Hey SaaS Founder,
Recently, I interviewed and deconstructed the raise with eight SaaS CEOs and founders who successfully raised the early-stage funding they needed for their businesses. The aim, of course, was to get practical advice on what other founders could do to raise their own. Although these leaders’ situations were all different, there’s a common narrative of perseverance. The reality is that, in most cases, securing the funding you need can be a long, drawn-out process.
This article deconstructs the raise and answers some of the most frequently asked questions SaaS entrepreneurs have about early-stage funding, using the information shared during these fascinating conversations.
If you’re interested in hearing the full interviews (we highly recommend it), please visit Deconstructing The Raise – you’ll find all the sound clips there. And thanks again to all the founders and CEOs who contributed their time and expertise.
I hope you enjoy the read, and it helps you on your journey!
CEO & Founder, SaaStock
What are my funding options?
If your funding journey is about to start, this is an important question. The good news is that you have various options. Note, however, that the lines between the different funding methods are often blurred and that much depends on the contacts you make along the way. Many SaaS companies ultimately secure funding based on good relationships and chance opportunities.
The most common funding options include:
- Bootstrapping or self-funding, where you use your own funds or raise funds from friends or family to get your startup going. Many businesses bootstrap in the beginning, because it can be difficult to attract other sources of funding before your company starts showing traction. Some startups bootstrap for a long time before raising funds from elsewhere.
- Crowdfunding is another popular way to raise funds. With this practice, you’d typically raise a small amount from many funders in exchange for future benefits like first access to new products or discounts. Platforms such as Indiegogo.com and Kickstarter.com provide the mechanism for this type of investment.
- Angel investors will invest early, usually in return for equity in your startup. Their investments are typically less substantial, but they’re often willing to take risks. Quantcopy was introduced to their major angel investor by a mutual friend who was also an angel investor in their business.
“He put us in touch with this […] entrepreneur-friendly angel group called IFG.VC,” says Quantcopy CEO, Rudy Lai, adding that they built a good relationship fairly quickly. “We were comfortable with the proposition they put on the table.” (Full Episode).
- Venture capitalists (VCs) are professional funders that invest in companies showing growth potential. Bruckshloegl recalls that Octopus Investments, the VC who helped them grow their SaaS platform, came knocking on their door.
“Octopus had over £9.1 billion under management and […] an impressive track record of portfolio companies,” he says. “Because every business in the world needs our platform, it was very important for us to have an investor with really deep pockets.” The group invested EUR 5 million of growth capital into the website-quality-management platform, helping the business to strengthen their position in the European market.
- Business incubators and accelerators also provide funding to SaaS (and other) startups. Incubators give funding and support at the startup stage, while accelerators do the same once a company starts to scale. They’re certainly worth exploring if you’re on the hunt for funds and assistance.
What do VCs look for when they search for businesses to fund?
VCs typically assess new companies in terms of the age-old risk-reward matrix, a tool that assesses the risk and reward profile of each startup.
The first and most important factor they look at is the quality of the startup’s management. They need to know that the team leaders can execute the proposed business plan, so the VCs typically look for people with a proven track record. A case in point is Flowrite, which offers an AI-powered writing tool. According to Co-Founder and CEO Aaro Isosaari, the startup founders’ extensive experience in software engineering played a critical role in securing VC funding.
The size of the market is also vital. VCs want to get a solid return on their investment and need to see that your company has a chance to scale up in the market you’re targeting. The most effective way to demonstrate the potential of your market is to present thorough market research and testimonials of actual and potential clients that talk to the desirability of your product. The bigger the possible reach of your product, the greater the chance of success (and raising funds).
This almost goes without saying, but you also need a fantastic SaaS product that’s preferably unique in what it offers – a software tool that truly solves customers’ pain points. VCs want to get in early before competitors jump in with similar products. A unique, new product has more potential for profit and, therefore, more funding appeal.
Griffin is an API-first, Banking-as-a-Service provider focused on simplifying the complexity of banking infrastructure and compliance operations. CEO David Jarvis knew they’d struck gold when they designed their one-of-a-kind product, as it made their venture an attractive option for funders.
“A financial services product needs the core pillars of accounting infrastructure, a banking partner, and compliance infrastructure,” he says. “The core thesis of Griffin is that we offer this as a vertically integrated product suite, and so all of the overhead of keeping them in sync is gone. That makes us unique.” (Full Episode).
Risk assessment is another critical step in deciding whether a venture is worth funding, or not. Your job is to convince the VCs that you have a sound business plan. This means you need to lay out exactly what you’ve achieved to date and where you’re headed. Also note any regulatory issues that may have to be resolved, and where you see your company in five or ten years’ time.
