and how the company will perform in the future. Sharing the financial details through metrics is truly the only way to prove the hard work that has already been done is coming to fruition.
If you’re still in the early stages of seeking investment, metrics highlight the vision so start collecting this data as soon as you’re able.
There are five qualitative data sets that investors are most likely to require: Growth, Net Dollar Retention, Gross Margin, Rule of 40, and Burn Multiples.
“The pace of growth matters more than the number.” – Mike Chalfen
Perhaps we can add a banner ‘ad’ for the SaaS Metrics piece here, a bit like TechCrunch do with their callouts.
Business
Keep it lean! This means cutting down on unnecessary costs and strengthening productivity across all vital departments. This should allow the product and service to be maximized.
David Skok listed “capital efficiency” as one of his top 6 qualities he looks for in a new investment.
Sitar also touched on this point at SaaStock:
“Unfortunately, leanness erodes as a company grows. As you have the money, you spend it. And then you built a fat business and the next round you raise needs to be even bigger. Yes, I think you need to raise money to scale, but I don’t think you need to raise as much as some companies do today.”