Whether you’re an entrepreneur, a startup, or an established business owner, knowing how to raise capital can often mean the difference between success and failure.
At the end of 2018, there were over 1.4 million outstanding small business loans held by community banks, worth over $94 billion. But while community banks are a critical source of capital for small businesses, they have been declining. Luckily, there are more ways to fund your business.
In this article, we’ll explore several capital raising strategies and provide advice on preparing for a capital raise.
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How to raise capital: debt or equity?
Equity financing is when a company raises capital by selling shares of company stock. These can be either common shares or preferred shares. The main downside of equity financing is that the company is effectively selling off little pieces of business ownership.
Learn more: Equity financing
Debt financing – also known as debt raising – is when a company borrows money and agrees to pay it back later. This is often by way of a loan, but not always.
The other option is to sell corporate “bonds” to investors, which mature after a certain date. Before they’ve matured, the company must pay interest payments on the bond to the investors.
How to raise capital for a startup: 6 capital raising strategies
1. Fund it yourself
2. Business loan
4. Angel investment
5. Personal contacts
6. Venture capitalist
Raising capital for business: be prepared
Now you know how to raise capital, but do you know how to prepare for a raise? When getting ready for a capital raise, the first thing you need to do is get your material information in order.
Executive summary, company structure, business and marketing strategies, profit and loss statement, balance sheets, tax returns, bank statements and legal documents – they need to be lined up in order to secure that all-important funding. Our capital raise checklist can help you prepare. A digitized template, it contains all the critical data points that ensure a company is healthy and prepared for investment.
Ansarada Deals™ brings together a purpose-built set of solutions into one fully integrated platform that delivers value across the complete deal lifecycle. Centralize all your capital raising activity with Deal Workflow™, project management tools, advanced data rooms, and AI deal insights.
Who doesn’t fantasize about starting a second career?
Millions of Americans have launched one in midlife. In fact, about 20% of all new businesses in 2013 were created by entrepreneurs ages 50 to 59 and 15% were age 60 and older, according to a study published by the Kauffman Foundation and LegalZoom.
If you want to join them, raising the necessary money can be a stumbling block, however.
But here’s the good news: If you’re in decent financial shape with no debt or very little beyond a mortgage, you have myriad options for funding your startup. Here are 11 of them:
Personal savings. The truth is most startups are funded with personal savings. Before you make a big withdrawal, however, I recommend that you have at least a year’s worth of fixed living expenses (like your mortgage and insurance needs) set aside.
When you’re starting your own shop, you may have to forgo a salary for a few months, even a year, until you gain traction and income starts flowing.
Friends and family. If you’ll go this route, be clear about the terms and put everything in writing, so no bad blood arises.
When Bill Skees, a former IT pro, needed funding to open his independent bookstore — Well Read New & Used Books in Hawthorne, N.J. — he asked his six siblings for three-year, 3.5% family loans. “At the time I was starting up in 2010, small-business bank loans were hard to get,” says Skees, who raised $124,000 from his family. He expects the money will be fully repaid by the end of 2014.
Banks and credit unions. Banks are not always easy to crack when it comes to small business lending. It goes without saying that you’ll need a firm business plan and a squeaky-clean credit record to get approved.
Your first stop should be a bank that’s familiar with you or your industry, or one that’s known for having a soft spot for small-business lending.
It’s a good idea to seek out one that offers Small Business Administration (SBA)-guaranteed loans; check the “Local Resources” page on the agency’s website (Sba.gov). SBA-guaranteed bank loans tend to demand a lower down payment, and monthly payments may be more manageable.
That said, a lender will probably want you to show that you have some skin in the game, too. That means you must be able to show that you have capital or equity that you’re prepared to invest into the business.
Angel investors and venture capital firms. Getting financing from them can be a high-wire dance. But if you can do a little soft-shoe and have a great idea and terrific business plan, these types of investors will back you in exchange for equity or partial ownership. If this route interests you, check out the SBA’s Small Business Investment Company Program.
