Launching a SaaS (software as a service) startup is a potentially lucrative avenue for any entrepreneur to go down, and yet finding funding is the main hurdle you’ll have to overcome to get it off the ground.
Luckily there are plenty of financing options for firms in this position, so let’s go over the products and strategies you need to know about to achieve sustainable success in the competitive SaaS space.
Just In Time Financing
Just in time financing is an efficient alternative to other funding solutions, and is also known as programmatic funding.
As the name suggests, it provides you with capital in an intelligent way, basing the cash made available to you on the anticipated needs of your startup on a month-by-month basis.
This essentially means that you never over or under-allocate your financing setup, but instead receive precisely what you need, when you need it.
Another advantage is that you don’t need to keep diluting your business equity once it is up and running and you have a reliable, growing revenue stream at your disposal.
Venture Capital
VC funding is commonly used across the SaaS marketplace by startups that are seen as representing an attractive and reliable investment prospect thanks to the growth potential they provide.
The right VC financing deal can be the launch pad your firm needs to eventually go stratospheric, although it’s not without its caveats.
You’ll unavoidably be handing over a stake in your firm to third-party investors, and this comes with diminished control over the company. Likewise, with the weight of VC investor expectations on your shoulders, you might be compelled to play it safe in order to earn a return.
Thus a mixture of VC funding and just-in-time financing is cited by some as being a better way for SaaS startups to access capital.
Revenue-Based Financing
Sitting adjacent to just-in-time financing, revenue-based packages are built on the basis of your monthly recurring revenue (MRR).
Unlike with VC funding, you can retain your full stake in the firm and you will therefore be able to take it in whatever direction you choose without answering to anyone else. The main downside is that you also don’t get access to the perks of VC involvement, such as advice and guidance, although this depends on the provider.
Obviously if your MRR changes suddenly, or your needs alter overnight, then revenue-based financing can be restrictive or prohibitively expensive, depending on your circumstances. This is where the programmatic, flexible nature of just-in-time funding takes the lead.
These funding options are particularly appealing for SaaS startups because you are unlikely to have adequate assets to secure traditional types of financing, yet you could have the prospects of significant revenue streams to solidify your status as a prospect for providers.
Angel Investors
While VC financing comes from full-blown businesses built around investing in startups, your SaaS operations could benefit from finding funding from a single source; namely, an angel investor who has the capital and the know-how to take small companies to the next level.
Typically you’ll find angel investors looking to get involved very early in a company’s gestation, although it is increasingly common for them to also play a role further down the line when future funding rounds are taking place. Choosing angel investors involves checking that their expertise and ambitions align with your own.
Key Takeaways
Ultimately, SaaS startups don’t need to choose just one type of financing but can play the field and select the combination that works well for them at a given point in their development.
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