Startup Funding Explained for SaaS Founders
As a startup founder in need of funding, different factors influence the path you’ll take. When thinking of SaaS Startup Funding, you need to ask yourself questions like:
As the founder, what skills do you have? Can you handle all tasks on your own, or have you specialized in a specific area and therefore need help in the others?
- What is the scope of your product?
- Are you offering a one-time Software-as-a-Service (SaaS), or is the product continuously changing?
- What are the goals of your project? Do you want it to grow to completion, or do you want to sell it out to another company?
Startup Funding Options
Self-funded startups
This is where the founder chooses to fund the startup without any support from external sources entirely. Most startups succeed in this at the early stages, and the founder shoulders both the risk and the reward. It is also known as Bootstrapping. This option is highly attractive since the founder retains 100% equity and full control of the startup. However, there are drawbacks such as a higher risk of making losses, slow growth, and limited scope.
External-funded startups
Startups with a record of success enjoy external funding. Bootstrapped startups can also get external funding once they develop a steady customer base and get a grasp of the market. This option is lucrative, as there is a higher probability of faster growth and scaling. The risk of incurring a personal loss is also reduced, and more expertise incorporated. The founder, however, loses creative control of the startup and has reduced equity. The external investors get rewarded commensurate with their funding.
The Key Stages of Startup Funding
A startup that opts for bootstrapping, there are no complicated stages of funding since it begins and ends with the founder. The startup can decide to go public at its own time.
Some startups that opt for external funding get satisfied with the money raised in Series A or fail to qualify for the next series. This means not all startups proceed to the other rounds of funding.
Seed Funding
Before involving Venture Capitalists, the money raised for the startup is referred to as seed funding. It can as well be divided into “pre-seed” and “seed funding.” In this case, pre-seed is the money raised by the founder himself, while seed funding is the money raised by individuals within the close circle of the founder, such as friends and relatives. The money accumulated at this point is used to establish the business by conducting market research, hiring employees, and purchasing equipment, among other primary accomplishments. Apart from self-funding and the funds from friends and family, you can also use Angel investing and crowdfunding.
Series A Funding
At this stage, a startup already has a stable customer base and distribution channels, displaying positive development. The money raised in this stage helps the startup to move to the next level and correct negative cash flow. Some of the startup funding used in series A, include VC Funding, Accelerators, and Equity crowdfunding. By the end of Series A funding, the founder will have reduced equity of the startup, which is bigger than the 100% equity of the initial smaller firm.
Series B Funding
In Series B, the startup concentrates on building new markets, products, and services. The startup has already proved to be successful, and only needs a bit of financial pumping to reach the ultimate level of growth. The money is used for scaling up, development of ancillary products, acquisition of top models, and perfect business models. Late Stage Venture Capitalists and Anchor Investors provide the funding. The difference between Series A and B is that in Series B, a single anchor investor attracts others, which is not an easy thing to secure. After a successful Venture Capitalist funding process, one of your previous VCs can act as your anchor investor.
Series C Funding
Startups that are self-sufficient and profitable make it to the series C funding stage. The investors are sure of their fat portion since the startup has proved to be successful. The money is used in acquiring other companies, scaling, or expanding to overseas operations. Hedge Funds and Investment Banks provide funding for Series C.
IPO
Initial Public Offering (IPO), is the ultimate goal of many startups, as it marks a fully established company. After Series A, B, C, some companies proceed to series D and E, but a company can go public at will. IPO simply implies allowing the public to invest in the company. The money is used in making final changes to the business model. Investment banks handle the IPO process of SaaS funding.
Here are some other great resources to use if you are starting up a SaaS company in 2020:
SaaStr
Created by Jason Lemkin, VC and advisor to SaaS businesses (as well as a 2x founder himself) SaaStr this is by far my favorite blog. You’ve got a ton of great content including; blogs, podcasts, Q&As, meet-ups and a full academy.
Predictable Revenue
Aaron Ross and Collin Stewart, the CRO and CEO of Predictable Revenue started this blog to help SaaS leaders. You’ll find great information and tips here as well.
For Entrepreneurs
David Skok, who has sometimes been called a serial entrepreneur, he’s also a partner in a VC firm and author of this blog about starting, growing, and selling software companies. He also has some great downloads that can help the scrappy startup founder along their journey.
Tomasz Tunguz
I haven’t had an opportunity to diver deep into this site but an associate of mine swears by it. They say that Thomasz Tunguz, a partner at VC firm Redpoint and co-author of the book Winning with Data, blogs about a data, leveraging insights and goes into a lot of the areas that VCs and Founders should hear but don’t get a lot of content about.
A Smart Bear
Jason Cohen, founder of WP Engine and Smart Bear Software, seems to use his site to explain and challenge our thinking towards startup methodology. I highly encourage you to subscribe to this blog. He uses great images on his page and they have helped me get up to speed very early when researching startup ideas and tips.
Also click here to view my webinar: Startup Funding Explained for SaaS Founders
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