SaaS (Software-as-a-Service) is a rapidly-expanding model for tech businesses; it is estimated that the sector will double in size over the next two years.
Driven by the huge potential for recurring revenues, flexible development models, and an ability to build market share without exposing clients to large upfront costs, SaaS has exploded. This has obviously led to an increased appetite for investment from private equity and venture capital.
Most SaaS growth starts here
In the beginning, where revenues are low and too small to service a loan, equity makes sense. Trading shares in your SaaS business for cash is the most common option for a young start-up.
Alternatively, some may try to jump on the bank merry-go-round and endure a continuous cycle of pointless discussions, resulting in covenant-laden and restrictive term sheets…
Alas, there is more to be seen.
Why it is challenging to grow SaaS?
High growth SaaS businesses need to hit customer acquisition targets, retain their customers and respond quickly to user needs. This requires significant investment in the form of sales and marketing teams, customer satisfaction managers, and specialised technical departments. Simply put, scaling a SaaS business is expensive.
What about SaaS finance?
The average SaaS growth rate is much higher than other companies, so it is important to plan capital needs accordingly around the different SaaS growth stages.
Sadly, we often see SaaS companies suffer growing pains because they wait until it’s almost too late to secure the finance they need to transition through growth stages.
What are the SaaS growth stages?
Below you can find the common SaaS stages and their most suited type of growth finance.
Stage 1: Pre-Startup and Startup SaaS companies
Once you’ve established demand, your next step is to identify and validate a target audience and channels. At this stage, it is likely you’ll make initial hires. Your objective is to secure your first paying customers. Then to keep them and to make them profitable. At the same time, you’ll want to identify a repeatable sales process. Elsewhere, you’ll want to start building relationships with advisors and business financiers.
Finance options for a pre-startup and start-up SaaS companies include:
- Seed money and angel funding
- Series A funding from a venture capital firm
- SaaS Venture debt with significant VC backing
Stage 2: Scaling up your SaaS company and reaching profitability
By now your SaaS company has established a product and market fit and proved the product/service concept. What’s more, you’re driving traffic, leads, and more importantly conversions. As a result, you have an established revenue stream, and your SaaS company is on a clear path to growth. Great! But, you’re still burning cash and need to move it into profitability soon. This is the point when you realise scaling is expensive. Indeed, your costs increase as you grow your customer base. It’s not unusual for costs to be higher than revenue.
Finance options for Stage 2 SaaS companies include:
- Series B funding from VC investors
- Beyond that, now is the time to explore private debt fund finance such as venture debt and revenue-based financing for SaaS companies to give you a cash runway to your next funding round and to ensure that you keep your equity.
Stage 3: When your SaaS company reaches maturity
Congratulations! You’re running an efficient operation that delivers a tried and tested product/service consistently at scale. But your work isn’t finished yet. You still have expenses to cover and you may find you have to compete with new entrants in your market. On top of that, your growth is slowing…
Now is the time to think about:
- International Expansion
- Mergers and Acquisitions
- Exit and IPO strategies
Finance options for Stage 3 SaaS companies include:
- Series C funding to support your VC firm’s exit
- Private debt fund finance in the form of bridging loans to support M&A activities
- Private debt fund finance to facilitate share buybacks
- Private debt fund finance to support international expansion
Where does your SaaS business fit in?
As CEO or CFO, you understand that growth finance planning is vital. With a top-to-bottom vision of the market, you can steer your SaaS business through this competitive arena with confidence.
There is never a bad time to understand your options. Talk to us today to discover yours.