SaaS companies provide cloud-based services to enable users to access applications online. If you are launching a SaaS business, you might be wondering whether there are financing options that are specifically designed to assist your scale-up efforts.
We have put together a comprehensive guide to everything you need to know about SaaS financing. This article will cover what SaaS financing is, the different spending options available, and their pros and cons. We will also explore what financing options are recommended at each stage of the company development and how to find the right choice for your business.
What is SaaS financing?
SaaS financing refers to specific financing options that are designed to assist SaaS startups. These companies usually have an end customer (or another business) that purchases the software, sometimes on a subscription basis, and makes it available to its own customers.
One of the characteristics of SaaS financing is that it offers non-dilutive capital funding. This means that you don’t need to give back up equity for the money you receive. Instead, you can repay the investment with your company’s future sales – and only when your SaaS business begins making a profit. And if you are doing great, your repayment window shortens.
Financing options for SaaS companies are designed specifically with your business model in mind. There are several options that are also easier and cheaper to access, so let’s go through them in a little more detail.
What does SaaS stand for?
SaaS means “Software as a Service”, which includes companies in both the B2B and B2C space. Most people use at least one SaaS product in their daily life (for example, email platforms), so finance providers have created products that cater specifically to this industry’s needs.
Have a question?
No business’ path to success and growth is the same. If you are ready to apply or would like to learn more about our funding, get in touch today.
What makes a SaaS business special? The stages of SaaS companies
SaaS businesses share what you could call a ‘typical’ trajectory. Their life cycle tends to be as follows:
- The initial stage. This is a very cash-intensive period. The company needs not just to develop the product but also to do a lot of R&D. At this point, there is still nothing to sell yet. You are mainly testing and sharing the software with internal groups and a few early adopters and seeing if there is a gap in the market for your idea.
- The networking stage. The next step when launching a SaaS business is, typically, to create positive network externalities – or build incentives so you can recruit new users. Many SaaS startups use social media to work on the gradual growth of their product. Some examples of networking efforts can include promo codes, vouchers, and demos.
- The leveraging stage: Once you have taken the time to network your SaaS products, the next step is usually leveraging its effects and the first revenue recognition. Generally, a SaaS business is, at this point, on its way up. The start might have been costly, but if things worked out, you now have the promise to scale exponentially. This can be one of the most exciting stages of your SaaS journey.
- The exit stage (or continuous growth stage): For the last step of your SaaS company journey, you tend to either sell or merge your business with a larger competitor; or you continue to grow on your own. This means it’s time to continue growing your product, move on to a new project or enjoy your hard-earned rewards!
Each of these stages is part of the SaaS business lifecycle and has its own funding plan options.
For example, when you’re just starting, you will want to consider the very expensive runway you will require to build the SaaS product and go for a capital-intensive strategy. After your initial track record has been approved, however, you will usually have Series A Capital available. And, if you want to scale your operations, you might consider a Series B.
So, let’s discuss the different SaaS business financing options in a little more detail.
The different SaaS financing options
SaaS businesses can raise money in a variety of ways, all of which are built to help your business by offering software as a service expansion. We covered the typical stages all SaaS companies go through when building their business. Now it’s time to review the finance options that are better suited for each of them.
Turning your vision into action: Seed-stage and angels
When you just start a SaaS company, all you might have is a vision. This is why most SaaS businesses rely on someone else who also believes in your vision and can back your business model with cash flow.
Some founders use their own money to fund the initial requirements of building a SaaS company. Others rely on an Angel or Seed stage VC fund. It’s not just about the money; investors can bring capital but also contacts and knowledge to help you succeed.
- Angel investing: An angel investor, or private investor, is a high-net-worth individual that can provide your SaaS business with backing. Typically, they do this in exchange for ownership equity in the company. Angel investors’ funds can be a one-time payment to get things off the ground or an ongoing injection to support the company through the early stages. Don’t think of anonymous cash; sometimes, SaaS founders’ family members are angel investors!
- Seed funding: Much of the seed capital a new software company raises comes from SaaS founders’ friends and family members. However, seed funding is usually also where venture capital financing begins. It takes a lot of time and money to build a SaaS company from the ground up, so entrepreneurs usually turn to VC investments to grow.
The distinction between these two groups is not always clear. Super angels, for example, are groups of investors on the hunt for startups, and micro venture fund firms also back companies at their beginnings.
There are also corporate seed funds (Google Venture is one example) that support startups in specific sectors like robotics and AI, as well as business accelerators and startup incubators that can provide you with mentorship, support, and funding.
Have a question?
No business’ path to success and growth is the same. If you are ready to apply or would like to learn more about our funding, get in touch today.