All of the above is part of the due-diligence process. The more prepared you are in your pitch to funders, the more likely you are to inspire confidence in the hard-nosed VCs you hope to persuade.
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How do the funding rounds work?
Funding rounds happen every time a company seeks to raise funds. Rounds are generally classified as Seed, Angel, or Series A, B, and C, and each is linked to a different point in a company’s growth trajectory.
Seed, Angel, and Series A funding is what you’ll be after in the early stages of growing your business. Series B funding will take your venture beyond the startup stage, and Series C will kick in when your business starts flourishing. This will be the point at which you’ll need capital to expand the business or move into new markets.
Note, however, that the rounds aren’t always clearly defined and that, for example, the Seed round can be more significant than the Series A one.
“Our most recent round was a £6.5 million round led by EQT Ventures,” says Jarvis. “This was more of a Seed round than a Series A. We raised £3 million in our first Seed the year before.” (Full Episode).
How long can it take to secure funding?
The raise can take even longer after the initial conversations have been completed, as Ryte’s Bruckshloegl recalls:
“The first [funding] conversation was in June, but we only signed in mid-December. A lot of time passed between the first conversations. In the last three months, we worked almost on a daily basis to close the deal.”
Putting in the time and staying focused on closing the round is crucial for a smoother raising process.
How do I create a winning pitch deck?
A pitch deck is a short, focused series of slides that sells your SaaS venture and product to potential investors. For some, like Maarten Masschelein of data-observability platform Soda, this is a living document that’s absolutely key to securing funding.
“I like it to be a growing, evolving thing. You have to test it out, see how it works, and see where there are gaps.”
Masschelein shares that his team made the first version of their pitch deck and then tested and tested it. The Soda team tinkered and adjusted it over several weeks, which helped them make it as strong as possible. (Full Episode).
With each funding round, the key slides changed. First, it focused on the management team; then the emphasis shifted to the product and how it solves the pain point they identified; finally, they highlighted the size of the market and how the business was perfectly positioned to succeed in the market they were going for.
What can I do to speed up the funding process?
Every business looking to raise funds is in a hurry, and there’s always the question of what you can do to speed up the process. Unfortunately, apart from good preparation, solid research, a couple of contacts, and a perfect pitch deck, there isn’t much you can do to hurry things along.
In fact, there’s a case to be made to not push for too much speed. “It isn’t really smart to rush the process too much,” argues Soda’s Masschelein.
“However, I think it’s important that you clearly communicate your timelines and what you want to work towards.”
Masschelein explains that the funding process has “a certain cadence to it” and that all parties concerned should respect the process and build in enough time to do proper due diligence.
Which hurdles can I expect to encounter during the funding process?
The first hurdle to overcome is complexity. It’s key to keep the process as logical and straightforward as possible, or else you’ll come across as uncertain about your goals. Funders move in a fast-paced world, and if you can sell them your idea concisely and logically, you’ll have a good chance of succeeding.
The second hurdle is understanding the investors and their processes. Listen to what they ask and how they request it. If you’re unsure, ask for clarification. If you don’t understand their process, ask for more information. Investors are in a risky business, and they know the importance of all parties understanding every detail of the deal.
According to Rudy Lai, the third and most significant hurdle is time management – balancing the demands of the raise with the day-to-day management of a startup business.
“Managing the fundraising process in addition to growth, […] customer success, and […] product management – that’s something I knew was hard, but it turned out [to be] harder than I thought.”
What are the legal considerations of the funding process and where can I find support?
It’s critical to get legal help from someone who knows the investment landscape. So, for example, if the investment in your business involves a specific country or region, you’ll need a law firm that understands the legal challenges you’re likely to encounter there. Potential investors will also insist you protect your intellectual property (IP) – another critical legal service to budget for.
Note that your investor can become more involved in your choice of a law firm than you might expect. For example, Griffin once engaged a private equity specialist lawyer in negotiating with a VC investor. But the VC objected to their choice of lawyer, which turned out to be the correct decision.
“My co-founder questioned whether it was the right thing for the investor to tell us which lawyer to use, but it turned out to be absolutely the right thing,” Jarvis recalls. “The service was fantastic, and we got great value.”
We’re here to help
Successful fundraising is easier when you immerse yourself in the SaaS space, meet other founders, and get access to investors. Don’t forget to listen to the full interviews highlighted in this article. The sound clips are packed with useful information and more tips from the SaaS experts we talked to. Also, I’d recommend signing up for Ventroduce:
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