Economic development programs. There are a range of development loan programs out there, but finding one you can tap might take a little sleuthing and you may need special certification to qualify. For example, if you’re a woman, you might consider getting your firm certified as a woman-owned business. If you’re the principal owner and from a minority group or are located in an economically disadvantaged region, you might qualify for a special loan as well.
The SBA’s economic development department resources can help you decide if this might be an avenue for you. If you’re a veteran, the Department of Veterans Affairs can provide you with information on how to get certified.
Corporate programs. Some big businesses offer small business start-up support as well. For instance, Michelin North America, based in Greenville, S.C., has provided low-interest financing — loans range from $10,000 to $100,000 — to certain minority-owned and disadvantaged businesses, including women-owned firms, in parts of South Carolina.
Grants. Go to Grants.gov for information on more than 1,000 federal grant programs.
Female entrepreneurs may want to connect with one of the SBA’s Women’s Business Centers around the country. These centers provide state, local and private grant information to women interested in going into business for themselves with a nonprofit or for-profit organization.
Crowdfunding and crowdlending sites. These virtual fundraising campaigns generally raise small sums, but you never know, the money can add up.
The king of crowfunding is Kickstarter, where it’s easy to get started. You simply post on its site a sketch of your project with a video, your target dollar amount and your deadline. You then blast out an email to friends, family and colleagues and politely ask them to share your project and funding invitation with their friends.
When someone opts to donate to your cause, payments are made via a charge to their credit card via Amazon. Once you reach your goal, Kickstarter takes 5% and you pay 3 to 5% to Amazon’s credit card service. If you don’t raise the money by the deadline, the pledges are canceled; your contributors aren’t charged for their donation and Kickstarter takes nothing.
Other crowdfunding sites for raising seed money online include Rock The Post, a free network that helps entrepreneurs meet professionals and investors who can help via funds, time or materials; Indiegogo and AngelList, which can match you up with potential angel investors.
Crowdlending is a variation on the theme of crowdfunding, but the people who assist you expect to get their money back. The Kiva website has a program called Kiva Zip, which patches together zero-percent loans as small as $5. The Accion crowdlender site offers loans with annual interest rates from 11 to 16%, plus closing and application costs.
Rollovers As Business Startups (ROBS). Here, you use your 401(k), Individual Retirement Account or other retirement funds to finance a business without incurring taxes or Internal Revenue Service penalties. The account gets rolled over into a new retirement fund that, effectively, becomes a shareholder in your business.
But be careful: ROBs are complicated and if you don’t set yours up right, you could owe penalties and a big tax bill. An article in Daily Tax Report, “Examinations of Rollovers as Business Start-Ups Arrangements: A Guide to Surviving IRS Scrutiny” might be worth reading.
Home equity loans. If you have substantial equity built up in your house and a credit score well above 700, this route may be a pretty good option. The funds are usually taken as a lump sum that you can pay off over time. And interest is not sky high, roughly 4.5% right now.
Credit cards. Using plastic is certainly easy, but it’s a risky choice. Most cards have double-digit interest rates on balances that roll over month to month. That’s a pretty high bar to saddle a new company with in its early days.
If you want to go this route, check out Bankrate.com and Credit.com for a list of cards with the lowest rates and best terms.
Many small businesses owners are hesitant to issue equity or take out loans to fuel business growth. However, businesses may find that operations stagnate without an extra capital injection. For debt and loan options, reach out to independent community banks and credit unions. They may have more interest in funding local operations and be able to offer lower interest rates.
Inevitably, an owner must use some of their own cash to grow their business. It's rare that an owner can obtain all the capital they need from outside funding, especially when they want to take on new projects. One benefit of investing owner capital is that it signals personal confidence in the business prospective. When someone's gone "all in" on their new business, outside investors may feel more confident in the operation.
