Complete SaaS Funding and Financing Guide: How to Impress Investors from New Startup to IPO
The SaaS funding process isn’t for the faint of heart. But if you’ve committed to the venture-backed path to building a high-growth company, you have to get comfortable with fundraising. This guide gives you everything you need to know — from the absolute basics to expert tips from people who have been through each stage before — to successfully raise money and put your company on the path to success.
Whether you’ve just got an inkling of a business idea or you’re in the throes of rapid growth, the old adage rings true — it takes money to make money.
But that’s a lot of competition for a finite amount of cash, especially if you’re a SaaS business going through the kind of down market we’ve seen since mid-2022.
Knowing the basics of SaaS funding is a good start, but what you really need to know is how to set yourself up for success at each stage of growth. Here’s how.
Due Diligence Checklist for Fundraising Success
Table of Contents
Types of SaaS Startup Funding
When you look at your cash runway and realize it’s time to inject some fuel into your bank balance, there’s one main question — where are we going to get the money?
There are seemingly countless and deeply nuanced types of SaaS startup funding options for those that aren’t bootstrapping. But you’ll likely be looking at the following categories.
Venture Capital (Equity Financing)
The most prominent type of SaaS startup funding is equity financing from venture capitalists. These are the deals that make the headlines across sites like TechCrunch and create major buzz for business startups across social platforms.
Equity-based venture capital investment through venture capital firms can happen at any stage of growth, from seed funding all the way up to IPO. However, not all VC firms participate in every stage of growth. Some of the biggest VC firms in the world — Sequoia, Andreessen Horowitz, Lightspeed Venture Partners, Accel, GGV Capital, General Catalyst, Founders Fund — will invest in both early-stage and late-stage companies. But with more than upwards of 3,000 active venture capital firms in the United States alone, the pool of potential partners extends far beyond those big-name firms with many more niche VCs in the mix. There are major players in the VC space that focus only on certain stages:
- Early-stage (Seed and Series A): Y Combinator and similar incubators/accelerators, First Round Capital, Greylock Partners.
- Growth-stage (Series B and beyond): Insight Partners, Norwest Venture Partners, Meritech Capital Partners.
Equity financing from venture capitalists is the most prominent form of startup funding because it trades the expectations of future returns for immediate cash. Your vision for the company and growth plans matter as much or more than your current financial and operational performance, depending on the stage. And if you choose the right investors, you’re getting a strategic partner that can help fuel your next stage of growth.
However, there are certain disadvantages to focusing entirely on equity financing:
- Each round of funding dilutes ownership for the founders as well as employees with incentive stock options based on the SaaS valuation.
- Especially in a down market, funding can be hard to come by as thousands of companies jockey for limited amounts of capital.
- It can take months of non-stop effort from founders to close a round of funding, taking time away from growing the business.
- Raising venture funds comes with the expectation of exponential growth, which puts pressure on everyone in the business.
For most SaaS funding processes, the majority of effort goes into finding the right partner and terms for equity financing. It’s just important to remember that it’s not the only option.
Venture Debt (Debt Financing)
Venture debt is a type of financing from specialized lenders who are willing to provide loans to startups, which are seen as riskier borrowers (especially in early stages when there’s no major revenue traction). Venture debt financing is almost always raised in tandem with an equity round.
The benefits of supplementing equity financing with venture debt are:
- The ability to raise more capital without further diluting the business (because debt financing doesn’t typically require giving up ownership).
- More flexible terms than a traditional small business loan.
- An easier path to raising capital if you’re a more mature startup with significant revenue.
- Faster due diligence processes compared to equity financing.
The tradeoff for these benefits is that debt financing can come with high interest rates and short repayment periods as well as specific guidelines for spending the money. These are all things you would need to negotiate with lenders as you search for the best terms.
Historically, software companies haven’t had a ton of debt on their balance sheets… because equity was really easy to raise; debt investors were scared by software companies. But we’re starting to see that change a little bit more now… Founders and CFOs are starting to think about taking out more venture debt even if historically they wouldn’t have.
The key to effective venture debt financing, according to Finley’s Jeremy Tsui, is finding a lender that truly understands your space and is familiar with your growth stage. Beyond that, you’ll want to evaluate lenders and term sheets the same way you do in equity financing, searching for the best terms for your unique business needs.
Angel investing is a form of startup funding typically raised by pre-revenue companies (pre-seed and seed rounds).
It’s similar to venture capital funding in that you’re generally exchanging equity in your company for cash to grow the business. However, instead of raising from a venture capital firm, angel investments come from independently wealthy people who are interested in re-investing their money in innovative startups.
This form of investment is similar to a friends and family round but extends beyond your immediate network to include accredited individual investors. The amount of money you raise from angel investors can vary dramatically but often comes in the range of $25,000 to $100,000. In some cases, you could raise upwards of $1 million to $2 million from a single angel investor. For SaaS funding, the amount depends largely on the industry you’re in and your ability to put together a solid pitch to the right people.
Flexible, Revenue-Based Financing
Flexible financing based on SaaS subscription revenue is an emerging type of funding. This form of funding is available through trading platforms like Pipe, which turn your SaaS bookings into working capital for a fee based on your industry and the health of your business.
Revenue-based financing is essentially a loan that you borrow against subscription revenue you haven’t yet collected. The booked revenue is your collateral, giving you an opportunity to fuel short-term operations with a loan that you’ll pay back as you collect that subscription revenue.
