As a Founder, successfully raising capital for your SaaS company is one of the most important, and hardest, jobs you have. Whether it’s your first time dialing for dollars or you’re back in the market for more cash, finding the right capital for your company at any given stage is always a challenge.
One of the most difficult parts of the capital raise process is determining and deciding when and why what types of SaaS capital are right for your business.
Top Types of SaaS Capital
Here are 10 types of capital formations and outcomes to consider for your SaaS business, from inception to exit:
1. Self Funding (aka Bootstrapping)
Typical Amount
$10k-$100k, depending on one’s net worth
Types of Capital
Sweat equity and credit cards, personal lines of credit, direct cash investment into the business in the form of an equity stake or a related-party loan to the company, deferring cash-pay compensation
Company Stage
Most critical at the inception phase of your company. Future capital providers love to see that you’ve invested more than your time into your endeavor.
What it Takes
Conviction, capacity, and commitment. If you’re unable or unwilling to self-fund your startup, you may want to consider getting a job for the time being and part-timing your startup until you’re able to and comfortable with personally financing your company.
Things to Consider
- First things first, is this a viable option for you? Do you have a cash reserve built up? Can you forgo a salary for a period of time? Are you personally creditworthy?
- If so, how much money will you need to build your product and get it to market and what types of capital will you employ to do so?
- This capital should be used for product development and the people required to help you build it. This is not the time to invest in sales and marketing. Your currency at this stage is your hustle.
- It’s really hard to get other people to write checks before you’ve done so yourself. This level of conviction matters as you’re putting your money where your mouth is. Unless you’ve been wildly successful with previous businesses that look somewhat similar, you just won’t have the pedigree or the traction to be an exciting investment opportunity.
Your currency at this stage is your hustle.
2. Friends and Family
Typical Amount
$10k-$100k, depending on the wherewithal of one’s family and network
Types of Capital
Negotiated personal or business loan, negotiated equity investment into the business (% of the company), gift with a “go get ‘em tiger” attached
Company Stage
Post inception after you’ve put some amount of your own resources into the company. Friends and family capital often serves as a primary capital source in the first 12 months of your company to 2-3x your capital resources.
What it Takes
This is situational and assumes one’s family and friends are able to provide some amount of capital.
If you’re not able to convince some subset of this potential investor group, you may want to reevaluate what you’re doing and how you’re pitching it or double down on yourself and prove ‘em wrong.
Things to Consider
- Are you comfortable taking money from your family and friends when it’s highly likely they will not get any of it back? Is this their life savings or just some play money they have lying around? If the former, don’t do it.
- How do you want to structure this investment? You should not screw these people over as they’re your earliest supporters. It does not matter if they’re supporting you because they love you, by taking their money you owe them.
- These are generally not professional investors, but you should treat them as such. Keep them informed, answer their questions, and be upfront. If nothing else, it’s good practice for the future when you may have professional investors who have these expectations.
3. Angel Investors
Typical Amount
Individual angel: $25-$100k. Angel group: $250k-$1M. Angel Round: $500k-$5M.
Types of Capital
Convertible notes and SAFEs notes are common with individual angels. Angel groups will generally participate via either of those instruments but some will only make preferred equity investments into a rationally priced round (say sub $3M pre-money valuation).
Company Stage
A lot of angels like to see revenue. Not so much in the Valley, but across the rest of the country, especially if you’re a SaaS business, not the case for B2C.
What it Takes
A product already in market that’s generating revenue, a business model you are proving out with metrics, a thoroughly thought through and rational capital plan and some thoughts around potential exits. Most importantly, securing a lead angel who is pushing to bring other angels in to get your round done.
Things to Consider
- The angel investor moniker is an easy one to claim. Truth is, real, check-writing angels are harder to corral and close. The doctors, lawyers, attorneys and real estate folks are generally not an efficient path to capital for a SaaS startup.
- Angel groups can give you more bang for your buck. They vary in terms of their quality, but networking into these groups and their investor bases can certainly be worth your while.
