When building a SaaS startup, it’s inevitable that there will come a time when you’ll be forced to seriously consider outside funding in order to start your business venture successfully.
Depending on others for your business to flourish is daunting and risky, but it’s a necessary step that will likely pay off in the future once your business takes off.
If you expect your business to grow, expand and meet your substantial expectations, you’re going to have to be careful while planning your next steps because they will be the deciding factors in the success of your SaaS startup.
Let’s review a few possible scenarios to help you understand your current position and figure out how to proceed in the most effective and productive way for your business.
1. Developed an idea for MVP
You’ve developed a well-grounded Minimum Viable Product (MVP) idea, but you lack funds for further development.
It’s likely you’re already past this stage, but if one thing is clear here, it’s that you’re in dire need of outside funding if you want to meet your expectations any time soon.
Luckily, there are many viable options out there. You can manufacture wireframes and copy if you want to make your vision is more tactile and do your due diligence regarding the market in order to be fully prepared for what’s to come.
You should create a solid plan where you’ll note every possible scenario and figure out funding regarding the market share, and that way, be one step ahead by anticipating every possible course of events.
2. Existing MVP that needs development
You already have an MVP, and you’ve created a solid plan for developing it:
Understanding how much money you’ll need for your SaaS startup is highly dependent on a few key factors. You have to take into account your team and its capacity and figure out how much it will cost to run your service and revenue model.
Work out your runway (cash in your possession minus cash that’s needed for spending purposes) in advance, and that way, you’ll know exactly how long you have before you need any outside funds.
If you’re nearing the end line regarding your independent growth, ask yourself these questions: Is there any way to improve your team’s productivity? Are you having any issues regarding user decline? What about sales tax on SaaS?
If you want to start your business successfully, get to the bottom of these questions first because funding won’t help you solve them; finding a fix (if one is needed) will.
3. The end line of the possibility of independent growth
You’ve reached the end line regarding the possibility of independent growth, and at this point, you’re no longer capable of funding your product, and you need to find extra funding to help your SaaS startup grow.
What you need to do here is make a viable plan. The first step is creating an outline where you’ll note your current position and calculate your needs for future development.
Having in mind your next idea or vision, work out how much money will be needed to make it come to life and decide how much equity you’re willing to lose during the next course of action (recommended amount is anywhere between 10% – 20% per round).
Finding the Ideal SaaS Funding For Your Startup
1. Venture Capital (VC) Funding
The first thing you need to know about this type of funding is that it takes a lot of work and patience on your part. Don’t expect to find an investor in a short period of time, because it’s highly unlikely to happen.
It’s possible that it will take a huge number of meetings before managing to stumble upon that one investor you can find common ground with and who will check all of your boxes.
And once you do that, there’s the whole getting them excited enough by your propositions for them to actually want to get into business with you in the first place.
If you want to get your prospective investors excited about your product, here are some of the vital questions you are going to have to provide solid answers to:
- What is it about your product that makes it stand out from the rest, and why should they give you a chance?
- Are you familiar with your competition?
- What is it that made you turn to those particular investors for help regarding your SaaS funding?
- What are your exact plans for further development, and in which ways do you plan on implementing them?
- And lastly, how much funding are we talking about for the successful execution of your vision?
Keep in mind that there’s a lot at stake if you choose to go this route. VC funding presupposes that you’ll be able to grow your business substantially and that their revenue will significantly increase in its value.
Your investors will always be on top of things by keeping tabs on the metrics and goals you’ve set in order to see and keep track of how you’re doing.
They will require to see results regarding the value of your business and gain back their invested money in an agreed-upon amount of time. If you aren’t successful in your idea by a designated time, it’s unlikely that you’ll be able to get that money again, and if you are, it won’t be to your satisfaction.
One other thing to be prepared for is that you might get to the point of experiencing a ‘’ down the road,’ which basically means that you raise at an estimation lower than the one before – and that could end up being fatal for the well-being of your business.
2. Funding By Angel Investors, Incubators and RBF
If your business is still in the early development stages and you’re not yet on anybody’s radar, it could become a problem. You need exposure and attention to your project for it to find proper funding.
Before getting into business with the first investor, you come into contact with, make sure to seek professional advice on this particular topic in order not to rush into anything prematurely and regret it later on.
