How to Raise SaaS Venture Capital Funding
Software as a Service (SaaS) stands for a software delivery and licensing model that uses a subscription approach for access to software on a centrally located host. It's also called "on-demand software." Venture capital (VC) is one form of funding for early-stage firms perceived to have high-growth potential. These firms may already have a large number of employees and significant revenue but need a cash infusion to expand and become profitable.
Venture capital firms are groups of individuals or funds that invest in these companies in order to get in on the ground floor and they offer capital in exchange for a percentage of ownership in startups. Venture capitalists assume the financial risks because they believe the company has a good chance of success. However, due to the uncertainty factors, VC investments have a very high chance of failure. These start-ups typically have a unique technology or an innovative business model. Most VC projects are related to high-tech industries like clean technology, biotechnology or information technology.
After a cold streak of declining funding for software venture capital firms in 2017, 2018 saw a jump in finance SaaS VC funding. In fact, the first two quarters of 2018 witnessed a big jump in SaaS VC funding at seed and early-stage levels. Crunchbase reports that there were more than 9,400 venture rounds from 2010 to 2018, and trends shows there’s still plenty of interest in angel funding among software venture capital firms.
Venture Capital Firm Definition
A venture capital firm definition must include the purpose and function of the organization. A VC is a special kind of investor that gives money to startups that show great promise. The VC firm receives an equity stake, which will yield a much higher return than their initial investment if all goes according to plan. Venture capital firms support small companies or fund new ventures the wish to expand but don't have access to equities markets or other funding sources.
VC Founders are usually called General Partners (GPs) while the investors they pull in are known as Limited Partners (LPs). LPs may be individuals with a high net worth, foundations, endowment funds, big corporations or pension funds. There are three primary functions that VCs fulfill: choosing promising startups, helping startups after the initial investment and raising more capital to support the investment.
VC support enables entrepreneurs to focus on product development and business growth and reduces their personal financial risk.
Top VC SaaS Partners
If you are the founder or CFO of a startup looking for a top VC SaaS partner, it’s important to consider financial and non-financial characteristics that make for a good fit with your service offering. From a financial perspective, you can look at their performance and shortlist the top venture capital firms 2019 that were also top venture capital firms 2018. It’s critical to shop around and evaluate the best VC funds from a technical, business and monetary perspective.
For example, SaaS accelerator programs offer fixed-term assistance that may include extensive mentoring services. These cohort-based programs include an initial seed investment. The best SaaS accelerators extend the partnership to opening up opportunities through connections, sales support, and educational roadmaps that culminate in events such as a public pitch or demonstrations to quickly accelerate growth.
The best performing venture capital funds involve individuals with a willingness to get involved. Discerning startups look for investors that don’t mind getting their hands dirty and offering sound advice on talent acquisition, customer experience management and product improvements. The best venture capital firms to work for include team members who do a good job evaluating markets based on solid logic.
SaaS Venture Capital
SaaS venture capital works differently than startups in other industries, such as healthcare, retail and recreation. First, SaaS venture capital involves a service rather than a commodity or other product that people buy and use directly. Typically, SaaS firms sell their products to businesses rather than individuals. Second, the B2B market is a different space and angel investors need to understand how to market to business owners looking for a specific value proposition. There are also valid B2C software products that require nurturing at the individual level as well, so it really depends on what your SaaS product offers.
Venture capital firms in this sector look for unique products that have wide appeal and that create software solutions that can streamline business operations for the target markets. If you’re looking for general information on SaaS venture capital Crunchbase makes a great resource for research.
Once you find an experienced SaaS venture capital company, be ready with questions regarding pertinent information on how well-equipped the staff is to deal with this unique sector. One of the benefits that SaaS offers over on-premise based software is that its cloud-based configuration saves end users tons of money on server costs and, for web-based solutions, potential compatibility issues for remote users.
This is a key selling point for savvy SaaS investors who get the unique value proposition and are willing to invest in this forward-thinking space. Working with SaaS VCs that understand this can greatly accelerate the acquisition of investors. To that end, firms looking for financial infusions need SaaS investors with connections, potential clients and potential employees that can create synergies between equity-holding investors and leadership-hungry startups.