- Be cognizant of the number of angels you are bringing into your company. Too many can muddle your cap table and bog you down with responding to questions and educating (which is not you executing and creating value). Do not expect much value add beyond some potential intros to other angels.
4. Incubators/Accelerators
Amount
$30k-$100k
Types of Capital
Standard would be 3-8% common equity stake or a $30k-$100k convertible or SAFE note. Some may take warrants, some may make you pay. Make sure you understand each program’s terms as they vary.
Company Stage
3-12 months participation. The culmination is Demo Day which is meant to serve as a springboard into your next round of capital.
What it Takes
Programs vary in terms of their competitiveness. For top-tier programs (YC, Techstars, 500 Startups), you need to be a top 10% company, fitting a near-term venture capital profile across your team, your product/market and your traction. For other programs, your vertical or impact may matter more.
Things to Consider
- These programs have proliferated over the past 10 years. Going from a handful to hundreds. Do your diligence in terms of quality, focus, investor and mentor networks and ongoing support/community.
- These programs generally push companies onto the venture capital path. Ultimately, that’s how they make money as they are early-stage equity investors in your business. The thought being you raise follow-on capital at higher valuations and their investment is in the black.
- While top-tier programs can certainly help you refine and accelerate your business. The onus is on you to: 1) come into the program with clearly developed desired outcomes, 2) leverage the community for ongoing support and 3) remember that you are the one responsible for running your business.
5. Venture Capital
Amount
$500k pre-seed to $500M late-stage. Completely stage dependent and market driven.
Types of Capital
Preferred equity investments made by limited partnership investment vehicles. Some pre-seed and seed funds will also participate in convertible and/or SAFE notes.
Company Stage
The full spectrum: from pre-revenue to full-fledged Unicorn.
What it Takes
Venture capital has traditionally been reserved for the top 1%.
The winner takes all, that company is a monopoly, achieving escape velocity at massive scale companies. It’s a game of binary outcomes. Those being no or massive returns for VC’s. Home runs make the fund, not singles or doubles.
For VCs, “making the fund” is of paramount importance for two reasons: 1) they get PAID via their carried interest and 2) they are able to raise a subsequent, often larger fund and hopefully get PAID again.
These days, a sound barometer for a SaaS business compelling to venture capitalists is one that could feasibly get to $100M ARR in 5 years and then continue growing 25+% year over year as it IPOs. This needs to be demonstrated across the business from team to product/tech to market and revenue traction, often at the $1M ARR level, when you need to be tripling revenue year over year.
Things to Consider
- Venture capital is meant to be fuel for rocket ships. That fuel is meant to be burned aggressively. Putting it into a business that does not fit that profile or may but is just too early to substantiate massive cash burn is dangerous.
- You need to understand venture capital fund economics. They are betting on massively outsized returns for each fund, which generally come from 1 or 2 investments. Those opportunities will get the lion’s share of follow-on capital and support.
- As more and more money has flowed into the venture capital asset class, funds have gotten larger, check sizes have gotten larger, valuations have gotten higher (hello unicorns), and investment concentration has increased. Today’s venture capital has started to look more like private equity with larger rounds going into fewer companies that have de-risked themselves and just need gobs of money to dominate a market. That’s a sound venture investment strategy if you have the fund size to execute it.
6. Private Debt Capital
Traditional lenders like banks struggle to align their lending requirements with SaaS business models, so they turn to a revenue-based model.
Business owners are provided unrestricted capital in return for a small percentage of the future months’ revenue. No equity is given away and the business is yours once you pay back the loans.
Amount
$100k-$500M
Types of Capital
Senior and junior (subordinated) debt capital structured as venture debt (term loans with warrants), revenue-based financing (% of future cash receipts), lines of credit (like a credit card, rare for non-bank lenders) and “other” term loans with where terms vary.
