What they say is true: money doesn’t grow on trees. But if you have a great idea for a SaaS-solution, there will always be ways to get your SaaS-startup funded. In this article, we will discuss the 7 ways to fund your business.
When you bootstrap your business, you use your own money to get your business going. This is the classic “From paperboy to CEO”-type of building your company. It’s romanticized, but also a lot of hard work. Often, those bootstrapping their startup have another stream of revenue, which covers their cost of living. You can use your savings to bootstrap your company, or you can take a personal loan. As the sales grow, and profits are reinvested, the company will slowly and organically grow.
Bootstrapping your company is not the fastest path to commercial success, but it has one main benefit: you maintain full ownership of your company and your ideas.
Grants from the government
Entrepreneurs often scoff at government interference. But without government funding, a lot of major companies would not have survived. The best thing about government grants is that you are under no obligation to pay them back. That being said, obtaining a grant can be a rather laborious task. Usually, the objectives of grant programmes are clearly defined. Only companies in specific industries meeting certain criteria tend to be eligible to apply. The application process tends to involve a lot of red tape and forms. The reward is worth it. Examples for grants which SaaS-startups could apply for is the EU-programme Horizon2020. This programme was designed specifically to boost innovation and big data in the European Union and is a good example of government support for SaaS-startups.
OK, money doesn’t grow on trees but free money does actually exist. Well, if you win a contest, that is. When you pay attention, you will find out that contests are everywhere. The prize money might not be huge, but it could just be the financial injection your SaaS-startup needs. And the great thing: you do not need to hand over ownership, or pay interest.
Of course, participating in a contest means you will have to play by their rules. Entry conditions may vary. But if you can participate, take the opportunity.
Even if you do not win, a contest provides ample opportunity to put your SaaS-startup in the spotlights. Often, performing a pitch is an important part of a contest. Even if the judges aren’t impressed, someone else might be.
An accelerator is not just a way of getting your SaaS-initiative funded. Even though accelerators usually offer some form of funding, they do a lot more than just hand you over a bag of money. When you enter an accelerator, you will enter into a mentorship programme which tends to last months. You will also have access to important other resources.
Startups usually join the accelerator before they have a marketable product. Under the supervision of experienced mentors, you can expect long workdays to get a lot of experience and a lot of product development done. Thanks to the operational support you could never hope for when flying solo, this is a way to really fast track your SaaS-startup. Keep an eye out for accelerators with a great reputation and track record.
Kickstarter, Indiegogo, Seedrs…. Crowdfunding comes in several flavours. Some crowdfunding platforms offer investors the opportunity to buy shares. Other platforms are a way of getting a loan when banks are too risk-averse or just don’t “get your idea”. With crowdfunding, anyone can invest any amount in your SaaS-company. Even when all investors chip in $50 or $100 each, large capital can be raised through crowdfunding.
The most popular form of crowdfunding, though, is where your end-user supports you financially in return for your product.
Crowdfunding is an amazing marketing tool too. You can use crowdfunding to create public interest in your product. What’s more, you tap into the demand from the Early adopters, finding supporters who are willing to buy your product before it is even ready.
Thanks to the Japanese, almost everybody has heard of “angel investors”. The programme, aired between 2001-2004, featured ambitions entrepreneurs pitching their ideas to a panel of investors (dragons). After a session of Q&A, the dragons decide whether they’d invest in the idea, and under which conditions.
Surprisingly, this TV-format turned out to provide enough drama to captivate a large audience. The show spread across the globe, introducing the general public in more than 30 countries to the concept of angel investors.
Of course, most angel investors don’t appear on tv. Usually, an angel investor is a wealthy individual who has money to invest. Sometimes, an angel investor is someone who inherited a large sum of money, but quite often, they are former entrepreneurs who sold their own business and now seeks new opportunities to grow their capital.
In a sense, they are just like you – except that they have more experience. That means that, along with their capital, you will be tapping into their experience and knowledge. You will need to convince them of your idea, but if you manage to do this, they are pretty fast at making business decisions.
The wise angel investor knows it is important to have a diversified portfolio. That means they tend to invest their personal money in several different projects. Typically, they’d have a stake of between $25,000 and $1M in companies.
Sometimes, angel investors decide to work together, forming an angel syndicate. Usually, a lead investor is selected, who will be your main contact. Some angel investors have become a SaaS themselves.
The final source of funding we will be discussing is venture capital. This is the most professional form of finance available to SaaS-startups. Most venture capitalists focus their attention to a specific sector or geographical region.
The trick with venture capitalists is to provide them with a solid plan. Venture capitalists offer access to large capital, but they do want something in return. Convincing them that your SaaS-solution will turn the world upside down is just the first step. You will need to do more. You will need to have a product which is ready to be shipped (even if it is just the minimum viable product or MVP). And they very much like to see some track record.
Venture capitalists want to participate in a startup, but they do have a time horizon. They will never take a stake in your company if there is no exit-plan. Working out a deal with a venture capitalist can be difficult, but in return, you are provided with a large capital injection, expert advice, operational support and –usually- access to a strong business network.
Invest in your funding
The seven sources of funding for you SaaS-company discussed each have their own characteristics. Some are perfect for small investments, whereas won’t answer the phone if you need anything under $1M. Some offer guidance, while other sources provide you with maximum autonomy.
Which method of funding is best for your SaaS-startup is a decision you shouldn’t take in a whim. But after that, you are not done. Even within a particular type of investor, differences can be huge. Crowdfunding platforms have varying terms and conditions. Some angel investors are angels, others might resemble demons. And if you chose the wrong accelerator, your company might grind to a halt.
Invest your time and energy to determine which way to fund your SaaS-company. It might be the biggest business decision you will ever make…