SaaS Growth Ventures
Gartner predicts continued strong growth for SaaS technology at $85 billion a year. To capitalize on this boon, founders need to find venture capital firms with enough resources to help them grow quickly. The right VC for your startup or emerging business is highly experienced with SaaS growth ventures.
Don’t be afraid to ask for proof. SaaS growth ventures hinge on reaching exponential growth rates each year. If your backers can’t deliver this, you could be dead in the water before you even get started. Ask for and carefully review case studies from the venture capital firms you are vetting. How many companies have they helped grow quickly? Another great indicator of SaaS-specific experience is referrals from other founders. Interviewing the principals of non-competing startups who’ve worked with the firm can provide proof that the VC knows what they are doing.
An electronically traded fund or ETF owns assets — such as commodities, stocks, or futures. ETFs often include riskier investments, such as SaaS startups, and have two major benefits. They spread ownership, thus risk, over a larger group of individuals or entities. A SaaS ETF holds SaaS shares in its portfolio and may be an option for founders looking for fast funding and who believe their product can attract sufficient interest from fund managers.
PowerShares is one of the most popular SaaS ETF options. Powershares dynamic software ETFs are part of a family of funds that includes international and domestic ETFs managed by Invesco Ltd, which is the largest provisioner of smart beta ETFs. To attract interest from SaaS ETFs, founders can approach fund managers directly, hire an experienced intermediary, or work through an existing angel investor or VC to pursue ETFs as a funding source.
Pursuing ETFs disperses the equity beyond the VC relationship but may be a viable option for SaaS founders unable to option venture capital.
SaaS stocks are somewhat of a misnomer. Issuing stock is one way to raise capital, but the stocks themselves hold no value unless an exit event occurs — such as the sale of the SaaS startup or an initial public offering. SaaS stocks are privately held assets owned by company founders and investors. Often, stocks are offered as incentives to employees of the SaaS company who sacrifice their time and effort for little or no compensation.
The public SaaS market is also very large. Even if you are unable to join a SaaS company, you can get involved by purchasing a SaaS mutual fund with high-risk, high-reward potential.
SaaS VC Funds
Be sure to thoroughly evaluate several Saas VC funds options before settling on one for your SaaS fundraising. Here are five guidelines to use in your selection process:
- Name and reputation in the SaaS market
- Development phase (choose the most experienced firm with the best track record)
- Industry Sector (Does the VC have experience with SaaS startups?)
- Required financing volume
- Location of the VC firm (Are they close enough to help?)
Each fund will have different terms and conditions, such as minimum and maximum funding opportunities based on their valuation of your growth potential. Don’t give away more equity than you’re comfortable with if you believe the VC is shortchanging your product’s potential.
SaaS ventures include a number of well-known players.
The SaaStr Fund holds $90 million in venture capital assets exclusively funding SaaS and B2B start-ups. There’s an annual SaaStr conference where SaaS and B2B founders can make their pitches to join the fund and they even have a SaaStr podcast available on their website.
High Alpha is a venture studio based in Indianapolis. High Alpha Capital, the venture arm of the High Alpha venture studio, has invested in B2B SaaS companies across the world. High Alpha Capital invests in SaaS companies in a variety of growth stages, most frequently in Series Seed and Series A funding rounds. The High Alpha team brings decades of SaaS experience to the table.
According to Crunchbase, Sequoia Capital also funds early and growth level SaaS companies and the company has overseen 269 exits. Sequoia Capital subsidiaries extend to Israel, China and other international locales for companies based abroad or with an international component.
Bessemer Venture Partners are also worth looking into. Bessemer Venture Partners Crunchbase entry indicates that the firm manages $4 billion of venture capital via 130 global companies.
San Francisco-based Founders Fund is a SaaS-friendly venture capital firm that bills itself as a builder of revolutionary technologies. Also, Accel VC caters to technology growth firms such as SaaS ventures.
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