Company Stage
12+ months to 25+ years operating history
Things to Consider
- Today’s tech companies have more private debt capital options available to them than ever before as these investors have gotten more comfortable with technology companies and certain business models (holler at me SaaS) as they have matured and proliferated. The market is out there for this form of capital; it’s not easy to navigate or understand for non-finance folks, so find people with expertise, who you can trust to help you.
- Debt capital gets a bad name. At the end of the day, it’s cash going into your business without taking equity away from you, your existing equity investors and your current and future team. Yes, you have to pay it back and it comes with its own set of expectations, as any capital does. For certain companies at certain stages, it can be a hell of a form of capital, in lieu of equity or in combination with it.
- Raising private debt capital is going to be a less arduous process than raising venture capital or private equity or conducting an M&A transaction. The debt investor’s lens is very different from that of an equity investor. They like stability, predictability, capital efficiency, growth yes, hockey sticks, not really. Their return requirements are different from equity investors’ because they are a fundamentally different asset class with different expectations from their underlying investors. As such, they are quicker to move and get cash into your company.
7. Bank Financing
Amount
$100k-Billions
Types of Capital
Credit cards, term loans, lines of credit
Company Stage
From a couple of years to 50+ years
What it Takes
For SaaS companies to get bank financing beyond credit cards, they will generally need one of three things:
- A brand-name venture capital firm backing them (for a venture debt term loan)
- $3M+ ARR (for an MRR-based line of credit)
- A Founder with a strong personal balance sheet (for a credit facility from a traditional bank).
Things to Consider
- Bank financing is hard to get for tech companies, period, full stop. 99% of tech companies are not VC-backed, so no venture debt, 99% never make it to $3M+ ARR, so no MRR-facility, 99% don’t have Founders with $5M+ net worth who are able to personally guarantee a credit facility, 99% don’t have a meaningful amount of leverageable assets (A/R, inventory, equipment) to serve as collateral for a credit facility.
- Most banks focusing on tech lending are not really interested in providing sub-$1M facilities. It’s just too much work to be worth it. They’ll take your deposits ‘til the cows come home, but don’t think they’ll be providing you with financing.
- If and when you can get bank debt, it’s going to be the cheapest form of capital you can procure for your company. It will be the least flexible with covenants and restrictions for accessing and using capital, but no doubt about it, it will be the cheapest by a long shot.
8. Private Equity
Amount
$5M-$1BN+
Types of Capital
Preferred and common equity investments
Company Stage
Cash-flow positive companies with $10M+ revenue
What it Takes
For non-distressed, PE investments, the targets are cash-flowing companies, oftentimes in niche markets. These investments take two forms: platform (potential market leader) and bolt-on (inorganic growth drivers for platform plays).
Things to Consider
- Private equity firms are in the leveraged buyout business. They need cash-flowing companies so they can fund part of their purchase price with debt capital, which reduces the amount of equity capital they need to put in and juices their investments returns (IRRs). These purchases can be for minority or majority stakes in the target company.
- PE can be a good avenue for entrepreneurs, especially if they’re lightly capitalized or bootstrapped, in that it can give them liquidity (taking chips off the table) while enabling them to continue with an ongoing equity stake for a potential “second bite at the apple”. In effect, this is two exit events for the entrepreneur with the second event often being potentially multiple times larger than the first one.
- A word of caution: Private equity investors are notorious for replacing management teams, laying off employees and stripping the businesses they invest in of what they view to be unnecessary fixed costs to achieve operating leverage as revenue grows. If you want to fully exit your business and can get your team liquidity and out the door as well, this may work for you.
9. M&A
Amount
$5M-Billions
Types of Capital
Cash and stock compensation. Oftentimes, earnouts (performance-related future compensation). Sometimes, seller notes for small transactions.
Company Stage
Generally for companies with $5M+ EBITDA. In SaaS, more focused on revenue and revenue growth rate. Generally, $10M+ ARR.
What it Takes
Assuming it’s not a distressed (acquihire) M&A event, the target company needs to bring revenue growth, market expansion or intellectual property strengthening into the acquiring entity.