Venture Capital Firms
Venture capital firms are institutions that invest in fledgling businesses on behalf of their clients in exchange for equity. They often invest large levels of funding and have a strong interest in the direction of the company. If you accept venture capital funding, the firm may want to send a representative to sit on your board. Equity is a great source of growth capital because the company doesn't have to worry about loan repayments or liabilities if the business fails. On the other hand, this also dilutes your ownership stake.
Angel investors are another type of venture capital. Unlike firms that invest on behalf of their clients, they're often individuals or groups of wealthy individuals seeking specific investments. Because they're not part of a firm, they're more likely to invest based on their personal opinion of the company and the mission. Like venture capital firms, angel investors may want to contribute to the company board or offer business advice. They can often connect the owner with a network of customers and suppliers to help grow the business.
Debt is a viable source of funding for small business growth. Banks typically won't attempt to direct or control how the business spends the funds and there's no ownership dilution. However, large loan payments can take a toll on business growth. If it takes longer than expected for the business to increase profits, the loan payments can become a burden that inhibits success. Unlike equity, banks have a claim on the money they lent and the business will have to pay them back even in times of distress.
When we talk about entreprenuership, there are a variety of ways to fund your startup, including venture capital, bootstrapping, and small business loans.
But what do each of these terms mean?
Venture capital is a form of private equity provided by investors to startups and emerging companies with high-growth potential. In exchange, the investor receives equity (ownership) in the company.
Sounds great, right?
Venture capital is often essential for a startup to grow at a rapid rate. Google wouldn’t be Google without venture capital. Same with Facebook, Twitter, and LinkedIn. Pretty much everything on your smartphone, including the phone itself, exists because a venture capital firm plowed millions of dollars of private investment into the company during its infancy.
Venture capital comes with a price, though. Founders must be willing to reduce their ownership stake, which can result in reduced control over strategic decisions. Venture capital is also relatively scarce. Despite the huge size of investments often covered in the media, the overall amount of venture funding available to new businesses is relatively small.
Venture capital is far from an entrepreneur’s only option.
Bootstrapping essentially means starting your business without any external funding. Rather than getting funding from VCs (the slang term for venture capital firms), an entrepreneur uses his or her personal money, as well as whatever initial revenue streams are available.
Despite venture capital receiving all the attention, bootstrapping is far more common. Simply put, even if your idea for a single restaurant is the best idea the restaurant industry has ever seen, the return on investment (ROI) for an investment in a single restaurant is usually not large enough to warrant the attention of investors.
If venture capital and bootstrapping represent opposite ends of the spectrum, there is a middle ground.
Small Business Loans
Obtaining a loan for your small business does not require giving up any equity in your company. When you walk out of a bank, you still own the exact same percentage of the business that you did when you walked in. At the same time, small business loans can provide the capital your business needs to grow–because while bootstrapping can seem like a wise decision, it can starve your business of the resources it needs before you even have a chance to test the validity of your idea.
But getting a small business loan is not as easy as walking into a bank and telling them your next great idea.
You need a business plan.
You need knowledge of your industry.
You need a good idea.
You need a go-to-market strategy.
You need good credit (in its infancy, your business credit will depend on your personal credit worthiness).
A loan is not free money. It will need to be repaid. You will need to have a strategy and a plan in place that ensures you can repay your loan and still run a profitable business. Venture-backed startups can be unprofitable for years. Amazon–the world’s largest retailer–can consistently suffer massive losses in a play for growth over profitability because of its ability to continually attract venture capital.
That isn’t the case for the owner who bootstraps her restaurant.
And it isn’t the case for the owner who gets his first business loan.
If you are an entrepreneur, there is a variety of ways to finance your new business.
Get your business moving and accelerate growth with quick and easy access to funds through Shopify Capital.
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Receive your funding within days of accepting an offer.
Repay from sales
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It’s time to make moves
With funding through Shopify Capital, you can make your next big move with confidence. Here are three ways to fuel your growth.
Hire for success, bring on an expert, or get more hands on deck. Invest in your talent and get productivity flowing
Stock up for seasonal sales, take advantage of bulk discounts, or order new materials. Get the capital you need to replenish your stock.
