Entrepreneurs starting a SaaS venture must learn funding strategies specific to Software-as-a-Service early-stage startups. The cloud application space is unlike other sectors, and founding a startup comes with unique challenges. The biggest of which is SaaS funding.
In the last decade or so, the SaaS venture landscape has grown exponentially. Of the 30,000 companies worldwide, the US accounts for 60% or 17,000 of them.
Starting from 2008 through 2020, the SaaS market had grown by over 28x to $157 billion. Further, global spending has grown by over 5x to around $176.62 billion. These figures indicate that this is the opportune time to come up with ideas for a viable SaaS startup.
90% of startups across all industries are likely to fail for various reasons. But, 47% of SaaS startups go out of business since they’re unable to identify the right problem or need for their products. And that’s just one of the industry-specific challenges they face.
Before approaching investors, have a clear overview of the potential snags getting in the way of your startup’s success. Your funding strategies specific to Software-as-a-Service startups should answer these issues in the pitch.
Start by developing a detailed business plan that addresses the challenges with practical ideas for dealing with them. Read ahead for more detailed information about how to acquire SaaS funding.
The Ultimate Guide To Pitch Decks
Understanding How SaaS Startups Work
A SaaS company develops software applications and tools that enable users to do things more conveniently. For instance, shopping online, booking services, accessing banking, watching media, and more.
Cloud technologies have successfully changed the way organizations across the board function. They compile and distribute data online, making it accessible on any device with a web browser.
The SaaS sector is intensely innovative and disruptive and faces tough competition, unlike other industries. Founders must develop new applications that keep pace with rapidly evolving technology.
They must also ideate new products that are unlike existing apps in the market. Or have features that give them a USP and set them apart from the competition. Thanks to the funding they receive from venture capitalists, SaaS startups quickly develop product prototypes.
Testing beta versions on actual users allows them to get feedback that helps improve the product and ensure the ideal product-market fit. This factor allows startups to build a ready customer base quickly while getting revenues from not just sales. But also subscriptions and annual or monthly fees.
More importantly, SaaS products need consistent upgrading, integration, and compatibility with newer versions and applications. Given the complexity of the industry, SaaS startups get support from a dedicated category of investors. Read ahead to learn more about how that works.
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Sources of SaaS Startup Seed Funding
Before coming up with funding strategies specific to Sostware-as-a-Service startups, you’ll compile a list of potential sources and types. Both public and private investors support startups with seed and further funding rounds.
Typically, small businesses acquiring less than a total of venture capital worth $100,000 can easily get private funding. However, more established and larger businesses that have raised VC funding of more than $1M go for public seed funding.
Founders who need small amounts of funding can approach angel investors. But if they need more substantial financial backing, their targets should be venture capitalists and private equity. You’ll need funding at different stages of the business, for instance:
Entrepreneurs with a viable product or business idea who have yet to start creating the actual product typically approach angels. At this point, they aren’t confident that their ideas will work, which is why they prefer to restrict their spending.
Incubators and accelerators are the best sources for seed funding or seeding. Founders can use the funds to develop a working product prototype and have it ready for testing in the market. Aside from finance, these investors also assist startups with building the infrastructure to set up the company.
You can also use their expertise and industry-specific experience to identify the right advertising and marketing strategies. Isolating the ideal target customers and organizing logistics are other business operational processes you’ll need advice with.
Venture capitalist funding is your next step when you’re ready to scale the company quickly. Investors offer injections of capital to startups that have proven revenues with the potential to grow them.
They may also offer high-level expertise to ensure bigger profit margins and returns. You can expect additional resources like technical assistance or support with advertising and marketing strategies.
These investors may also provide funding for research and development so the founders can build more products to capture the markets.
Among the top examples of investors specifically backing SaaS startups are SV Angel, Right Side Capital Management, and Andreessen Horowitz. You could also contact First Round Capital, New Enterprise Associates, Accel, General Catalyst, and Alumni Ventures.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Fundraising Strategies Specific to Software-as-a-Service Startups
Look for SaaS Investors
Founders building a new company from the ground up in the SaaS space would want to look for SaaS investors specifically. This strategy has several advantages like:
- You’ll receive industry-specific expertise and assistance from entrepreneurs like yourself who have successfully navigated the sphere. This guidance can help you scale the startup quickly and attain maximum success.
- Tapping into the wealth of knowledge can help you avoid critical mistakes. You’ll learn more about the dos and don’ts that will keep you out of the 90% startup failure bracket. Not to mention slowed growth and the potential of bankruptcy.
- Since SaaS is a rapidly evolving sector, capitalizing on new technology is best done before the competition catches on. Getting early-stage funding can help entrepreneurs kickstart their startups and get on the growth trajectory quickly.
