Who Funds SaaS Startups?

Matt Preuss
Marketing Manager

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Being a startup founder is hard. On top of finding customers, hiring top talent, building a product, and managing an acquisition funnel — founders need to secure funding for their business. At a high level, most funding options for early-stage startups are similar. However, there are some nuanced differences based on a company’s vertical or market.

Over the last 2 decades, SaaS (software as a service) companies have risen in prominence. At the same time so has the venture capital industry and the funding options available to startups.

Learn more about this data from Silicon Valley Bank here.

Related Resource: The SaaS Business Model: How and Why it Works

Learn more about SaaS financing and funding options below:

What is SaaS startup financing and how is it unique?

Over the last 2 decades, SaaS startups have become a popular investment vertical for venture capitalists and investors in general. As put by the team at Salesforce, one of the original SaaS companies, “Software as a service (or SaaS) is a way of delivering applications over the Internet—as a service. Instead of installing and maintaining software, you simply access it via the Internet, freeing yourself from complex software and hardware management.”

SaaS companies can increase margins and build at scale with a smaller team due to the ease of access for their customers. Naturally, monthly or annual pricing (subscriptions) has become the norm for SaaS companies. These areas combine to fuel investor interest as SaaS companies can efficiently grow and become large, profitable companies.

As SaaS is still relatively new, so are the funding options. Over the past few years, the funding options available to SaaS startups have been improved and expanded. Learn more about the common types of SaaS funders below:

Types of SaaS startup funders

As we mentioned above, the funding options available to SaaS startups have improved and expanded over the last 2 decades. The innovation has led SaaS startups to a plethora of funding options fit for any stage.

Related Resource: Valuing Startups: 10 Popular Methods

Learn more about the most common SaaS funders below:

Venture capital

As put by the team at Investopedia, “Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.” Venture capital has been integral in the funding of SaaS companies.

VCs are generally willing to take risks and fund startups with little to no revenue in the hopes the company will create long-term value. However, this comes with a set of pros and cons — learn more below:

Pros

Venture capital certainly comes with its list of pros. We boiled down the list into a few key points below:

  • No personal capital of the founding team. Getting a SaaS startup off the ground requires some form of capital investment. To help get things started, VC can be a popular option as it does not require capital (or free time) from a founder.
  • VC requires little traction or data. Traditional funding methods (like bank loans) require collateral or some type of traction. VC investors are buying equity in the hopes that your company will grow into a large company.
  • Lastly, VCs offer extensive networks and resources. VC funds need resources and tools to help founders succeed to stand out among their peers. This can be everything from helping with hiring to helping with product strategy.

Related Resource: All Encompassing Startup Fundraising Guide

Cons

Of course, venture capital comes with its own set of cons. We boiled the list down to a few key points below:

  • Giving up equity. In order to secure venture capital, startup founders need to give up equity in their businesses. This can be costly in the long run.
  • VC pressure. A VC fund’s duty is to generate returns for their LPs (limited partners) with the hopes of raising another fund in 10-12 years. Because of this, some of the pressure to exit or change business strategy might fall on the shoulders of portfolio founders as GPs look to generate returns for their own investors.

Notable venture capital funders

As SaaS has become a hot commodity in the VC funding space, there are thousands of investors out there. Below are a few of our favorites (check out our free investor database, Visible Connect, to find more SaaS investors):

Related Resource: 23 Top VC Investors Actively Funding SaaS Startups

Angel Investors

As put by the team at Investopedia, “An angel investor is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.”

Related Resource: ​​Venture Capitalist vs. Angel Investor

Angel investors invest in a similar style as VCs — buying equity in a business with cash. However, they are often single individuals that write smaller checks and are investing to diversify their assets.

Pros

Like venture capitalists, angel investors come with their own sets of pros and cons. We laid out a few of the main pros of raising capital from an angel investor below:

  • Like VC, angel investors require founders to spend zero personal capital. This can help alleviate the financial stress of startup and building a SaaS business.
  • Occasionally, angel investors can be strategic investors. Some angels might have expertise in your space or direct experience building a company in your space. This can be incredibly helpful when it comes to developing products, go-to-market strategy, and hiring leaders in the space.
  • Angel investors can be integral in building momentum during a fundraise. Due to their smaller check size and an investment committee, angel investors can make investments quickly. This will help when building momentum in a fundraise. As an added bonus, angel investors often know other investors that can make introductions. Elizabeth Yin of Hustle Fund makes the case for smaller angel checks below:

Cons

Of course, angel investors come with their own set of cons as well. We laid out a few of the main cons of raising capital from an angel investor below:

  • Lack of experience. Some angel investors might be new to investing which can create a burden for some founders as they might have more frequent questions and asks for founders.
  • Smaller checks. While we mentioned smaller checks can be a pro of angel investing, it can also be a con. With newer funding instruments, these small checks can be rolled into 1 investment there are instances where many angel investors can create a headache on a cap table.

Notable angel investors

Angel investors are all around you. Angel investors can be anyone from your dentist to a former boss. However, there are a few angel investors that have made a name in the space:

  • Keith Rabois
  • Kim Perell
  • Chris Sacca
  • Reid Hoffman

Accelerators and incubators

As put by the team at Investopedia, “An incubator firm is an organization engaged in the business of fostering early-stage companies through the different developmental phases until the companies have sufficient financial, human, and physical resources to function on their own.”

Related Resource: What is an Incubator?

