SaaS Founder Series: Is Raising Venture Capital a Good Idea for your Startup? Part i
What exactly are VCs looking for when investing in a SaaS startup? Typically, they are looking for a cohesive management team, a decent market size, a product with a competitive advantage, and the right amount of risk. If you check those boxes, then go ahead and start practicing your pitch with this in mind.
Your management team is not something to be overlooked when trying to raise venture capital. VCs don’t want to run your company, rather, they want to advise. They are making a large capital investment, so they expect that you already have the right people in place for seamless execution.
A large market size is a given for VCs. Even before entertaining the thought of securing a large investor of any kind, market research and competitive analysis is fundamental. There’s a lot of variety associated with SaaS, which is promising for makers and entrepreneurs to create their dream product. The bottom line is that VCs want to see something with rapid growth potential and product market fit that can easily be scalable.
Venture capitalists aren’t investing in an idea. They are investing on an executable solution to a real problem that needs to be solved. They look for products with clear competitive advantages that consumers want to keep going back to. Having this type of competitive advantage is important to VCs such that there are fewer direct competitors in the space that can affect your profitability.
With any investment, there is a risk associated with it. Venture capital, of course, poses an immense risk, considering you are exchanging a large amount of capital for a portion of your company. As mentioned before, product market fit is extremely important to get the best return on their investment. They’re looking for that high quality monthly recurring revenue with healthy margins to achieve that.
So, what if my SaaS startup isn’t exactly that?
Not every company requires venture capital to survive. In fact, your startup could be an example of a micro SaaS, which is a typical approach of the bootstrap founder. Micro SaaS companies tend to be smaller, operate in a very niche market with a narrow focus, and generally have a smaller user base. There are many examples of successful micro SaaS companies that have been bootstrapped from the ground up and have grown to the point where they can rely on their monthly recurring revenue to cover their operating expenses.
For some founders, bootstrapping can only go so far and might find that they need some extra capital. If you’re the type of founder that doesn’t want to operate in a rapid growth startup environment or give up equity in the process, then debt financing can be a great non-dilutive option to bridge that gap. There are a variety of options depending on your need and revenue model, and it is often more flexible than raising venture capital.
In this series we’ll cover :
What types of alternative financing models cater to SaaS businesses
Why SaaS businesses are uniquely positioned to access debt financing
How SaaS founders should think about optionality as it relates to their capital stack