Fuel campaigns, build your brand, and get the word out. Use Shopify Capital to boost your marketing budget.
“After I received my funding from Shopify Capital, I was able to use that money for marketing the next day.”
Riaz Surti | Hearthy Foods
“I just didn't want to deal with the whole process of going through traditional lending—I wanted to focus on the business. A traditional loan felt cumbersome and more restrictive. Shopify Capital has a different mentality to it. It's so easy.”
Tracey Hicks, Founder | All Things Real Estate
“I really love the flexibility of the repayment system of Shopify Capital. On busy days I repay more, and on slower days I repay less.”
Phoebe Yu | Ettitude
Unless you have a clearly defined plan and a path to follow, you’re going to waste precious time.
Cash is the lifeblood of business. If you run out of it and lack access to additional resources, the game is over.
/>DNY59 | Getty Images
As the founder of a startup, you’ll find that raising funds is a significant part of your efforts and, for better or worse, a major challenge. Unless you have a clearly defined plan and a path to follow, you’re going to end up wasting precious time that could have been spent elsewhere.
So, understanding the basics of raising capital will be critical to your success. If you’re clear on what you need to do to get from where you are to where you want to be, you’ll be less likely to derail while you’re in the thick of it. Here are the steps you need to take:
Preparing yourself for the road ahead
Preparation is crucial to finding the funding you need. This step is often overlooked, but unless you want to be constantly pumping your own resources into your business, you’ll want to assess and address various aspects of your company to ensure its overall readiness.
Not only will you need to examine your team’s overall health from every angle, but to research your industry, competitors and the market, define your products, prepare financial projections and determine how much money to raise, plus decide whether to tap into debt or equity.
Preparation may be the most time-consuming and effort-intensive aspect of raising funds. But if you know what you want and outline the rationale behind those choices, you’lll find it easier to figure out whom to target and ask for what you need.
Remember, as you court investors, they will be asking the tough questions. So, you’ll have to be equipped with all the relevant information you need.
Researching the different types of investors
Just because you’ve decided whom you’re going to go after and what amount to ask doesn’t necessarily mean you’re going to get what you’ve requested. When it comes to financial matters, the more options you can identify, the better. That way, you’ll always have a backup plan when you need it.
Among the different types of investors out there that you may consider are: founders, family, friends, venture capitalists, angel investors, single family offices, business incubators, investment groups and crowdfunding pledgers.
Keeping in mind that some forms of funding are costlier and riskier than others, you can also use credit cards, lines of credit, bank loans and the like. These financing options are often last resorts or backup initiatives, as they are more contingent on the condition of your personal finances and assets, versus the value or potential value of your business.
Getting your pitch deck ready
Much has already been said about the necessity of a pitch deck and the ways in which to put together an effective presentation. The fundamentals are that your presentation should be used to highlight the most attractive aspects of your business.
Keeping your target audience in mind and knowing what’s important to investors is key.
Generally, 10 to 15 slides containing information on your company, your team, competition, target market, milestones, future plans and funding requirements is sufficient. Armed with this information, your prospective investors should be better able to decide on a course of action that’s in alignment with their best interests.
Networking and finding potential investors
You can never know too many people. While networking, you don’t necessarily need to be constantly promoting your business; you should make sure you are helping other people. This will help you garner a positive reputation, and when you help others get what they want, they will be more likely to help you.
Keep in mind that you will face rejection when discussing your business with others. Some investors may not be looking for an opportunity right now. For other people, your concept simply won’t be the right fit. Knowing this going in can save you a lot of heartache and stress.
Researching various investment groups and resources online can prove worthwhile. Just don’t get sucked into the bottomless blackhole of the internet. Try making a phone call or sending emails, so that you remain proactive when reaching out.
Finding companies that offer capital in your niche
If you have a niche business model aligned with ecommerce or SaaS, or you produce devices for the healthcare industry, say, you can find investors that offer funding to those types of companies.
This isn’t to suggest you won’t need to look for additional sources of funding, but if finding tailored solutions streamlines your process of finding capital, it will be worth looking into.