Accelerators and incubators have made a name in the startup space as a valuable resource for companies just getting started with limited to no customers or revenue. Learn more about the pros & cons of incubators and accelerators below:

Pros

Accelerators and incubators come with their own set of pros and cons. We laid out a few of the key pros below:

  • Peer networking. One of the major pros of going through an accelerator is the networking opportunities with the other founders. By going through an accelerator you’ll be linked to other founders and have peers to learn from and lean on as you build your business.
  • Investment. Many times, accelerators make the first investment in many startups. Over the course of your time in an accelerator, chances are they will help with introductions to potential investors (or even make follow-on investments themselves).
  • Education. Education and programming is built into most accelerators. Over the course of a program, many accelerators will bring in thought leaders and experts to help hone different skills.

Cons

Of course, accelerators and incubators come with cons as well. We laid out a few of the key cons below:

  • Equity. In turn for investment and resources during an accelerator, you will need to give them equity in your business. Do your research and talk to past founders to make sure trading equity is worth it.
  • Time. Most accelerator programs take place between 10 and 14 weeks. Traditionally they have been in person but there are various virtual programs. For most founders, this is a serious time commitment and could require moving or relocating.

Notable incubators and business accelerator programs

Since Y Combinators’ inception in 2005, accelerators and incubators have become well-known in the startup space. Check out a few of the most popular accelerators and incubators below:

  • Y Combinator
  • Techstars
  • Expa

To find more accelerators, check out our saved list in Visible Connect, our free investor database.

Revenue-based financing

As put by the team at Investopedia, “Revenue-based financing is a method of raising capital for a business from investors who receive a percentage of the enterprise’s ongoing gross revenues in exchange for the money they invested. In a revenue-based financing investment, investors receive a regular share of the business’s income until a predetermined amount has been paid.”

Pros

Revenue-based financing comes with its own set of pros. Check out a few of the key pros below:

  • Maintain ownership. Revenue-based financing does not require giving any equity to investors. This means all existing members on the cap table will not be diluted.
  • Faster funding. As we mentioned above, raising venture capital is very much a process. Due to this, it can take months to receive capital. Revenue-based financing can be procured in a matter of days or weeks.

Cons

Of course, revenue-based financing comes with its own set of cons too. We laid out a few of the key cons below:

  • Requires revenue. Most early-stage companies likely have little to no revenue (and when they do, it is largely unpredictable). This can make revenue-based financing not viable until later stages.
  • Future payments. Revenue-based financing requires a monthly payment. Most early-stage startups are generally cash conscious and would prefer to make monthly payments.

Venture debt

As put by the team at Silicon Valley Bank, “​​Venture debt is a type of loan offered by banks and nonbank lenders that is designed specifically for early-stage, high-growth companies with venture capital backing. The vast majority of venture-backed companies raise venture debt at some point in their lives from specialized banks such as Silicon Valley Bank.”

Pros

Venture debt comes with its own set of pros and cons. We laid out a list of the key pros of venture debt below:

  • Debt over equity. As we’ve mentioned previously, equity is the most expensive asset a startup has. Venture debt allows you to avoid giving up any additional equity.
  • Timeline. Venture debt is commonly tagged on at the end of a venture capital round. Because of this it can move quickly and offer an extended runway for startups

Cons

Of course, venture debt comes with cons too. Check out a few key cons of venture debt below:

  • Financial covenants. Venture debt comes with a set of required performance metrics. The penalties for missing the required financials can be large for startups.
  • Future funding. Having debt on a balance sheet can be a negative signal for future funders.

Alternative types of funding

The SaaS funding options above are a few of the most common. However, SaaS funding options have continued to evolve over the last decade. Check out a few different alternative SaaS financing options below:

Crowdfunding

As put by the team at Investopedia, “Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.”

Bootstrapping

Bootstrapping is when a founder (or founding team) starts a company by using their own capital and taking no outside capital. From here, bootstrapped companies generally use company revenue to fuel the growth of their business.

Related Resource: Bootstrapping 101: Pros & Cons of Bootstrapping Your Startup

Nondilutive Options

Over the last few years more nondilutive funding options have been created for SaaS companies. One of the most popular is Pipe. As they put it, “Pipe transforms recurring revenue into up-front capital for growth without dilution or restrictive debt.”

Related Resource: Checking Out Venture Capital Funding Alternatives

Which is the most popular funding source for SaaS startups?

Traditionally, raising venture capital or bootstrapping a SaaS startup has been the most popular funding source. As the options available to SaaS startups, the most popular options will ebb and flow. However, venture capital will likely always find itself as the most popular option as more SaaS companies create outsized returns for VCs (fueling more VC investment into SaaS companies).

At Visible, we like to compare a venture fundraise to a traditional B2B sales and marketing funnel. At the top of the funnel, you are adding new investors, nurturing them with meetings and updates in the middle, and ideally closing them as new investors at the bottom of the funnel.

Just as a sales and marketing team have dedicated tools — we believe founders should have the same to manage their most expensive asset, their equity. Find investors for your startup, share your pitch deck, nurture them with updates, and track your conversations all from one platform — give Visible a free try for 14 days here.

Succeed in your venture capital efforts with Visible

Determining the right funding option for your startup is only half the battle. If you’re raising venture capital — finding the right investors and having a game plan to manage your fundraise will allow you to spend time on what matters most, building your business.

Find investors for your startup, share your pitch deck, nurture them with updates, and track your conversations all from one platform — give Visible a free try for 14 days here.

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