SaaS Funding Options For Growth

John Delaney.

 

So how do you decide which type of funding is right for your SaaS business? Your answer will depend on what kind of SaaS company you are building, what stage you are in its trajectory and where you want to take it – and also what matters most to you. Do you want to keep full control of your company? Are you trying to minimise dilution? Are you willing to offer personal guarantees to secure the funds?

As the business model matures and continues to establish credibility, the options for funding the growth of SaaS companies is expanding. Everything from crowdfunding, loans and lines of credit, angel and venture capital, corporate venture to subscription prepayment program (like Multipli) are available to help you fund your growth.

No one can predict exactly how a company will grow and what twists and turns will impact its future trajectory. But, when it comes to making choices on how to best fund its future, you need a good understanding of the trade-offs, risks and payoffs that come with different financing options.

To start let’s take a look across four of the major categories – Angels and Venture Capital (VC), receivables based funding (such as Multipli’s subscription prepayment financing) and traditional bank loans and alternative debt. The table below provides a high level snapshot of some of the key features and considerations for each of these funding different options.

 

Angels

Venture Capital Subscription Pre-payment Funding

Bank Loans and Alternative Debt

Growth stage Pre-revenue or one or two customers.

$1M plus ARR

Some traction to relatively large scale.

At least $1M plus ARR

A few to many subscription customers.

$1M plus ARR

Established businesses with a solid long, track record and assets
Suited to those looking for Seed funding for initial product build or traction Rapid, high growth companies with huge market potential needing large capital injections Growing companies looking to invest consistently in their growth Funding for specific purposes
Ownership Expect to give up to 50% in equity Expect to give up between 10% & 50% depending on series No equity dilution No equity dilution
Security No guarantees No guarantees No personal guarantees Personal guarantees usually required
Control Require board seats Require board seats N/A May impose financial covenants
Cost of funding High High Medium to Low Low to High
Repayments Payout when company is sold Payout when company is sold None Variable to Fixed
Time taken to get funding 3 to 6 months 6 to 12 months Less than one month 3 – 6 months

Each funding option can make sense for you at different times but the growth trajectory you envision for your business should have a major influence on your funding strategy. If you are expecting to be a major player in a $1 billion market, a predominantly equity, VC-backed funding strategy makes the most sense. But if you think you can reach your market share goals under your own steam, then a non equity based option might make more sense. You will retain more control and value in the long term.

As a rule, venture capitalists are looking for companies that show a significant change in their situation, those that can make it really big, really fast. Hockey-stick growth is a key determinant of breakout potential and appeal and is more likely to attract venture capital. But competition for VC money is steep and it can take a long time to secure. Founders often find that they spend almost all of their time fundraising – so make sure you have a good support team in place that can keep things going without you.  

“Ongoing business success requires knowing and understanding all the different funding options.”

Traditional banks are not as impressed with hockey-stick growth. SaaS companies require capital to grow before they are making profit and banks generally will not lend to them during that crucial period. What they are looking for is established companies with slow but steady profits and strong annual revenues. They sometimes struggle with software and SaaS companies and their lack of physical assets or inventory. If you can get it, they will often be among the cheapest financing options. However, they will require regular repayments, may restrict how you can use the funds or impose covenants that allow them to recall the loan, should something in your business change.

Receivables based funding – such as Multipli’s subscription prepayment program – looks to help companies fund their own growth. It is best suited to SaaS companies seeking smaller capital infusions to fund sales and marketing or product development. Since the amount you receive is entirely based on your sales – there are no repayments, no guarantees or limitations on how you spend the funds and you don’t have to be profitable. You just need growing Annual Recurring Revenue (ARR), low churn and customers who see the benefit of price stability through multi year contracts.

 

Know the right questions to ask

So in deciding what makes most sense for you ask yourself a few questions. How much capital do you really need right now? Do you need a huge war chest to power hockey stick growth or are you looking to grow consistently over the next few years? Are you willing to give up equity and control? What’s your end goal – IPO? Sale? Continue to trade? What are you willing to risk to fund your business? And how much time can you afford to spend looking for and raising capital?

There is much to consider in the fundraising journey – much more than we have covered here. Do your research and make sure you take the time to think about what is important to you in a funding relationship. Often entrepreneurs can feel like the junior partner with little say in their funding options. But the truth is – you have agency and you have a business of value – so make sure you find the funding that suits where you are right now and where you want to go.

Next steps

Read Funding SaaS Growth – Overcoming Death by Drip Feed