Whether you are looking to process payments online, create websites, or order food using a food delivery app, our dependency on successful SaaS startups is at its all-time high. There are several reasons for the recent rise in SaaS startups, from those looking to raise their income to those who felt the timing was perfect for introducing a software or SaaS product. Irrespective of the motivation it is also crucial to understand the hazards associated with Saas businesses.

Like all other startups, SaaS businesses also need money to remain in operation. Software development, deployment, and marketing are expensive, especially in the early stages of a firm. Hence startup SaaS companies may need an initial investment to survive. Raising money is not only required for a new company to get off the ground but also allows a fledgling company to create a strong base for expansion.

STAGES OF STARTUP FUNDING

The type of finance that startup SaaS companies should seek depends on their stage of development. Given below are the critical steps necessary for raising money for startups.

Pre-seed startup stage SaaS

The smallest SaaS startups are allowed to enter the pre-seed stage. Early-stage firms seeking pre-seed funding might need financial assistance to create a usable prototype or launch their product.

Seed startup stage

Software and top SaaS startups typically need to raise between $100,000 to $2 million in the seed stage, which is regarded as the first official equity fundraising round. In this stage, startups generally raise funds for product development, growing their staff, or expanding operations.

Series A Funding – Generating Revenue

Series A Funding helps businesses enhance their strategy and survive cash flow volatility. When a startup SaaS company or software business has started generating income, Series A fundraising can help you expand your business. This funding will help optimize the company procedures already in place. Attracting the right investors at this stage can help create the best SaaS startup.

Series B Funding – Equity fundraising

Series B fundraising is equity-based financing in which businesses provide investors with the firm’s shares in exchange for cash. This funding serves as a cash infusion to accelerate business growth. In this stage, you must show that your product is profitable and your company can compete at a particular level.

Series C Funding – Final Round

This is the last phase of funding. The focus is on aggressive expansion during this stage. Your company must be well-established and provide a low investment risk to be eligible for this funding round. Your software or b2b SaaS company should be making enough money to scale, resulting in investors receiving less equity for their investments.

WHAT ARE THE DIFFERENT SOURCES OF RAISING MONEY?

Startups receive their initial investment during the seed funding stage, which is the first step in taking a service or product to market. During the seed stage, angel investors, crowdsourcing, and bootstrapping (family and friends) are frequent business funding sources. 

 Bootstrapping – 

Bootstrapping describes borrowing money from relatives and friends to launch a business. The initial funding for the bootstrapping strategy can come from private loans or savings, proceeds from the first few sales, or funds provided privately by friends and family. Numerous prosperous businesses, including MailChimp, DShuttershock, GoPro, and Shopify, were bootstrapped initially.

Advantages

• Motivation to create a functioning b2b SaaS startup that produces instant income.
• The management of your company remains entirely in your hands, and it allows you to maintain control over the company.

Disadvantages

• Since you cannot receive outside funding for your SaaS business, scaling, budgeting, and management are more complex.
• You won’t have access to the marketing and mentorship that can delay the process of you becoming the best SaaS startup.
• If you push your limited resources too far, you risk getting into debt very rapidly.

Crowdfunding – 

Crowdfunding, mainly through online platforms, is a fantastic method to gain traction for your SaaS business. Crowdfunding immediately increases potential customers, investors, and brand loyalty. It is a low-risk way to raise money and conduct some initial “market testing.”

Advantages

• It’s an easy and quick way to raise money, especially for businesses in their early stages.
• You decide what, how, and where to crowdfund. 
• This tactic constantly changes and provides versatility that other solutions don’t commit.

Disadvantages

• It requires familiarity with the various systems. Regulations on crowdfunding place limits on how many investors you can have and how much money you can raise.
• Fees for payment processing and facilitation on crowdfunding platforms.
• You are not provided with expert advice.

Angel Investors – 

Angel investors are individuals or organizations that provide capital at the startup phase of a business in exchange for stock. Angel investments are a more flexible source of fundraising, and they invest in organisations that promise to offer good returns for their investments. Angel investors often contribute between $25,000 and $100,000 and frequently take 20% to 25% of the company.

Advantages

• Angel investors might get more intimately interested in your company because they are independent contractors, and you can approach them for business advice.
• Establishing a personal connection with your investors opens up the possibility of a reliable source of money. Your angels will be more receptive to future funding if you convince them that you can be trusted with their money.
• Compared to other investors, angel investors are more risk-tolerant. Because they don’t have board members to answer to, decisions can be made more quickly.

Disadvantages

• It can be pricey to invest in angels. Their return-on-investment (ROI) expectations may be as high as ten times of their initial investment.
• It is worthwhile to initially research for right angels because their availability, vigour, and knowledge can differ.

Venture Capital – 

Venture capitalists are high-net-worth individuals who invest in startups with strong growth prospects. VCs distribute smaller sums of money among many enterprises due to the financial risk associated with early-stage startup investments. As a result, venture capital is the preferred private market investment for top SaaS startups. 

Advantages:

• The value of your SaaS startup can be validated by venture funding. It also communicates to your industry that your product is valuable and viable and that potential buyers may trust it.
• It gets simpler to get a follow-on investment.
• If a venture capital firm finances you for one funding stage and you meet your goals, it will be more confident to provide additional funding.

 Disadvantages

• Venture capitalists could ask for stock or board seats in your SaaS business in exchange for money.
• Startups need to present dependable metrics to support their performance claims.
• A venture capitalist can want a say in how things are conducted because they have a stake in your company.

Incubators – 

Incubators are physical locations that provide office space, finance, and knowledge. Most of the time, these spaces are rented in return for monthly dues or, less frequently, equity. To aid in the launch of new enterprises, incubators might offer supplementary services like training, network access, and specialized equipment. They are, therefore, ideal for the seed stage.

Advantages

• Some of the best minds in the industry employ incubators.
• Entrepreneurs can receive a lot of assistance from these networks.
• Acceptance into an incubation program signals to your rivals that your company has the potential to grow.

Disadvantages

• Acceptance into a program is challenging because incubators are so popular.
• They need to own between 2 and 10 percent of your company in return for their services.
• These programs will cost you, whether in the form of a monthly charge or equity. They cannot, however, promise more capital.

SUMMING UP

Startups aim to expand quickly; therefore, they require significant capital to finance their growth. Although numerous fundraising options are available, considering the benefits of each funding source mentioned above might help you choose which one to pursue.

Irrespective of the method you use, SaaS fundraising can be a time-consuming process. You’re likely to encounter a good number of rejections along the route. Each rejection you receive will force you to spend time editing your pitch, but you should view these setbacks as learning opportunities rather than failures.