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How to Avoid Dilution for SaaS Companies

Instead of looking at (expensive) venture capitalists for funding, consider factoring as a way to pull your cash flow forward. BRIDG offers a modern approach to factoring.

Raising a child is not cheap. It is not different when it comes to that other baby of yours: your SaaS startup. In order to grow, you need a lot of funding. Earlier, we discussed 7 ways to get funding for your SaaS startup.

The most common way of getting funding is to get an angel investor or venture capitalist on board. However, there is one minor downside to this type of funding. These people don’t just invest out of the kindness of their hearts. They want something in return. Quite often, this is a stake in your company. Now, selling 5% of the voting rights for a large cash injection isn’t that big of a deal. And sure, giving up 5% of future profits doesn’t sound that bad either.

But if you have to go through several funding rounds (like most companies) all these small bits do add up. Dilution (both in control and profit) can become a big issue.

As a founder, you’d probably want to keep at least 50% of the company. Reality draws a different picture, though. Did you know that SaaS company founders on average exit the company after roughly 15 years holding only low single digits? That’s right: 15 years of backbreaking work for a stake in your own company of 5% or less.

Does this mean you should shun venture capitalists? No. You can’t grow without them. But selling your company while building it? Try to avoid it. Seek smarter funding.

Don’t blow VC money on quick fixes. Skip that fancy coffeemaker, but invest to generate long-term returns.

 

Getting VC money is difficult

By the way, it’s not that easy to get a venture capitalist fund to invest in your SaaS start-up. They tend to have pretty strict policies, which results in 95% of applicants being turned down. And did you know that the average ticket is “only” 1 million dollars? Yes, that is serious money, but it’s only a fraction of what you will be needing to really make it big time.

 

Get your clients to fund your growth

Many SaaS companies have looked for ways to get their clients to fund their growth. One common way is to get clients to pay their annual subscription in advance. While this is a great way of pulling your cash flow forward, it does come at a cost: the discount. Often, paying annually instead of monthly is 17-30% cheaper (for the client) than monthly payments.

Not just that, it changes your pricing perception: clients no longer view the monthly subscription fee as the “cost”, but the discounted price. This hurts your valuation (which might bite you in the back next time you try to get funding).

 

A new alternative

Recently, BRIDG entered the playing field. On BRIDG you can sell your future revenues to institutional investors. Nothing changes for your client, they keep paying monthly. However, you already got your money from the investor.

This is a great way of getting your cash today, and not at some point in the future, without hurting your valuation.

According to BRIDG, their approach has these benefits:

  • No more discounted annual subscriptions
    • ..that you need to push buyers into
  • No high-interest debt
  • No dilution

 

Think for yourself

BRIDG presents itself as a revolutionary way of financing your SaaS company, an alternative for high-interest debt. However, their approach is nothing new. Factoring has been around for decades (if not centuries). Whether it is actually cheaper than a debt remains to be seen. BRIDG does not disclose any cost on their site, but you can be sure the investors that buy your future revenue will want something in return for their money (and the risk they take).

What is new, is that BRIDG works with an app that makes factoring more accessible and easy to use.

It may pay to look into this new finance supplier. But don’t think of them as the golden bullet for your company. Keep a level head, and hold your calculator near you!

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