Things to Consider
- M&A events can be a minority sale of equity, more of a financing event than a true sale of the business. Generally an M&A event is a change of control event, whereby the company being sold either: 1) has a new cap table post-closing with a new majority investor (financial buyer) who wasn’t there before or 2) is subsumed by another entity (strategic buyer) and either becomes its own is or rolled into an existing operating division within that entity.
- Not all M&A events are a success. It’s common that an M&A transaction is a way for existing investors, both debt and equity, to “soft land” an underperforming investment and get as much return out of it as possible. This may result in the Founders walking away with no proceeds from the sale, but at least they’ll have a job going forward and be able to say they were acquired and returned some money to investors.
- Preparing your company for an M&A event years in advance is a good thing to do. Get to know potential acquirers through partnerships and product integrations. Run and organize your company such that it’s ready to go through diligence at any point in time. Keep your cap table and overall capital structure clean to reduce clutter than scuttle a deal.
10. IPO
Amount
Generally $100M+ in proceeds
Types of Capital
Selling of common equity in a publicly-listed and traded entity
Company Stage
The ultimate exit for a company, so very late-stage
What it Takes
A true SaaS IPO candidate is at a $100M ARR run-rate, growing 30+% annually going into the IPO. Here’s a great article on what it takes to “SaaS IPO”. Beyond the numbers, large institutional investors need to believe that the company is a market leader and long-term grower, not an also-ran.
Things to Consider
- Once you go public, you can’t go back. Actually, you can by being “taken private” in an M&A event. But that’s beside the point. Being a publicly-traded company comes with a whole lot of investor/market scrutiny and regulatory compliance that does not apply to private companies.
- Just so we’re clear, tech IPOs are a rare thing. In a typical year, 1,500 VC deals get done in the U.S.; just over 3% of those make it to an IPO. Some data: From 1980-2016, the median annual tech IPO count was 52 (source). There were 27 tech IPOs priced in 2017 and 11 are in the current IPO pipeline (source).
- Providing capital support to companies that ultimately go public is the ultimate feather in the cap for venture capitalists. This is what makes their funds and cements their reputations with their peers, Founders, and investors. It’s great for them! But Founder beware, it’s not necessarily the best for you. You will be heavily diluted along the path (see Aaron Levie, Tony Hsieh, not Zuckerberg/Bezos), you may have lost your position as CEO way before the IPO or you’re just thrust into an operating environment that you can’t stand (quarterly earnings calls FTW!).
SaaS capital for all stages of the journey
There is no one way to raise SaaS capital. There are certain ways that are more efficient at any given stage in your business.
We recommend you get familiar with each way, have reasonable expectations, build relationships, ask questions, and get that capital. Or, just bootstrap your way to success and don’t worry about any of this 😉
This post was written in collaboration with Brian Parks, CEO at Bigfoot Capital.
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Brian Parks
Brian Parks, the founder of Bigfoot Capital, transitioned from a promising career in financial services and investment banking to the high-stakes world of tech entrepreneurship. His early professional life, deeply rooted in finance, provided broad exposure to various industries and capital structures. However, a desire for a more impactful and hands-on role led him to the startup ecosystem in 2010. Brian's initial foray into this world as the first employee of a tech startup marked the beginning of his journey into the operational aspects of early-stage companies, sparking a passion for building and scaling businesses from the ground up. In 2017, leveraging his deep experience in finance and firsthand understanding of the challenges faced by early-stage software companies, Brian founded Bigfoot Capital. The firm was conceived to fill a gap in the market by offering flexible financing solutions to B2B software companies, a sector traditionally overlooked by conventional financing methods. Under his guidance, Bigfoot Capital has grown significantly, providing nearly $20 million in commitments to 22 companies. Brian's innovative approach to financing has proven successful, supporting the growth of these businesses while navigating the complexities of lending to asset-light and often pre-profit companies.