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A Comprehensive Guide for SaaS Fundraising

An article we liked from Thought Leader Julio C. Ortiz:

Successful SaaS Fundraising: Navigating the Evolving Landscape

Investors have been pouring capital into SaaS startups.  Navigating the Evolving Landscape of Fundraising

But that doesn’t mean raising funds is easy. This guide to finding the right financing options can help lead you to the treasure in this tricky terrain.

Slack, Zoom, DocuSign—these are just a few of the many SaaS companies that are now household names. Slack’s messaging platform, Zoom’s video conferencing system, and DocuSign’s digital signature services have become the glue holding most of the global workforce together during the COVID-19 pandemic. The incredible success of such companies has inspired venture capital (VC) and other investors to put massive amounts of money into SaaS startups in hopes of getting in on the ground floor of the next big thing.

SaaS—software as a service—does not refer to a specific type of software but rather the business model and method of delivery. SaaS companies sell access to software that is centrally hosted in a cloud-based system and accessible via the internet through a monthly or annual subscription. This kind of cloud-based software enables providers to roll out updates and new features quickly, scale up distribution rapidly, and frees customers from the costs of hosting software on their own servers. Subscriptions let customers spread out their costs over a longer period of time, as well as create steady and predictable recurring revenue streams for SaaS companies and their investors.

Total Capital Invested

The SaaS business model is not new. Investors have poured US $3.62 trillion into the space since 2013, more than any other category of IT-related company, according to PitchBook Data, Inc. However, this trend has significantly accelerated in recent years, due in large part to the growth of cloud-based computing, and the rapid rise of remote work and education during the COVID-19 pandemic. Globally, end-user spending on public cloud services is expected to exceed US $480 billion in 2022, according to a recent Gartner Forecasts report, up from US $313.9 billion in 2020 and an estimated US $396.2 billion in 2021; SaaS specifically is projected to reach US $171.9 billion in 2022. This presents a tremendous opportunity for founders and early-stage SaaS companies looking to raise funds. However, finding the right investors and securing funding when you need it can be surprisingly difficult.

At least, it’s surprising to many companies that are new to fundraising, I’ve discovered. The importance of experience and expertise in developing and executing a successful fundraising strategy is not to be underestimated. After 25 years at the financial helm of large multinational corporations, I’ve spent the last few years helping owners of early- to mid-stage startups (mostly SaaS and e-commerce businesses) raise funds to grow their companies. I’ve found that many tech companies, understandably, aren’t familiar with the fundraising landscape, which is also evolving rapidly. As a consequence, even SaaS companies, clearly a favorite among investors right now, may make missteps that can cost them valuable time and resources.

Mistakes to Avoid

Chief among these missteps is targeting the wrong type of investor for your company’s stage of development; for example, pursuing VC funding with a questionable minimum viable product (MVP) and no demonstrable marketplace traction. Other potential issues include raising too much or little capital, misallocating limited capital for the wrong purposes, or worst of all, giving away too much equity early on and losing out on value you worked hard to create. The issue of equity dilution is perhaps most pertinent for SaaS startups, where recurring revenue opens the door to alternative financing options, like revenue-based loans, at an earlier stage than for many other businesses.

What I’ve found is that most early-stage companies could use more guidance about how, when, and where to try to raise capital. In this article, I provide a basic map of the fundraising landscape that can help startups and founders better orient themselves. First, I describe the standard rounds of financing and how they should align with a company’s stage of development. Then I lay out the various categories of investors and highlight those that will be most receptive at each stage. My goal is to give you a guide to help you find the right funding for your company, no matter its stage right now.

Targeting the Right Investors at Each Stage in the Fundraising Life Cycle

The amount of available capital is increasing and the investor base is expanding as private equity, hedge funds, and sovereign wealth funds have begun to compete with more traditional venture capital firms to invest in startups, particularly private SaaS companies. The recurring revenue streams and capital-light nature of the SaaS business model make it more appealing for traditional institutional investors.

US Startup Financing Deals

However, as investor interest in the space has increased since 2010, so has the complexity of the SaaS fundraising landscape. With a broader investor base and more flexibility in terms of financing options, a solid understanding of this environment and a well-thought-out plan for how to approach it are more necessary than ever before.

In recent years, a growing number of early-stage investors (from angels and accelerators to VCs) have adopted a social impact focus, investing in companies that generate positive social and environmental impact alongside a financial return. It’s a common misconception that you have to be saving the world to attract this kind of capital, and it may be worth considering whether your company would fall under a particular impact mandate. In the case of SaaS companies, such a mandate could be as simple as expanding access to underserved demographics or geographies, like a fintech company whose product increases financial inclusion.

Before you start to formulate any kind of fundraising strategy, you need to have a good sense of what stage of development your company is in. This will help you determine the type(s) of investor(s) you should target and what they will typically want to see from you, as well as the appropriate purpose(s) for raising capital and how much you’ll need to raise. Remember: Fundraising is a process, not a one-time event. You’ll likely go through several rounds of financing before your company becomes the next Zoom—or even just a self-sustaining enterprise. In any given round, your primary objective should be...

Read the rest of this article at toptal.com...

Thanks for this article excerpt and its graphics to Julio C. Ortiz.

Photo by Anastasia Petrova on Unsplash

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