- Seed funding can fuel your expansion into new and as-yet-unexplored markets. Use the money to capture underserved clientele for accelerated profits.
Identify and Detail Revenue Sources in the Pitch
One of the most critical slides in your pitch deck is the revenue and profits slide. Investors need assurance that your startup is poised to earn significant profits and get them rich returns. Outline the sources for your startup’s revenues like:
Cloud applications are typically about offering platforms for accessing data and have several revenue sources. For instance, subscriptions, more storage, enhanced speed, bigger data packets, upsells, set-up fees, and updated versions.
Aside from direct revenues, SaaS startups can also earn profits from affiliate sales and APIs. integrating the application interface to work with programs and customizing them per client needs can also add to sales.
White-label licensing, reporting, and advertising space are other ways to earn revenue. Outsourced customer service programs with a fully staffed, highly-trained team can be hired out for a retainer fee.
Most importantly, your pitch should talk about how you’ll monetize the revenue sources and maximize their potential.
Indicate Proven Target Markets and Value Proposition
As mentioned earlier, the foremost reason why SaaS startups fail is the lack of value proposition. Make sure to do the necessary research to identify your markets and the problem the product will solve.
SaaS products are undoubtedly innovative and groundbreaking. But, they should solve a problem and meet the client’s needs. Your pitch deck should talk about the key pain points and the target market’s needs. You’ll indicate that you’re well aware of the biggest potential pitfall and are ready for it.
Outline Marketing and Advertising Strategies
Without effective marketing and advertising approaches, selling any product is challenging. Founders need to deploy exceptional efforts to sell their SaaS products.
Without the right lead generation tactics, aligning customer pain points with the product’s features is impossible. Unlike popular misconceptions, SaaS products also need aggressive marketing, which you’ll outline in the pitch.
You’ll also focus on customer retention efforts and minimizing churn rates. This strategy should be effective in lowering new Customer Acquisition Costs (CAC). Possibly the most effective marketing approach with SaaS products is word of mouth.
List advertising channels you’ll use, like social media, to build trust and confidence among customers so they are inspired to test and use your products. Email blasts, Search Engine Marketing (SEM), and Search Engine Optimization (SEO) are other strategies that work well for SaaS products.
Provide Team Profiles
The right talent and skill set is the most critical resource for a SaaS startup. You need to hire the right expertise to drive innovation and new product ideation, especially for customization per client needs.
Upcoming SaaS startups now adopt hyper-targeting strategies for talent acquisition that deploy a systematic approach. That’s how you’ll identify and retain individuals who have an in-depth knowledge and understanding of how the SaaS landscape operates.
That’s how you can deliver top-notch customer experiences that maintain subscriptions and growth. The team slide should have details of the engineers you have on board, their LinkedIn profiles, and success stories.
Even as you’re reading up on how to design pitch decks, check out this video I have created. You’ll find detailed information about the best sources of funding for your startup.
Assure Compliance with Regulations
Several industry regulations are in place to protect customers from hacking and cybercrime incidents that endanger their Personally Identifiable Information (PII).
The finance and healthcare sectors are great examples where companies may incur penalties and fines for non-compliance. Not to mention the loss of reputation and customer confidence. The pitch deck should talk about the contingencies you have for such situations.
Adaptability to Market Conditions
The SaaS sector is driven by rapidly evolving technology, and startups can sustain themselves only if they can adapt to changing market conditions. Indicate how your products will stay relevant and retain clients.
Agility and the ability to pivot to match industry trends should be an essential feature of your pitch. Also, address issues like the competition and new startups emerging in the industry with disruptive ideas that could push your company out.
Staying on top of competitor activities and matching their products with yours is crucial for staying in the game.
Interestingly, startup founders should also be prepped for scalability with the proper infrastructure. Cloud technologies and applications should have the capacity to serve large numbers of customers as sales improve.
As more clients download or sign up for products, the equipment should be upgraded and updated to serve them efficiently. Also, deploy advanced customer service teams to address customer issues and resolve them.
Estimate Costs More Accurately
Estimating costs is an essential part of any startup business plan. However, founders may fall short with SaaS startups. Developing, maintaining, and regularly upgrading their products can be expensive.
You’ll also need money for hosting platforms, developing advanced applications, marketing, and customer support. Calculate your asking amount after taking into account the ongoing and future costs of running the SaaS company.
SaaS funding needs founders to use strategies specific to Software-as-a-Service startups. You’ll start the fundraising process by working out your list of targeted investors, specifically entities that back startups in the space.
Work on the pitch deck, taking into account the specific queries investors are likely to have. Highlight the potential pitfalls and how you intend to deal with them when building and scaling your company.
Use these strategies to attract funding from investors at all stages of the venture’s growth trajectory.
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