SaaS companies offer digital services where users can access the products online. If you’re planning to start a SaaS business, understanding your financing options could help.
But what exactly is SaaS financing?
SaaS financing offers various financing options to assist SaaS startups. These businesses often have clients that have purchased their products and use them to run their companies; it is often done on a subscription basis.
In most cases, SaaS companies cater to both B2C and B2B. For B2C, the costumes use it for their daily life or to help them with their job. On the other hand, under B2B, clients use SaaS companies’ products to run the business as they provide their needs.
4 Stages of Growing a SAAS Company
For a SaaS company to grow fully, it has to undergo four stages. Keep in mind that the business can’t reach its full potential without going through all of the stages.
- First Stage. The first or initial stage for any SaaS company requires funds. During this stage, research and development are critical for the product. The company will build and improve the software and do a lot of testing for development purposes. At this point, there’s no sale yet as the product hasn’t reached the final output.
- Second Stage. This stage is also called the networking stage. This is where the company will launch the product. The business needs to build positive networking or recruit many people to use the product. Some SaaS companies offer promo codes, vouchers, or discount coupons to attract users. They also utilize social media to market the product.
- Third Stage. Once the company has successfully created a network, the next step is to leverage its effects. In this stage, the SaaS business goal is to go up. The start of the SaaS company might have been costly, but if your business plan works well, the business will grow. For most SaaS business owners, this is the most exciting part.
- Fourth Stage. When the business has reached this stage, two things could happen. The company or product can be sold to a competitor or merged with another business. The other way is to grow the business yourself, where you’ll continue to build the company with its products. You can improve your current software and create a new project.
Financing Your SAAS Company
For many people who want to start a SaaS company, SaaS finance can be critical. These owners need funds to start the business. Some of them start the business with their savings, while others avail of financing options.
When building a SaaS company, you need to secure enough funds. You need money not only for the capital but also for the risk management process.
Since you are using a limited budget, it'd be difficult for the business to secure the usual funding. However, there are two main types you can choose from to start:
Small Cash Injections
When building a SaaS company, one thing that you should expect is the monthly recurring revenue (MRR). If your company’s capital is three times your MRR, the capital is considered small.
Most businesses can go to a bank and get a line of credit. Small SaaS business owners prefer this option as they are affordable and easier to process as there is less paperwork.
This option is ideal for short-term cash flow problems, such as when you need additional funding to market your product on social media or Shopify.
Keep in mind that this isn’t enough for high-cost company needs. However, this is a great option for a fast solution for instant cash.
Larger Cash Injections
On the other hand, if the capital you need requires more than three times your MRR, a bank is still an option but it could be more difficult to process as the amount is larger. Other options are financing leaders or venture debt lenders.
Angels are also a great option. They are a group of investors hunting for SaaS businesses starting up.
The 3 Stages of SAAS Finance
If you have enough funds from the very start until the last stage of your SaaS business, you won’t have any problems. However, that’s not always the case for people starting a business, especially with SaaS companies.
For many founders of SaaS companies, finding funds at every stage is important. Each stage will require a different amount as the needs vary. Generally, when the company reaches the next stage, other financing options will be available.
Stage One: Seed Stage VCs and Angels
As mentioned above, during the first stage, you’ll need funds. The best case is to find someone who finds your vision reliable. In the usual case, it could be your friend or someone you know, perhaps this person is one of the key people in the business. However, it can also be someone outside of your circle. The external help is called the Angels and Seed Stage VC fund.
The main difference between the two is that VCs invest after the start when the startup has proven itself that it could generate profit. Angels are entrepreneurs looking for a way to grow their money, while VCs have more input from financial professionals.
Remember that it’s beneficial for SaaS businesses to get financial backing early to have a secure cash flow later on.
Stage Two: Series A
Once your SaaS company has generated revenue consistently and has earned its name in the market, Series A funding will be unlocked. To fully utilize this funding, you’ll need to add new customers regularly. This will catch the investors’ interest.
If you’ve successfully shown that your business has to increase MRR and ARR, you’d most likely get approved with Series A funding.
For example, if more and more people subscribe to your software, your MRR would increase. This will immediately catch the potential investor’s attention. Once they see that your business has a huge potential, they’d invest their money in it. Besides, nobody wants to lose their money on investments.
Stage Three: Series B and Others
When your SaaS business is ready to expand, you’ll have structured funding that can help the organization grow. However, you need to ensure that the company has proven that it can attract a number of customers in a certain period. It should also have built trust between customers and the business itself.
Once this stage is unlocked, you’d be able to access different financing options, such as private equity companies, venture debts, and more.
Alternative SAAS Finance Options
Most SaaS founders rely on self-funding and fundraising activities. Others go for bank lines and VC options. Fortunately, when it comes to SaaS companies, there are other funding methods that you can utilize.
It can be challenging for SaaS companies to get a higher amount of funding in more advanced rounds because of the amount needed. However, businesses that have put in funds for their product’s research and development could be eligible for SR&ED financing.
This type of financing allows you to access your SR&ED tax credits. You’ll be able to reinvest this amount in your company instead of waiting for the verdict from the CRA.
If you’re looking for a way to extend your cash runway, venture debt is one of the options. It decreases the organization’s equity cash and increases debt cash. When you go for venture debt, you’d have time until the next equity round.
You can also use venture debt to add to the company’s valuation before the next equity financing round. Using venture debt for a one-time purchase, such as large equipment, is also possible.
For example, if you need new equipment to further develop your software, you’ll need funds for it; venture debt is a great choice.
Similar to venture debt, revenue-based financing also extends your SaaS company’s runway. You can also use it to purchase large equipment for your software.
The equipment needed should provide you with revenue, as the cash flows from these purchases are used to pay the debts.
This is ideal for SaaS companies that want a monthly payment scheme that fluctuates based on the company’s performance in the market.
SaaS Finance: Align With Revenue Growth
SaaS companies must go through multiple stages to ensure the company's growth and unlock various financing options. The options available will depend on the company’s level and performance, as well as the amount needed.
At first, businesses need fast cash to start their MRR before they can make the organization’s level higher. During the first stage, it’s best to make investors interested in your company even though it isn’t mandatory to ensure funding successfully. But when you have investors backing you up financially, it would be easier for your business to adjust as it grows, especially when you need cash.
As a founder, it’s your responsibility to know alternative options for your SaaS company, especially in the later stages. The most common financing options are venture debt, SR&ED financing, and revenue-based financing.