Securing SaaS funding can be exciting but nerve-racking \u2013 understandably, it may be the starting point for significant growth.<\/p>\n
Whether it\u2019s deciding which type of funding to pursue, knowing where to find investors, or even navigating the whole process, it\u2019s bound to make anyone feel uneasy.<\/p>\n
Securing SaaS funding is one of the quickest ways to scale your business. Regardless of which element you\u2019re unsure of, we\u2019ve broken it down into sections so you can follow along and learn more.<\/p>\n
In this article:<\/b><\/p>\n 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.<\/p>\n Angel networks are popular, too. These groups consist of 10 people or more, and as a group, they decide which businesses to invest in.<\/p>\n A venture capitalist (VC) is a private investor who provides funding to companies with unique products that have a wide appeal.<\/p>\n 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.<\/p>\n 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.<\/p>\n Usually, an incubator or accelerator program will include a group of startups or individuals with keen ideas so a community-like feeling naturally forms.<\/p>\n Revenue-based financing<\/a> is a growth investment structure with different mechanics, provisions, and return profiles than either equity or traditional lending products. It\u2019s a debt instrument that is paid back by sharing in a company\u2019s revenue.<\/p>\n In an interview with Miguel Fern\u00e1ndez<\/a>, the CEO and co-founder of Capchase explained how revenue-based financing means you can really plan ahead.<\/p>\n \u201cYou\u2019re going to know exactly how much you\u2019re gonna be paying back and how much money you can draw to continue to invest.\u201d<\/p><\/blockquote>\n Bootstrapping is where the business is funded with your own money and the income from the company\u2019s sales. Sometimes, money from family and friends can be included in that too.<\/p>\n It means no venture capital investment or external fundraising has taken place.<\/p>\n Crowdfunding is fundraising raised by a large number of individuals, usually through an online platform – like JustGiving, GoFundMe, and Kickstarter.<\/p>\n This is where members of the public can support your goals and business.<\/p>\n To be frank, there isn\u2019t a \u2018right\u2019 time to start looking for SaaS funding. It\u2019s completely dependent on your business and future goals.<\/p>\n 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\u2019ve likely seen growth in the business but may feel it\u2019s stagnating or slowing as you need more resources.<\/p>\n 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.<\/p>\n To see where your business stands in comparison to the SaaS industry, consider overlapping your metrics with ChartMogul\u2019s Benchmarks<\/a> feature. This will give you insight into other businesses, timelines, and opportunities.<\/p>\n 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.<\/p>\n This is the first round of investment and involves generating enough funds to launch operations, test the idea, and refine the value proposition.<\/p>\n Again, there isn\u2019t 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.<\/p>\n 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.<\/p>\n Pre-seed investors include family and friends, angel investors, incubators and accelerators.<\/p>\n 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\u2019s also about beginning to scale sales.<\/p>\n At this point, investors will want to understand your monthly recurring revenue and initial growth projections.<\/p>\n Seed investors include family and friends, angel investors, accelerators, syndicate groups, and VC firms that specialize in this stage.<\/p>\n 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.<\/p>\n Metrics-wise, you\u2019ll want to focus on your revenue run rate, gross margin percentage, customer lifetime value, and customer acquisition cost.<\/p>\n 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.<\/p>\n The cash injection seen in Series B is used most commonly for scaling operations, planning for acquisitions, or expanding the team into new markets.<\/p>\n 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.<\/p>\n The money is usually given by hedge funds, investment banks, private equity firms, or other large investors. By this point, there\u2019s likely not much risk involved as the company can prove itself as being successful through metrics and experience.<\/p>\n This doesn\u2019t 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.<\/p>\n 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\u2019t mean it\u2019s an easy and stress-free process, though.<\/p>\n Carefully weigh up the pros and cons of each type of investor. We\u2019ve analyzed and compared the growth metrics of bootstrapped vs VC-backed SaaS companies from around the world.<\/p>\n Our SaaS Growth Report<\/a> 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.<\/p>\n 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.<\/p>\n This is where you need to decide what’s most important to you and which method would be most beneficial.<\/p>\n Once you\u2019re sure about what you\u2019re looking for, start reaching out to your networks to see if your contacts can help you reach the right people.<\/p>\n 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\u2019s the only way people can see the potential growth trajectory.