Instead of turning to VC funding, you can also consider angel investors. They are the right choice for you if your business is still in an early phase of development because angel investors are prone to get involved as early as possible and provide a personal touch.
They are also likely to put you in touch with a wide variety of their substantial network, which is always a plus for a SaaS startup.
Incubators are also a legitimate, good way to go, as they are keen on getting you access to some necessary training programs and mentorship, while also getting you acquainted with their network and therein helping you expand and grow one step at a time.
It’s important not to try and speed up the process but rather be patient while asking for help that you really need and learn as you go. Nothing grows unless properly nurtured, so treat your SaaS startup carefully and make sure to make a wise decision that will ensure growth in revenue.
One other model of funding to take into consideration is RBF (revenue-based financing).
With this funding plan, the investors provide you with capital as a loan that you’re obliged to pay back over an agreed-upon amount of time with a markup.
The appealing factor in RBF funding is the fact that you don’t lose any equity in the process, which means once you pay back what you owe them, your business remains yours entirely!
Europe vs. the US Model – Pros and Cons
VC firms have a much longer and more well-established history in the US than in Europe, and the angel investors in the US are more entrenched there than anywhere else.
It’s true that the European VC funding firms and angel investors are well on their way to securing a top spot in prominence, but they still cannot compete with the fact that the rounds of funding for businesses in the beginning stages in the US are still significantly bigger, generating up to 2 to 3 million dollars.
A positive side to US investors is that they won’t have a problem with investing in Europe, but it would substantially help if you had at least moderate experience with the US funding techniques and are familiar with the Silicon Valley investment code.
Keep in mind that if you’re a SaaS startup in Europe that’s still in early developmental stages and looking for funding, you shouldn’t get your hopes up that you’ll be able to find a US investor because those odds are slim to none.
Instead of looking to find US investors, try some other options.
Go to your local ecosystem for investment and focus your attention on these European cities for possible assistance: London, Berlin, Stockholm, and choose the one that is within your proximity.
Explore each one to find which model is most in tune with your needs and do some research to know what to expect. It’s always best to be one step ahead and always be prepared for all possible outcomes.
Other Vital Things to Keep in Mind When Starting a Business
Know the difference between wants and needs.
Being able to anticipate what your users need is the key to your success. Yes, they’ll always make sure to inform you of their wants, but it’s on you to figure out if it coincides with what they actually need.
Analyzing data and doing your research is always commendable, but being able to follow your gut feeling is what it’s all about. In SaaS, you can easily stay on top of things and fix what needs fixing if you’re able to react quickly and instinctively!
Find the right strategies
Instead of always strictly following a strict code of conduct and being true to analyzed data, have you ever considered to explore your last few interactions with your users and using that information during your next course of action?
Don’t presuppose anything but rather rely on your intuition! When you try to foresee the end result, you subconsciously manipulate information in order for it to fit what you think should end up happening, and that’s a mistake! Follow your gut and act tactically.
Take it one day at a time (baby steps)
Don’t overwhelm yourself by taking on too much too soon. SaaS model is very practical when it comes to getting people to buy your product, but you also have to be mindful of pricing.
Don’t expect to gain profit immediately. You are very likely to lose revenue in the beginning stages, so be prepared for that while also having a plan in place for when you finally break even and start getting your money’s worth.
Make sure you also have a termination clause because that way, you ensure your interests are always protected, which is of vital importance.
The Main Takeaways
When trying to grow and expand your SaaS startup, make an effort to do as much as you can on your own before resorting to outside funding.
Always have a solid plan on the exact expectations you want to meet and provide a step by step guide on how you plan on accomplishing just that. Planning ahead is of crucial importance.
When seeking outside funding, always explore every option before resorting to a specific one. This is important in order for the logistics and technicalities to go as smoothly as possible.
VC funding is a legit option, but it comes with certain shortcomings. Familiarize yourself with other options such as angel investors, incubators, and RBF. You are more likely to find an investor in those if you’re still in the early stages of development.
Don’t rush the process. Taking it one step at a time is the best way to be diligent, efficient, and productive while making an educated decision that will make your business grow exponentially.
Know that it will take time, but if you do things the right way, sooner or later, your SaaS startup will become profitable, and all of your hard work will have been well worth it.