Even with all your ducks in a row, there are no guarantees you’ll get the capital you need from the investors you’re courting. But problem-solving is part and parcel of entrepreneurship. Knowing all your options and what you can do to get the money you need can give you greater confidence when you encounter bumps in the road. And that is something you, unfortunately, can count on.
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Your next big business deal could be one connection away – and Wholesale Investor is helping to open those doors.
Watching an idea flourish into a profit-churning business is every entrepreneur’s dream. Although getting it off the ground and onto the international stage can be challenging, especially if you don’t understand the secret tools to raising capital.
Essential in taking a startup to greater success, raising capital doesn’t have to be as daunting as it may sound.
Opening entrepreneurs to a world of high-net-worth investors, venture capitalists and family offices, Wholesale Investor Co-Founder and Managing Director Steve Torso propels capital raising businesses to their full potential.
Understanding firsthand what it takes to be a business founder, Torso established the company in 2008, accidentally coinciding with the global financial crisis. Initially launched as an industry magazine in the same week the Dow Jones dropped 18 per cent, the startup grew to become a global venture investment platform responsible for 10 unicorns and more than 65 exits.
“To be successful, you have to be relentless. Absolutely relentless day and night,” Torso tells The CEO Magazine. “It’s been 13 years for me and I still have a hard work ethic.
“As a founder, you spend 90 per cent of your life thinking about things that don’t exist, and you’re driving towards building that. The other 10 per cent is putting out fires.
“The goal of what we’ve got to do is to keep chipping away, chipping away, chipping away until we get that opportunity.”
And opportunities are exactly what Wholesale Investor creates through connecting capital raising companies with high-net-worth private investors and venture capitalists.
“The founders build the business, it’s just that we can open the doors for them,” Torso says. “Investors can make a difference to the ecosystem far beyond the money, and that’s where it’s important.
“A lot of equity crowdfunding companies, for example, will get you to bring your investors or your network into a deal, then position it as their own but also charge you a percentage of money for raising money from your own network, and they put in restrictions.
“I always wanted to deal with high-net-worth clients and professional investors because my belief is they can actually add value to the company or assist a founder in commercialising or expanding internationally.”
“They’ve got some big investors behind them and they’re tackling skin cancers and tumours in a big way,” he adds.
Although it’s not just pioneering life sciences that have recently been successful in raising capital. Every sector from technology to renewable energy appeals to investors.
“The next five years will be an opportunity for people to create more wealth from innovation than what they did in the last 20 years because of a number of factors,” the Co-Founder says. “First, all the platforms have been built, so everyone has access to people at scale. Second, the adoption S-curve is taking place faster and faster.
“Then finally, everything is becoming cheaper, from solar panels to artificial intelligence training.”
But with more opportunity for entrepreneurs comes more competition.
“Investors get annoyed because every startup comes to them with a sense of no-one’s doing what they’re doing and that they’re the first in the world – when really, investors have seen three of them in the last month,” Torso says.
In order to raise capital, the self-proclaimed optimist says entrepreneurs need to ensure their business is truly unique in providing a solution to a problem the world didn’t even realise it needed a solution for.
Despite the current economy fuelled by the pandemic and Russian conflict, Torso has faith that the investment opportunities will remain positive over the next few years – a valuable insight he has carried with him since the GFC, and one that drove him through COVID.
“When capital becomes harder to come by, that’s when typically companies start seeking out more ways of getting access to additional investors,” he explains. “When COVID came, I knew it was going to be an opportunity for us, but also for the ecosystem.
“The people in our innovation space – the founders, investors, entrepreneurs – are all optimistic. I knew the space would be resilient because everyone involved is resilient.
“You don’t get into this space if you’re a pessimist and you think the world’s about to end. It’s full of optimists who are trying to improve a certain area and create a better future.”
Are you so confident in your new business venture that you’re convinced you’ll become a millionaire? That’s a good start!
