Ultimate Guide to Funding SaaS: Financing, Stages, Prep, & Options

SaaS financing is a crucial step in the growth of any SaaS business. It can also present more than its fair share of challenges.

In 2022 alone, over $35 billion of SaaS funding was invested in early-stage startups, proving that plenty of investors are willing to put their money behind the business model. Nevertheless, obstacles such as finding these investors, demonstrating market validation, and proving growth potential make securing funding one of the more difficult stages of scaling a SaaS company.

In this guide to SaaS financing, we’ll cover everything you need to know to overcome these challenges and secure the growth capital your company needs to succeed.

What is SaaS financing?

SaaS financing involves securing funding for software-as-a-service (SaaS) startups. There are numerous ways that entrepreneurs can go about funding their SaaS companies, including financing options such as venture capital (institutional investors providing funding in exchange for capital), angel investors (individual investors who offer capital and mentorship in exchange for equity), crowdfunding (which involves raising small amounts from a large pool of individual investors), and bootstrapping (which is when the business’s founder(s) provide the funding themselves).

While these funding options mean that SaaS financing can take a lot of different forms, let’s look at one hypothetical example of what SaaS financing might look like. Consider a SaaS startup that is developing a new customer relationship management (CRM) platform. Once their minimum viable product is finished and thorough market research has been completed, the founders decide to pursue external funding. After approaching a venture capital firm specializing in B2B SaaS companies, the founders convinced the firm to provide $1.5 million in exchange for a 10% equity stake. Their SaaS company is then free to use the money to accelerate development, marketing, and customer acquisition efforts.

How does the SaaS financing process work?

Before SaaS companies can start reaching out to lenders or potential investors, there are several important tasks that need to be completed upfront. And, once a terms sheet has been presented, there’s still plenty of due diligence that must be completed before you sign the dotted line.

From start to finish, here are the key fundraising steps that need to be followed by any company that wants to know how to raise capital:

• Make a short list of potential VCs or lenders: Start by compiling a list of venture capital firms, angel investors, or lending institutions with a track record of investing in SaaS companies. Be sure to prioritize those that are aligned with your company’s vision and industry focus.
• Get your financials in order: Before you approach investors, you’ll need to have all your financial statements in order, including income statements, balance sheets, and cash flow projections. This will be key for proving your company’s financial viability and its ability to generate a return for investors.
• Reach out to VCs and lenders: This step often involves presenting VCs and lenders with a compelling pitch deck or business plan that outlines your company’s value proposition, market opportunity, revenue model, and growth strategy.
• Carefully consider your term sheets, valuation, dilution, and equity splits: If you succeed at convincing investors to fund your company, you’ll be presented with a terms sheet that details the proposed financing terms, such as the company’s valuation, funding amount, the amount of equity offered, and repayment terms. As the borrower, you must carefully consider these terms and ensure that the cost of capital won’t hinder your company’s growth plans. You will also want to be careful about making any personal guarantee that could leave you on the hook if your financial obligations to your lender are not met.

There are a lot of important steps you need to complete and SaaS funding questions that you should ask before you agree to part with any of your company’s equity. By following these investor pitch tips for securing SaaS funding, you can ensure that you reach a deal that ultimately benefits both you and your investors.

Preparing for due diligence

Before any intelligent investor is going to be willing to part with their capital, they’re naturally going to want to conduct their due diligence first. As a SaaS founder, preparing for this scrutinizing process can be stressful, but it’s also a vital part of securing SaaS funding.

Here is everything you need to know about preparing your SaaS company for investor due diligence, including what it is, why it’s important, and the financial/SaaS metrics you’ll need to have on hand.

What is due diligence, and why is it important?

In the financing process, SaaS due diligence refers to the investigative process potential lenders conduct to assess the potential risks and returns associated with investing in a SaaS company. It typically involves examining numerous aspects of your company, from its financial records to its operational processes and market positioning. If you want to increase the likelihood of receiving funding and maximizing your valuation, preparing for due diligence ahead of time will go a long way.

Prepping financials and SaaS metrics

When assessing a SaaS company’s funding eligibility, there’s nothing more valuable than cold, hard data. There are numerous financial metrics for SaaS companies that potential lenders are surely going to want to see, and it’s important to have these metrics ready and available. This includes key metrics such as your company’s:

• Monthly recurring revenue (MRR)
• Annual recurring revenue (ARR)
• Customer acquisition cost (CAC)
• Customer churn/retention
• Customer lifetime value (CLTV)

Prepare these metrics ahead of time, and you’ll be ready to showcase your company’s potential for revenue growth (and thus its potential to earn money for your investors).

The 5 stages of SaaS funding

Funding a SaaS company is a process that can typically be broken down into five stages, and it’s important to know the standard practices associated with each stage. With that said, here is what you should know about the five stages of SaaS funding:

• Pre-seed and Seed funding: This first stage involves seeking initial capital to develop a proof of concept or minimum viable product (MVP). This round is often raised by friends, family, or angel investors who believe in a startup’s potential.

