Babies how adorable they are? yet their seductive attractiveness results from a lot of nurturing and guidance.
Like… How should a newborn be fed?
How can you keep it wholesome?
How do you properly bring it up?
The same emotion occurs in the hearts of business owners; they want to exert every effort and follow every piece of advice available to care for their baby, the startup.
But what if you can’t afford to raise this child? especially if it is a startup SaaS company.
As, obtaining funding is an important but frequently difficult stage in the growth and development of a SaaS startup.
So, what steps should you take?
How to attract investors for a SaaS startup? Why is SaaS attractive to investors?
Things to consider before looking for SaaS funding.
Step 1# How do SaaS businesses get funding?
Stage 1: You have a notion for a Minimum Viable Product (MVP), but you lack the funding to develop it.
This is a pretty obvious situation where you do need financing to realize your vision, but you’ve probably already moved past it. There are many things you can do to get ready with inference, including aggregate planning and copy to make your idea more concrete, conducting initial market research, and generating a proper plan that outlines what you can’t accomplish as well as how much market dominance you could gain with funding.
You should be ready to explain in detail how you will be allocating funds because, as you know, having money implies that you should be using it.
Stage 2: You've developed an MVP and a growth plan.
As much as you can, try to grow the business on your own. Using client investment or your own cash, you can bootstrap a business.
How much money you require depends on your team size, the expense of running your website or service, and even your monetization approach: To establish how long you can operate without further capital, estimate your runway (cashflow less cash outflow).
If your ability to develop on your own is reaching its limit, take some time to evaluate the problem.
Do you have trouble keeping customers? Funding cannot fix these types of growing pains; instead, they must be recognized and dealt with.
Stage 3: You are unable to progress on your own.
Step 2# What type of SaaS investors exist?
Venture capital (VC) businesses fundraise by seeking contributions from a number of investors for their investment fund, which is often invested in startups with strong growth prospects. Both raise money via limited partner (LP) investors and invest in privately owned businesses, making them occasionally mistaken with private equity (PE).
When it comes to the businesses they invest in, the amounts of money they offer, and the amount of equity they demand in return for their investments, venture capital and private equity firms operate very differently.
You must demonstrate your company has the potential for significant future growth in order to obtain VC funding. Be prepared to respond to some challenging questions because venture capitalists will want to see data that demonstrate the value of SaaS companies.
Angel investors are typically private individuals that personally invest in your company rather than a fund or enterprise. For the funding, you forfeit a share of the equity.
Angel investors normally provide less capital than venture capital firms. If your company is still developing, angel investors are more inclined to give you financing. These investors typically look for new businesses that have the potential to generate large amounts of money during the first three to five years.
Accelerators and Incubators
Incubators are spaces that provide office space, finance, and knowledge. Usually, these spaces are ‘rented’ in return for monthly dues or, more often, stock.
To aid in the launch of new enterprises, incubators might offer supplemental services like training, network access, and specialized equipment. They are therefore ideal for the initial phase.
In the later stages of scaling, these programs provide support to Startups for a set amount of time. By facilitating access to investors, funding, and education, they serve as mentors for accelerated growth.
RBF – Revenue-Based Financing
A great way to get money is through revenue-based financing, commonly referred to as royalty-based financing. SaaS businesses get a loan from a group of investors who, in return for their investment (rather than stock), get a portion of the company’s ongoing gross revenue.
Until a predefined sum has been repaid, investors in an RBF get a regular part of the company’s profits. This amount often ranges between three and five times the initial investment amount and is a multiplier of the original investment.
RBF is different from debt financing even though a company that raises money through it will need to make recurring payments to the initial investment. There are no set payment amounts or interest rates applied to the unpaid balance.
Instead, you receive a loan based on the total sales of your company, with repayment taking the form of a proportion of your monthly income plus a multiplier of the initial investment.
Step 3# How do you convince clients to invest?
Plan Your Time
Get the paperwork ready
Organize Your Plans Well
Be Mindful of Your Business
A reduction in growth could deter potential investors, so make sure your company doesn’t suffer while you hunt for investment.
Develop Your Company
Before you look for startup finance, make every effort to expand your firm.
Step 4# Why is SaaS attractive to investors?
Because all of those clients stay for a very long time after a SaaS company produces enough revenue from its customer base to pay the cost of recruiting new customers.
Due to the client’s initial outsourcing of the software to the software vendor, which makes it highly predictable and likely to generate substantial revenue flows, these organizations are difficult to reject.
Finally, we observe the inverse of what we witnessed during the firm’s founding stage: all of the costs of attracting a client were incurred in advance and long ago, and the company now receives nearly all of the incoming cash flows from its clients as profit.
In comparison to businesses offering perpetual licenses, SaaS providers have another highly intriguing but rarely discussed long-term cost advantage: R&D.
Customers favor SaaS for additional reasons.
It is extremely challenging to switch suppliers because SaaS has been incorporated into business processes. Customers of SaaS, by definition, made the decision to outsource application management to a third party just once. The internal IT staff maintains all the software in the perpetual license model, so if they decide to transfer providers, it can cost money internally.
Because departments frequently have the freedom to choose how to acquire and operate SaaS technology, budgets become significantly more decentralized with SaaS. The chief information officer (CIO) could easily switch application suppliers on their own in the top-down sales technology approach.
Due to the fact that departments use SaaS, there are generally many more users in a firm than there have in the past for conventional software products, which raises shift costs. Many times, departments are more in touch with the SaaS customer care agent than they are with their own IT division.
Since the barrier of entry is high, many SaaS companies are investing extensively in sales and marketing even though this is affecting their current profitability. In winner-take-all technological markets, this early growth is crucial because it is territory-grabbing.
Concluding on funding for SaaS startups
Whatever method you choose for SaaS funding, it will take time and work to secure. We cannot stress this enough. Each rejection you receive will force you to spend time editing your financing pitch, but you should view these setbacks as learning opportunities rather than failures. You’re likely to encounter a good number of rejections along the route.
It’s important to bear in mind that, before you even begin speaking with potential investors, you’ll need to spend time away from your product creating one-pagers, investor decks, business strategies, and financial predictions.
To make your SaaS service the next great thing, you’ll need to put in a lot of effort. But you are not alone on this journey, contact us to develop your SaaS product. Connect with us to know more.