But while we have every confidence in your exciting new quest, it’s worth being aware that it’s pretty common for startups to fail at the first hurdle: getting startup funding.
Starting a business as a student requires a lot of hard work and commitment, and perhaps most important of all it requires getting your hands on some dosh to make your entrepreneurial dream a reality. So if you’re wondering how to raise capital for a startup, here are some ideas to get you started!
How to get startup funding
Here are some ideas on how to raise money for a business:
Ask friends and family
For most young entrepreneurs, the first investors to take an interest in their big ideas will be their parents, family and close friends.
And with your friends and family having a small stake, they’ll be more inclined to offer invaluable (and honest) feedback on your business or product, as well as promote it through word of mouth.
It’s a good idea to make this your first port of call as if you find there’s someone in your life with a secret stash of cash they’re willing to invest in your business, you may not need any other startup funding.
Crowdfunding for new business ideas is extremely popular nowadays (you could even crowdfund your degree!). It’s a pretty effective way to make cash – provided you have an interesting idea that will capture public interest.
The most well-known crowdfunding websites for startups are Kickstarter, Seedrs and CrowdCube. Bear in mind these sites all charge a fee of 5% – 7% of what you raise (plus an additional fee for processing your payment), but these fees are only deducted if you reach your funding target.
The potential to raise capital here is huge, and some of the biggest success stories in the UK startup scene began on crowdfunding sites. However, you might be better off looking to raise a smaller amount of seed capital and giving away a bit more equity, since the risk for potential investors is high.
Approach angel investors
Angel investors are essentially people with a lot of cash (normally very successful business people themselves) who want to invest in the next big idea. Think Dragon’s Den, but without the sneering and shady comments.
Best of all, angel investors are about more than just a decent slab of cash to help with your business. They’ll even mentor you throughout your adventure, offering advice when you need it and warning you against common mistakes they’ve seen being made time and again by small businesses.
How to get the attention of angel investors is another matter altogether. A quick Google should throw up some ways of getting in touch with investors, but the UK Business Angels Association website is a great place to start too.
Try the government’s startup loan scheme
Perhaps the quickest and most straightforward way to find startup funding is through the government-backed startup loans scheme.
The scheme is specifically aimed at young entrepreneurs, offering loans of between £500 and £25,000 to get your business venture up and running. If you’re serious about raising capital for your business, this is something you should look into.
Loads of students have benefited from government loan schemes for their businesses whilst still studying for their degrees – including these guys.
You would then be expected to repay the loan at a rate of 6% per year over a maximum of five years – which is a decent deal as far as business loans go.
Look into university schemes and competitions
Believe it or not, even your university could be interested in investing in your idea – and will often have cash set aside for budding entrepreneurs like you!
There’s nothing universities love more than nurturing the entrepreneurial spirit in their own students, and if your business is a success, it’s great PR for them too.
Fund it yourself
Easier said than done, right? But if you’re really serious about getting your business up and running, you should be trying to put aside some cash to help fund it if you can.
We’d recommend setting up a student savings account with the sole financial goal of backing your business idea. Deposit any spare cash that comes your way into this account and leave it to grow with interest.
Ask for a bank loan
We’ve pushed this one to the bottom as it’s a lot harder to get accepted for a bank loan as a young person, making the above options a lot more realistic if you’re still at uni.
Being accepted for a loan would rely on you having a good credit rating and an extremely solid business plan. This is basically so the bank can be sure that you’ll be able to pay them back when the time comes.
If you don’t need thousands upon thousands to get your business started, check out our guide to making money quickly – it could do the trick!
Funding is a vital but often quite challenging part of the growth and development of any SaaS startup.
There’s a number of questions you need to answer:
- When is a good time to start looking for capital?
- What kind of investment is right for your SaaS?
- HOW do you get capital?
- Should you be raising capital at all?
There is no universal answer to this last question. Whether you should raise money or not depends on what you have at the moment. Getting money from other people means saying goodbye to independence and answering to those people. At the very least, it means that the journey you have originally planned for your SaaS in terms of growth and revenue is going to change. But the fact is, a good investor will provide valuable guidance and help you avoid mistakes.
