Funding Options for SaaS Companies Explained

At some point in growing your SaaS business, you might find yourself lacking the resources to level up your business.

For instance, you may have a concept, but no funds to develop an MVP. Or maybe you already have an MVP, but developing it further costs more than you can afford.

Additionally, perhaps you have bootstrapped your business as best as you could up to a certain point, but your growth and expansion costs exceed your current capabilities.

In all these scenarios, you’ll need to consider some new funding sources. Let’s look at some most popular funding options available for SaaS companies.

Angel Investors

Partnering with angel investors is a highly desired path for startups, especially during the early stages of development.

In simplest terms, angels are wealthy individuals investing their own money in your business. Their investments tend to range between $25,000 and $100,000.

To protect their investment, angel investors will ask for a share of your company in return. Commonly, the equity percentage business angels receive ranges between 20 and 30%.

The exact percentage will depend on several factors, most notably on your negotiation skills and business valuation. The more critical the investment is to your SaaS business value, the more the angel can ask for in return.

Some big players such as Uber, Instagram, Spotify, or Zoom received seed funding from business angels in their humble beginnings.

Source: AngelList

For instance, Mike Walsh was one of the first business angels to invest in UberCab, later to become simply Uber.

Walsh saw tremendous potential in a car service that would eliminate the common headaches of waiting for a cab. He was right; Uber became a multi-billion success, and as a result, Walsh greatly profited off an initial $10,000 investment.

Aside from cash, angels bring in vast business experience, leadership, and practical advice to guide founders through the early stages of developing their business. They have ties to potential partners, customers, financial or legal professionals, or other investors.

Angel investors can also boost your business credibility by association. Imagine how attractive your SaaS business would become if it were listed in an angel’s portfolio, next to some of the top players in your industry.

You can find potential angel investors in several places. Check out online communities and platforms such as:

Alternatively, LinkedIn and specialized networks are also excellent options.

Lastly, a good way to get in touch with business angels is through personal introductions, either within your own network or via your business partners.

 Source: AngelList

Angel investors are often willing to take on higher investment risks. They don’t have a board to convince that your startup is a good opportunity, and their capital is not tied up with banks or other financial institutions. If your endeavor fails, they only have personal losses to account for.

However, to convince them to enter your business at such a risky stage, you’ll need to demonstrate a bulletproof business plan, map out future investment and growth, and provide reasonable spending projections.

On top of that, angels often look for founders who exude confidence and passion, demonstrating that they are innovative and forward-thinking.

Therefore, create an exciting pitch, show how your SaaS product will change the world, and you’ll be sure to catch an angel’s attention.

Venture Capital

Unlike individual investments made by business angels, venture capital firms comprise multiple investors and funds.

Consequently, VCs can inject much larger sums into your SaaS business. And when we say larger, we mean anywhere between $3milion -10 million in the early stages of investment.

However, more money means higher stakes.

 Source: EquityNet

In exchange for a more substantial investment, however, you might need to surrender a larger share of your business. On average, VCs take over between 25% and 55% of equity.

Additionally, VCs will want to ensure that their investment pays off, so they are likely to be more involved in your daily operations and strategic planning.

Having them on board is not a bad idea, though. VCs will invest not only money but strategic resources such as tech and expertise to see your business grow.

Venture capital is a good option for SaaS businesses that have already gained some traction on the market. In other words, you will need to show that your SaaS product has achieved a product-market fit, and that it has a strong foundation to scale user base and revenue.

Securing funds from VCs generally takes a longer time than with angel investors, as more stakeholders are involved. The terms of your business relationship, legal and otherwise, tend to be much more complicated too.

Going through the process of establishing it also takes quite a while. On average, it lasts between three and six months at a minimum to close a deal with venture capitalists.

Source: Both Sides of the Table

The good news is that there are plenty of VCs available to SaaS businesses, as these types of investors generally prefer tech-driven companies with high-growth potential.

Incubators and Accelerators

In its earliest stages, incubators and accelerators provide the founders of a SaaS startup with mentorship, infrastructure, and sometimes seed funding to get their ideas off the ground.

Incubators and accelerators share some core traits but differ in regards to their outcome and entry terms.

Source: Regpack

Accelerators admit startups that already have MVPs, some early adopters, a strong product-market fit, and high-growth potential. The startup then goes through an intensive, short-term process of speeding up growth that could otherwise take years to achieve.

Let’s take a look at one famous example.

Had it not been for the Y Combinator accelerator, the story of Dropbox might have gone a different way.

Dropbox already had an MVP when it started the accelerator program in 2007. It was a much simpler product than what it is today: users could only upload their files to the cloud and retrieve them later.

 Source: Medium

Nevertheless, Dropbox was already a fully functioning and promising product. So, the accelerator provided Dropbox’s founders with invaluable business advice, a chance to test their product in a highly innovative environment, and the ability to secure several rounds of fundings.

Aside from Y Combinator, another notable accelerator is TechStars, which kickstarted the success of Outreach and SalesLoft, and boasts a total of nine unicorns to date.

Source: Techstars

Accelerators are mostly organized by venture capital firms, and participants can expect to sign over a certain equity percentage, usually between 7% and 10%.

Additionally, these programs meticulously vet cohorts of startups they consider good candidates for future investments. Unsurprisingly, graduating from an accelerator increases a startup’s chance of raising venture capital by 50%.