• Series A: Raising Series A funding provides the growth capital needed to propel Saas companies into their next stage of growth. Series A funding is usually sourced from venture capital firms and institutional investors, and it is commonly used for customer acquisition, refining a product, and establishing a strong foothold in the market. At this stage, SaaS startups and scale ups should be focused on achieving product-market fit and doubling down on what’s driving revenue for their business.
• Series B: Series B funding can be secured once a SaaS company has reached significant milestones, such as a large user base and substantial revenue streams. These funds are commonly used to scale a company’s sales and marketing efforts. Still, they can also be used to support R&D to break into a new vertical or achieve product differentiation from competitors.
• Series C: Series C funding is typically acquired after a SaaS company has achieved a prominent position in the market and is poised for substantial expansion. These funds are often provided by larger VC firms and strategic investors, and they are generally allocated towards international expansion, mergers and acquisitions, and further product development.
• Late-stage private equity: This funding round typically occurs when a SaaS company is preparing for potential exit strategies, such as an IPO or acquisition. The funds raised in this stage are commonly used for scaling operations, acquiring competitors, and preparing for a strategic exit.

Understanding these five stages of SaaS funding is key to securing the right type of funding for your company at the right time.

The best funding options by growth stage

We’ve already discussed how there are numerous funding options for SaaS founders and co-founders to consider, including angel investors, VC firms, bootstrapping, and private equity. Each of these financing solutions offers its own benefits and drawbacks, and the option that is best for your company will depend on several factors.

One of the most important of those factors is your company’s growth stage, so let’s explore the best funding options for each stage in a SaaS company’s growth:

Seed stage: Bootstrapping and angel investors

To retain as much control and ownership as possible during a company’s early stages, many founders choose to fund their company themselves. This is known as bootstrapping and involves using either your personal savings or the money generated from the company to support its initial growth.

Another common option for seed-stage funding is to seek out angel investors. These individuals are typically experienced entrepreneurs or business professionals looking to support promising startups. Along with the angel investment funding they provide, the mentorship and guidance that usually come with attracting an angel investor make this financing solution an especially beneficial option for new companies.

Series A through C: Venture capital

Venture capital firms typically invest in SaaS companies that are in their Series A, Series B, or Series C rounds of funding. These venture capitalist firms provide funding in exchange for equity, but they also offer other benefits to SaaS founders, such as valuable expertise and access to their networks/resources. The funding secured from VC firms during this high growth stage is vital for scaling operations, expanding market reach, and fueling innovation.

Late stage and exits: Private equity

Private equity comes into play during the late stages of a SaaS company’s growth. It is most commonly acquired when the company is preparing for a strategic exit, such as an acquisition or an IPO. The funding provided by private equity firms (as well as their guidance and expertise) can be used to help position the company for a successful exit.

Alternative funding options for SaaS companies

Along with the traditional SaaS funding options we’ve covered so far, there are also several alternative funding options for SaaS founders looking to secure financing. To help you decide if these alternative funding solutions are the right choice for your company, here are the options you have available and the pros and cons of alternative funding:

• Crowdfunding: Crowdfunding involves raising funds through small contributions from a large pool of individuals. This is typically done via online crowdfunding platforms such as Kickstarter and GoFundMe. Crowdfunding provides SaaS founders with an accessible way to generate initial funding, validate their concept, and engage with early adopters.
• Revenue-based financing: Revenue-based financing is a unique form of funding where a SaaS company receives capital in exchange for a percentage of its future revenues. This non-dilutive financing option allows founders to acquire funding without giving up any equity, and it is especially appealing for SaaS companies with consistent revenue streams.
• Debt financing: Debt financing involves borrowing capital from lenders that will need to be repaid with interest over a specified period of time. This financing option provides short-term access to funds through various debt structures available to SaaS companies like venture debt or lines of credit.
• Grants, incubators, and accelerators: Grants and incubators, and accelerators are programs that invest in early-stage startups to provide non-dilutive funding and support. SaaS founders can leverage grants and incubator programs to access capital as well as mentorship and resources that are tailored to their industry.
• Equity financing: Unlike taking on debt, equity financing involves exchanging ownership shares in a company for capital. While this type of funding has more in common with traditional SaaS funding, it’s a good option for SaaS founders who want to bring on strategic investors who can provide their valuable expertise, partnerships, and strong network in addition to funding (highlighting the difference between debt vs equity financing).

The pros and cons of alternative funding for SaaS

Alternative SaaS funding and growth resources have their benefits and drawbacks, and it’s important to carefully consider both before making a decision. The pros of alternative funding include things such as access to non-dilutive funding, diverse capital sources that reduce dependency on a single funding channel, and (in the case of alternative funding options such as grants and incubators) access to industry-specific support, mentorship, and resources.

However, alternative funding can also present drawbacks, such as high-interest rates and repayment obligations that can impact cash flow in the long term.

Before you move forward with a SaaS financing strategy, be sure to carefully consider all of the options you have available, like adjusting your pricing strategy, and the long-term impacts (both positive and negative) that they are likely to have on your company’s growth.

Extend your cash runway with Maxio

Securing financing is a vital step when scaling a SaaS business. However, before you can begin attracting investors to your company, getting all of your financials in order is an essential first step. Thankfully, this is a process that Maxio can streamline and automate.

With Maxio, you can fully automate your SaaS company’s billing, subscription management, collections, and reporting processes. This ensures that all of the data you need to prove your company’s viability and growth potential is placed at your fingertips without requiring manual data collection and analysis.

Schedule a demo to see how Maxio can help you prepare your SaaS company for every stage of SaaS funding.