The benefits of revenue-based financing are that it doesn’t dilute ownership at all and is more easily accessible than traditional debt financing. However, because it’s tied specifically to your revenue growth and the health of your business, the loan amount may not be sufficient for your needs, and/or the terms may be less favorable than other forms of financing.
The 6 Main Stages of Funding
There’s no one-size-fits-all path to growing a startup from idea to household name. But in terms of financing the business, there are six main stages of funding that most will go through:
- Pre-Seed. The earliest and often unofficial round of funding, which takes place in the idea stage before entrepreneurs start developing a product. This round may consist of microloans or funding from friends and family and/or angel investors to help prove out the business model.
- Seed. The first “official” round of funding can come from early-stage VC firms or angel investors. Seed-Stage funding helps you finance business development, the creation of an MVP, and the process of building out a team beyond the founders.
- Series A. A major round of early-stage funding that’s meant to expand on traction with initial customers. You raise a Series A with early signs of product-market fit and use the funds to set the company up for go-to-market scale.
- Series B. The transition stage between early-stage and growth-stage where you’ve proven product-market fit, and you need funds to double down on go-to-market growth. The funds should help your company capitalize on existing demand in the market and expand into new spaces.
- Series C/Series D+. Series C and beyond is where you’ve reached scale, and you’re sustaining the business on the path to IPO. The funds are used to reach new market segments, expand into new verticals, and otherwise set the company up for some sort of exit. Companies often IPO after their Series C, but there are plenty of examples of businesses that have raised Series D, E, and even F rounds.
- Initial Public Offering (IPO). The exit stage where a company shifts from private company to public company, paying off the investments that VCs and angels made early on. While IPO is a common path to public listing, there are alternative paths, such as SPACs or direct listings.
Challenges for SaaS Companies in Pursuit of Funding
The process of raising a round of funding varies greatly from company to company and can take anywhere from a couple of months to over a year to complete.
As you go through the process, these are a few of the challenges you could run into that hurt your conversations with investors and drag out the fundraising cycle.
Creating a Compelling Pitch Deck
Even though there’s a fairly standard set of information your SaaS pitch deck should cover, you have to think of ways to make your business stand out.
John Luttig, Principal at Founders Fund, says one way to do that is to be upfront about what you know will be the biggest concern for investors. For example, “If the investors will be concerned about margin structure, then you should have some sort of chart around gross margin over time.”
Proactively communicating potential concerns can help you shift the primary focus of the conversation to what makes your business a strong investment.
Updating Investor Pitches with the Latest Data
When your funding cycle takes months, it’s not enough to have a single set of data to pitch to investors. You have to present the latest and most up-to-date information to each investor you talk to.
But when managing financial and operational metrics is a heavily manual process, you risk not having enough time to update all the numbers before an investor meeting.
Managing the Due Diligence Process
A successful investor pitch is just the beginning of the process of getting a term sheet. If there’s interest after the initial pitch, you’ll have to go through the due diligence process, where investors dive deep into the nuances of your business.
Be prepared to answer ad hoc questions and variations of standard reports as investors try to better understand the potential of your business.
Telling the Financial Story at the Right Granularity
There’s a fine line between too much and not enough information — both when pitching your business and when going through the due diligence process.
Whether you’re in the earliest stages or your business is more mature, you need to master the art of financial storytelling to properly convey how you’re performing. That means getting into the “why” behind your numbers rather than just reporting a high-level snapshot of where you are currently. And it means knowing where investors want deep granularity and when simpler overviews suffice.
How Mosaic Helps SaaS Startups Appeal to Investors
The top 1% of high-growth companies may have a somewhat smooth path to landing funding, but for the vast majority of businesses, it can be a slog. However, there are ways to streamline some of the more manual parts of the process and set yourself up to impress investors at every turn.
That’s what Mosaic has helped Untapped do on its path to raising $70+ million in funding to scale its recruiting platform. As Untapped moved from Series A to Series B, the leadership team had to give investors a tight, cohesive picture of financial performance as well as multiple scenarios for where they’d go in the future. Managing that process for dozens of investor conversations can feel impossible.
We needed a way to provide compelling growth projections quickly and efficiently. Mosaic provided an all-in-one finance platform to help us drive clear and confident financial plans for investors.
Mosaic aggregates data from all of your core source systems — CRM, HRIS, billing systems, ERP, and data warehouse — to give you real-time actuals and the flexibility to plan and analyze on the fly. Untapped was able to model multiple scenarios in 15 minutes. But Mosaic also lets you build custom dashboards with all of the most granular information investors will ask for in the due diligence process:
- Historical monthly financials with department-level insight
- Revenue growth broken out at the customer level
- Win rates and sales cycles with insight into closed-lost reasons
- Channel-by-channel overviews of pipeline generation
- Net and gross dollar retention by customer, product line, segment, etc.
Don’t let a tough investor question derail your funding round. Reach out for a personalized demo of Mosaic and learn how you can weave a narrative that lands term sheets.
SaaS Startup Funding FAQs
How do startups get funding?
Startups can get funding through angel investors, venture capital firms, revenue trading platforms, various debt lenders, or from various smaller options like small business grants, crowdfunding platforms, or business credit lines. The process involves networking to connect with investors, pitching the business to those investors, and going through a due diligence process to share deeper insight into performance.