So, if you have decided to start looking for capital, the first step is to prepare.
Prepare Your SaaS for Funding
Raising money for your SaaS can be quite cumbersome and intimidating. It’s not easy to get money, especially from venture capital companies. That is why you need to prepare and position your SaaS startup for funding.
1. Determine Your Target Funders
Before you start looking for capital providers, take some time to do research. Who provides the kind of funding you’re looking for? Do they provide capital for SaaS startups? Which one is the most likely to fund your company? What are their requirements?
2. Prepare Your Documentation
Make sure that all your documentation is in order: your business plan, cash flow projections, plus a brief presentation for prospective funders. Your financial and legal documentation should also be prepared and updated, including the capitalization table, bylaws, and articles of incorporation. Have all the stats for your unit economics available, including CLTV (customer lifetime value) and CAC (customer acquisition costs). Check with a legal counsel to ensure that everything is in good standing.
3. Think About the Amount of Capital You Need
Think about how much capital you need and how you will use it: will you invest it for developing new features, organizing marketing events, expanding, hiring new employees…
Image: mindandi for freepik.com
4. Be Specific on How the Capital Will Help Your SaaS Grow
Even though there are different types of investors, they all have a common fear- underperforming. That’s why you need to persuade them that you will be making good decisions with their money. Investors want to know how their money is going to help your SaaS grow. Are you going to focus on hiring top talent? Are you going to invest most of it in marketing? Have a detailed plan in place to demonstrate this.
Different Types of SaaS Startup Funding
VC (Venture Capital) – Is It Right for Your Saas?
Venture Capital funding takes quite a lot of work. Expect to have more than thirty meetings before finding an investor who’s interested in getting involved in your SaaS startup. Be prepared to answer the following questions
- Why should they finance your SaaS?
- Who are your main competitors?
- Why did you choose them to invest in your SaaS?
- What is your growth plan and how are you going to realize it?
- How much capital do you need to execute the plan?
Bear in mind that venture funding comes with an expectancy that your business and team will grow substantially and that their investment will increase by ten times in value. Investors will want to look at specific metrics to check whether you’ve succeeded in making your SaaS more valuable (and, as a result, enabled them to get substantial gains).
Incubators, Angels, and Revenue-Based Financing
If your startup is at an early stage, consider angels over venture capital. Angel investors are not only more likely to invest at earlier stages, but they also tend to be personally involved and will help you network quickly, which will provide you with an opportunity for mentorship. Incubators and accelerator programs also provide training and mentorship and will include you in their network.
RBF (Revenue-Based Financing) is a model where an investor injects capital into your business in return for a percentage of ongoing gross revenues with a monthly markup. In this case, you’re not giving away any equity and once you fully repay the loan, the business stays in your hands.
What to Avoid When Raising Funds
1. Mind the Timing
Raising funds before your SaaS has launched is not a good idea because it leaves you no room to learn and iterate. Dedicate this time to build relationships with investors and gather the necessary information about the investment process.
On the other hand, waiting for too long before raising money is also bad. This will put you in a distressed position and you probably won’t be happy with the deals available.
2. Set Realistic Expectations
If your list of potential investors is too long, they might question your targeting abilities. That doesn’t mean you should target only 2 or 3 people. Settle somewhere between 30 and 50.
Make sure that your investment time window isn’t too small in order to avoid losing steam.
Be careful not to overestimate your SaaS company’s value because you’ll narrow your market.
3. Know When to Get Comfortable
Constant renegotiating can cause deal fatigue, i.e. make the potential investor feel frustrated and irritated. If you can’t get comfortable with a deal, your investor will most likely start doubting their investment.
Be aware that raising money requires a lot of work and is time-consuming. It will most likely put you under lots of stress, especially after facing inevitable rejections. But who said getting rich was easy? The good news is, there’s a number of financing options out there so, if you can dream up a new financing structure, you can probably make it happen.