<\/p>\n At ChartMogul, we spoke with investor Jess Bartos from Salesforce Ventures<\/a>. She said companies should understand their growth trajectory, net dollar retention, gross margin, rule of 40, and burn multiples.<\/p>\n \u201cHigh growing cash flows is something all investors are looking for.\u201d<\/p><\/blockquote>\n Aside from providing the metrics, which is essential in a pitch deck, Jess explains how you should integrate storytelling into your pitch.<\/p>\n \u201cIn the noise of all these numbers, use your numbers to tell a great story.\u201d<\/p><\/blockquote>\n This could include a compelling story about the business, where it\u2019s going, and how the company is going to disrupt the market and make a name for itself. Wherever you\u2019re at in business, stay excited about your product and ensure investors feel this passion.<\/p>\n If you\u2019re at the beginning stages of investment, the process will be less formal than the later stages.<\/p>\n 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\u2019ll usually have to decide within 24-48 hours so knowing what terms you\u2019re requiring is important.<\/p>\n Ahead of speaking with an investor, it\u2019s a good idea to secure an understanding of what you\u2019re happy to go ahead with.<\/p>\n Carefully consider economic rights (business valuation, liquidation preferences, anti-dilution rights, share vesting) and control rights (investor rights and board composition).<\/p>\n Whether you\u2019re 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.<\/p>\n Regardless of which stage you\u2019re at in your SaaS startup, the fundamentals of the business model haven\u2019t changed. This includes determining a strong product-market fit, high growth goals, and a focus on customer retention and churn.<\/p>\n Nailing these elements down will put you in good stead to attract investors. Going beyond the basics, investors focus on different elements.<\/p>\n 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.<\/p>\n We interviewed a panel of VCs at SaaStock and gleaned insights from Connect Ventures\u2019 managing partner Pietro Bezza. He explains how his team expects more of the product:<\/p>\n \u201cProduct 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.\u201d<\/p><\/blockquote>\n Also, it\u2019s not enough to adequately address the market\u2019s needs. Investors also want to see differentiation. What sets you apart from the competition?<\/p>\n At SaaStock, VCs discussed the technology at the foundation of your product, and also the design.<\/p>\n \u201cTechnology is what differentiates from competition. Execution really matters, but you can hire for that. Technology is the only weapon.\u201d \u2013 Gil Dibner<\/p><\/blockquote>\n Investors look for founders who have a unique insight into the market or the problem they\u2019re solving.<\/p>\n A \u2018Founder-Market fit\u2019 is often highly sought after. This doesn\u2019t mean you need a certain background or education, it\u2019s about having intimate knowledge of the space and the need – as well as an attuned and innovative perspective on how to solve it.<\/p>\n The technology industry moves quickly, with companies needing to be agile in their responses. It\u2019s the founder who needs to make this happen and stay ahead of the curve.<\/p>\n Other qualities?<\/p>\n As in, have one. Think big \u2014 envision your idea after funding, at scale, going global. What kind of impact will your company have on the industry and on the world?<\/p>\n Not only that, but also be able to express this vision pointedly and persuasively. It seems investors don\u2019t hear that enough!<\/p>\n It\u2019s the vision that sells them, because it is this \u2014 the big picture \u2014 that is enticing. Articulating this during fundraising meetings is just as important as sharing performance metrics and stressing the numbers.<\/p>\n Any investor needs to understand the metrics<\/a> 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.<\/p>\n If you\u2019re still in the early stages of seeking investment, metrics highlight the vision so start collecting this data as soon as you\u2019re able.<\/p>\n 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.<\/p>\n \u201cThe pace of growth matters more than the number.\u201d \u2013 Mike Chalfen<\/a><\/p><\/blockquote>\n\n
Types of SaaS funding<\/h2>\n
Angel investors<\/h3>\n
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Venture capital<\/h3>\n
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Incubators and accelerators<\/h3>\n
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Revenue-based financing<\/h3>\n
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Other ways you can fund your SaaS business<\/h2>\n
Bootstrapping<\/h3>\n
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Crowdfunding<\/h3>\n
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When should you start looking for SaaS funding?<\/h2>\n
The SaaS funding rounds explained<\/h2>\n
Pre-seed<\/h3>\n
Seed<\/h3>\n
Series A<\/h3>\n
Series B<\/h3>\n
Series C+<\/h3>\n
Navigating the investment process<\/h2>\n
Identifying potential investors<\/h3>\n
Crafting a compelling pitch deck<\/h3>\n
Negotiating deal terms<\/h3>\n
What do investors look for in a SaaS startup?<\/h2>\n
Product<\/h3>\n
Founder<\/h3>\n
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Vision<\/h3>\n
SaaS metrics<\/h3>\n