There are many approaches to acquiring funding for a software as a service (SaaS) company. These web based software platforms provide users value through interaction with the program. An example of a popular SaaS is Salesforce CRM software. These types of companies are very popular for venture capital firms if they have market viability because they can scale quickly for an early exit, have some of the best profit margins out of any industry and have the potential to obtain a defensible market position.
Several methods of acquiring funding for a SaaS company exist, however the methods of receiving it depend upon several factors. These factors include the age of the business, risk factors, total funding requirements, credit level and the general preferences of the management team. For companies that are in the start-up phases, it also depends on whether or not the technology has been developed. This article will cover the various methods of obtaining funding for a SaaS company and analyzing which factors hold the highest potential for your specific needs. For additional information or a free consultation, Pro Business Plans can help your company to understand more deeply into this and build a plan to assist in the funding process.
Venture Capital & Angel Investors
While seeking a venture capitalist to supply small development fees may be challenging and an angel investor may be better, there are many venture capital funds covering SaaS companies. It is important to understand that not all venture capital companies are the same, this is a mistake that many people needing to fund their SaaS business grow confused with. Even with an excellent technology and implementation, if a venture capital company is not aligned with your sector or business type, they may completely ignore the opportunity.
When approaching a venture capital firm with opportunities related to your SaaS business, do your research on them and the management team. Look at similar companies that they have funded and ask yourself if you could see your company fitting into the group. Focusing your efforts on developing highly targeted proposals to a limited number of venture capital firms will be much more effective than sending large e-mail blasts. Venture capital funding is best when your company is seeking over $1.0 M in funding, especially if they have a broad industry network and are willing to help your company grow in other means by providing strategic support or access to their extended network pool.
The debt financing is best for companies that do not want to give away ownership into the business. Considering the risk level of a company, it is extremely risky for banks to finance start-ups without collateral of the owner. For the same reason, it is very risky for an owner to use his or her own assets as collateral for financing a start-up company. Taking on debt to grow any business is risky, but if the company has significant upside potential, it can also mean saving millions of dollars or even voting potential into one’s SaaS business.
Obtaining loans are popular in North America, as subsided government loans with competitive interest rates exist for the United States and Canadian markets. Loan programs from the Small Business Administration (SBA) or Canadian start-up banks provide the opportunity to fund early phase ventures and other similar subsidized loans are available for business expansion.
Before taking on debt, review the company financials and measure the risk of taking on the principle and interest payments monthly. Consider how such payments will impact the short-term performance of your company with the current cash flows. If your business is pre-revenue, it is advisable to be generating sufficient profits to cover the payments on the debt monthly. Hoping that profits will cover this after the investment is injected into the company entails risk.