 Source: TechCrunch

However, before applying to participate, consider whether an accelerator is what your startup really needs. If you aren’t ready to take the product to market yet or pitch it to investors, you’re diluting equity for mentorship alone.

If you still have a way to go, incubators might be a better choice for your startup.

Source: Regpack

Unlike accelerators, incubators are managed by public entities, non-profits, or academic establishments. Because of this, there’s less capital investment involved. Also, incubators generally charge a fee rather than demand equity.

Oftentimes, incubators also provide affordable office space or access to tech to local founders and entrepreneurs while developing a prototype or MVP. Mentorship and support are available as needed.

Additionally, participation time is not limited, meaning that a startup can occupy an incubator until it is fully able to operate independently.

This type of support directly correlates to the survival rate of startups: 73% of startups say that an incubator significantly contributed to or was vital for the startup’s success.

In short, while incubators and accelerators both provide backing and mentorship for startups in the early stages of development, your choice of either one of these options will depend on the kind of support you need.

Bootstrapping

Investments from angels and VCs can put your SaaS startup into a hyper-growth mode, but if you don’t want to dilute equity or don’t dream of multi-billion IPOs, bootstrapping is the way to go.

What does bootstrapping mean, exactly?

Source: Regpack

In business terms, bootstrapping refers to starting and growing a startup with little to no cash from external sources.

Even if you invest a part of your life savings into starting the business, growth is fueled exclusively by the profits being reinvested into the business.

 Source: FourWeekMBA

Obviously, to bootstrap your company, you need a product that can start generating profits as soon as possible. Fortunately, SaaS products have low startup and entry-level costs. With an MVP, you can go to market fast, generate revenue and profit, and upgrade your product as you go.

Another advantage of the SaaS business model conducive to bootstrapping success is the recurring revenue model, which makes for easy revenue tracking and prediction.

That’s crucial because bootstrapping requires great financial discipline and wisdom to strategically reinvest the cash you have available.

But even so, bootstrapped growth is slow.

 Source: TheNextWeb

The chart shows how ConvertKit’s revenue grew over time. It took a year and a half for their revenue to start curving upwards and reach $2 million by mid-2020.

Despite that, ConvertKit pledged to stick to the no-investors route and made it clear that they put their mission and clients first.

Source: ConvertKit

And accomplishing the mission has been going rather well for ConvertKit:

Source: ConvertKit

Therefore, it’s possible to achieve great success without external funding, as we’ve seen from ConvertKit’s example. Although businesses raising millions in funding make the press, the reality for startups is much different than what the headlines imply.

Numbers vary, but only around 3% of startups receive funding from angels or VCs. The vast majority of startups either self-fund or make do with other funding options.

Source: Regpack

Bootstrapping your way up and therefore not accruing debt puts your business in a much better position later on.

Just ask Markus Persson, the founder of Mojang, the creative powerhouse behind Minecraft.

He charged a flat fee for the game and ran the company with just 50 employees. Minecraft became the best-selling game of all time.

Mojang earned nearly a billion dollars in profit before Persson decided to sell to Microsoft for $2.5 billion. Out of that, Persson’s share constituted $1.8 billion.

Bootstrapping takes a considerable amount of time and even more patience and discipline. However, it comes with a great payoff—not just in financial terms, but in control and stability as well.

Other Funding Options

Finally, there are other ways to raise funds for growing your SaaS startup.

Many businesses source funds from family and friends. You can either share equity or repay the debt once your startup starts generating profits.

Such funds are referred to as “love money”, and they are often a viable option when a business doesn’t qualify for bank loans yet.

To receive a business loan from a bank, you’ll need a good credit score and some collateral as insurance.

Source: Shopify

Make sure to research all advantages and disadvantages of taking on debt in the initial stage of growing your business. Accruing too much of it early on could hinder your chances of receiving other types of funding further down the line.

Crowdfunding is another attractive option for startups. It doesn’t only raise initial capital, but it also allows you a chance to gauge public interest in your solution and generate awareness.

In fact, Alex Mittal, co-founder of FundersClub, says the best time to enter a crowdfunding platform is once you have already validated your software idea.

 Source: The Startup Funding Book

In return for contributions, you can offer access to the product or other perks. This further helps you test the product and gain valuable feedback and improvement suggestions.

By taking loans from family, friends, or banks, or crowdsourcing funds, you won’t necessarily have to share equity, which is a great advantage.

However, make sure to research all options to see which one makes the most sense for your type of product.

If you show initiative and a solid financial strategy, it’s a good signal for future investors that you’re determined to make your startup succeed.

Conclusion

Not all funding options are suited for all stages of a SaaS business, nor are they equally appealing to all founders.

Angel and VC investments usually entail giving over some control over your business, but such investors also bring in great expertise. Furthermore, they can invest more money than you could source on your own.

If you’d rather grow your business your own way, you can raise funds from family and friends, or take a bank loan. You can then bootstrap your business growth to avoid further debt and equity sharing.

Research your options carefully, and consider the pros and cons to decide which option best supports your short-term and long-term business goals.

About The Author
Asaf Darash
Asaf Darash
CEO and founder of Regpack

Asaf, Founder and CEO of Regpack, has extensive experience as an entrepreneur and investor. Asaf has built 3 successful companies to date, all with an exit plan or that have stayed in profitability and are still functional. Asaf specializes in product development for the web, team building and in bringing a company from concept to an actualized unit that is profitable.

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