Funding is a crucial but often challenging point in the development and growth of a SaaS startup.
So how should you go about it?
When should you start looking for investment (if at all), and what kind of investment is right for you?
Should you be raising funds?
Raising money means answering to people and losing your independence—or, at the very least, going on a different journey than you originally planned in terms of growth, returns, and expectations. But good investors will guide and prevent you from making mistakes.
So should you be raising, or not?
There is no definitive ‘yes’ or ‘no’ answer to the dilemma, but a common starting point is looking at what you currently have.
Scenario A: You have a concept for a Minimum Viable Product (MVP) but can’t develop it without funds.
You’ve probably passed this stage already, but this is a pretty clear-cut scenario where you do need funding to bring your concept to life. There is plenty you can bootstrap to get ready: produce wireframes and copy to make your idea more tangible, do some preliminary market research, build a proper plan to outline what you can and cannot do, and how much market share you could take with funding.
Remember that with money comes the implicit understanding that you should be spending it, so you need to be prepared to show exactly how you will be allocating funds.
Scenario B: You have an MVP and a plan for growing it.
Try growing the business as much as you can on your own: use some version of customer funding (for example product pre-payments, monetizing the first version of your product, or having a single key customer pay for specific feature development), or bootstrap using your own funds.
How much money you need depends on several factors, including your team size, the cost of running your website/service, and even your revenue model: calculate your runway (cash you have minus cash you spend) to know how long you can operate before you need extra funds.
If you are reaching the limits of how much you can grow independently, take the time to analyze the situation: do you need to refine your team processes (see the chapter on Operations)? Do you have a problem with churning users? Funding will not solve these kinds of growing pains—finding their causes and fixing them will.
Scenario C: You cannot grow further on your own.
This is the point at which you probably need funding to make your product go further. This places you in a similar position to Scenario A: start making a funding plan, figure out how much money you need to achieve the next milestone or objective, and how much equity you are willing to give up as you go through the process (think around 10% to 20% per round).
Is Venture Capital (VC) funding right for you?
VC funding is a lot of work. It might take well over 30+ meetings to find an investor you click with, who is excited enough about your SaaS to consider getting involved. Here are some of the questions you’re going to need to answer during these initial stages:
Why should they be paying attention to you and your product?
Who are you competing against?
Why do you want them specifically as investors?
What is your concrete growth plan, and how are you going to execute it?
How much money do you need to realize the plan?
Also remember that VC funding comes with an expectation that you will grow your team and business significantly, and that their stake will increase 10x in value. There will be specific goals and metrics that investors will look at to see if you have been successful in making your company more valuable and, in turn, allow them to realize significant gains. If you haven’t reached agreed upon metrics, you might not be able to raise money again or, at the very least, it will not be on the terms you're expecting. You could experience what VCs call a ‘flat’ or ‘down round’, meaning you raise at a valuation lower than your previous one—which is a near-death experience for your company.
A few other options: angels, incubators, RBF
If you’re at the early stage, lack of exposure or experience can work against you. Make sure you get proper advice and mentoring when you are thinking about funding (start by watching the video below and going through the resource list at the bottom of the page) and consider angel investors over VCs. Angels are more likely to invest at an earlier stage, be personally involved, and introduce you to their extended network. Similarly, accelerated programs and incubators (Techstars, Workbench, YCombinator just to name a few) will provide mentorship and training, and help you build a network fast.
You can also consider an additional model: revenue-based financing (RBF), where investors inject capital in the form of a loan that gets paid back over time with a markup. Unlike taking on investors, in an RBF scenario no equity is given away and once the loan is repaid the business remains entirely in your hands.
Funding ecosystems: Europe vs. the US
US-based VC firms have been around much longer than European ones, and the angel investor system is both quantitatively and qualitatively more established. While top VC funds and angel investors in Europe have been catching up fast, seed rounds (that is, rounds of funding for early-stage, growing companies) in the US are still generally larger, reaching up to 2 or 3 million dollars.
US investors will not be opposed to investment in Europe by default (one famous example is Tim Draper); it helps if you've incorporated in the US before and use the standard Silicon Valley investment boilerplate, as opposed to more localized investment documents. But if you are a very early-stage European startup looking for funding, the chances of raising money from a US investor are slim. Approach your local or national investor ecosystem instead, and look at cities in Europe like London, Berlin, Stockholm, or wherever is nearest to you. Review this list of European (and US) based investors as a starting point.
Useful recommendation: check out Stripe Atlas, an invite-only program that helps international tech companies incorporate in the US, and deals with payment processing after incorporation is successful.
Plan for time: you will need it
We cannot stress this enough: no matter which route you go, do not underestimate the amount of work you will need to put in when you are trying to raise funds. It will be immensely time-consuming and likely to cause significant and prolonged periods of stress, especially as you inevitably face round after round of re-work and rejection:
"We got the pitch deck ready in November and closed the round in March. From January to March, I was stressed. I started smoking again. Every time we thought we were there, I’d wake up in the morning and there was a new email from another lawyer who was just saying “Look, we want to change these terms.” At the time, I kept asking myself why am I doing this? Why am I putting myself through this?"
Remember that you will be kept away from your business at a delicate time as you prepare one-pagers, pitch decks, investor decks, business plans, financial projections—and that’s before you even start having actual conversations with potential investors. You also cannot afford to neglect your business while you are in fundraising mode: any decline in growth will show up in your due diligence, and that might deter investors from investing altogether.
Try growing your SaaS startup as much as you can before raising funds.
Make detailed plans of where you want to go and exactly how you are going to spend the money you raise.
Study up on the differences between different funding ecosystems, so the overall legal/logistical/practical process can be smoother.
VC funding is not your only option: familiarize yourself with alternative models.
Account for the substantial amount of time you will need to prepare all the documentation and deal with prospective investors.
Saas Funding Napkin, the 2017 Edition, Christoph Janz
Startup Pitch Decks, Product Hunt
The Exclusivity Asymmetry, Christian Thaler-Wolski
Video & Audio
Building a $100 Million ARR SaaS Business Without VC, Peter Coppinger and Alex Theuma
Going from $0 to $300K MRR as a Self-funded SaaS Business, Emeric Ernoult
SaaStock on Tour, London: How We Raised a $2.75 Million Seed Round, Olivier Pailhes
XAwards: Funding Panel, Christian Thaler Wolski, Josef Calleja, and Alex Theuma
Venture Deals, Brad Feld