Growing your SaaS: Series A capital
Series A investment is a round of venture money that typically comes after seed and angel investors have helped you grow your business operations. Usually, you are ready to apply for Series A Capital once you have shown your SaaS company’s potential to generate revenue.
Series A financing can bring millions of dollars to your SaaS startup. However, you need to demonstrate you have a viable business strategy and can expand your operations through hiring, purchasing, and pursuing long-term goals.
In exchange for their investment, financiers of Series A Capital typically gain a considerable or, in some cases, controlling interest in your company. Technically, there aren’t many other differences between Series A and seed capital (other than the amount of money involved and the type of ownership, that is).
Most Series A financing capital comes from two sources:
- Venture capital (VC): A form of financing that usually comes from well-off investors, financial institutions, and investment banks. Although it typically takes a monetary form, venture funds can also be provided as technical or managerial expertise.
- Private equity (PE): This type of capital, composed chiefly of funds and investors that engage in private companies and public companies’ buyouts that result in delistings, is part of a public exchange. Retail and institutional investors provide the capital, and that capital is used to fund new technology and bolster a balance sheet. A private equity fund normally has Limited Partners (LP, who own 99% of shares in a fund) and General Partners (GP, who own 1% of shares).
These firms tend to manage multi-billion dollar portfolios and invest in several startups and SaaS companies in early development.
Although Series A investments can be risky for financiers, the payoff is a potential for above-average returns. Many SaaS companies go for this type of investment because they can’t yet access capital markets or bank loans. The downside of Series A capital? Investors usually get equity in your company – and a say in your decisions.
Scaling your business: Series B and more
Once a SaaS company has proven it can attract customers and scale its revenue growth, many businesses choose to do more funding rounds – or growth rounds.
Series B Financing is usually considered the second round of SaaS finance funding businesses go through after they have met certain milestones and have moved on from the initial startup stage. They are considered of higher valuation, so investors typically pay a higher share price when compared to a Series A round.
Series B funding can come from venture capitalists, private equity investors, credit investments, or crowdfunded equity. These investments aim to expand operations – for example, by buying new equipment and inventory and hiring new staff. By this point, investors have seen what your SaaS company is capable of and can see whether an investment is worth it or not.
Investors in Series B typically prefer convertible stock (rather than common stock) because of its anti-dilution feature. Non-dilutive funding doesn’t give away equity or ownership of your company, so investors don’t get watered down in subsequent rounds. This type of investment tends to have less risk (than Series A), but financiers get in at a lower share price.
Another option for raising your business’s capital is debt funding (or debt lending). Your company sells debt instruments to investors and repays them at a later date – usually with some added interest. A common form of debt financing is a bank loan or bond. Debt financing is tax-deductible and allows you to plan your interest payments, but you agree to provide some of your business assets as collateral.
Have a question?
No business’ path to success and growth is the same. If you are ready to apply or would like to learn more about our funding, get in touch today.
The financing advantages for SaaS
SaaS companies usually work with subscription models – or models based on annual recurring revenue. This offers one significant advantage: Provided your customers continue to pay for your services (and this will definitely be the case if you have annual contracts), you can predict exactly how much money you will have and when.
What does this mean for securing financing for your SaaS business? It means you can take your monthly recurring revenue model (or MRR) to your potential investors or non-dilutive financing partners upfront. And, of course, you can request the amount in investments assuring your SaaS business will be able to fulfil any obligations quickly.
Other key SaaS metrics that financing options consider when designing efforts to support SaaS accounting include:
- Committed Monthly Recurring Revenue (CMRR)
- Customer Lifetime Value (CLTV)
- Cash Flow
- Churn and Renewal
- Customer Acquisition Cost (CAC)
SaaS frequently asked questions
What can you use the funds for?
SaaS funding tends to be non-restrictive. This means that you use the money for any purpose you deem appropriate. For instance, your funding can go toward:
- Platform development
- Marketing spend
- Team growth and recruitment
- Sales
- Customer acquisition cost
- Improving your pricing models
- SaaS management
What is debt-based financing for SaaS?
Debt-based financing is, typically, a loan secured by a company’s assets such as buildings, inventory, land, etc. Because SaaS companies don’t usually own hard assets to offer as collateral, the calculation is done based on the company’s potential. Usually, the lender will take security as a warrant that allocates equity if the borrower defaults.
If you are a SaaS business looking for working capital or non-dilutive funding to resolve cash flow issues, get in touchwith our team today. We provide access to financing in as little as seven days from completing your application! We offer several other forms of funding for SaaS companies, including the Fundsquire Grant Advance and R&D Tax Credit Loans.
In between funding rounds?
Fundsquire has funding for every step of your growth journey. Maximise your working capital with non-dilutive options.