5 types of SaaS funding
“Startup funding” is not a one-size-fits-all concept. Types of SaaS funding vary according to a number of criteria, like the investment amount typically provided, the structures used for providing it, and the expectations associated with them. Therefore, being able to tell funding types apart is key to recognizing which one is best for you.
1. Venture capital
Venture capital is provided by firms or funds founded specifically to give investment to fledgling companies. As a funding type, venture capital investment is typically provided to startups that are deemed to have either a high growth potential or a strong enough track record of recent growth to suggest that investing now will result in a much larger pay-out later.
Venture capital, sometimes shortened to VC, is a household concept. It’s the glitziest and most prestigious funding source for SaaS companies. Securing VC funding is a sign that a company has considerable potential for exponential growth.
However, being endowed with a VC investment comes with a ton of expectations and pressure that are, in many ways, absent from the other, less meteoric SaaS funding types. It’s highly likely that when receiving VC investments, you’ll cede a large ownership stake to your investors and give up a certain amount of control over your business as a result. Your investors will expect significant return on investment, too—there’s much less room for failure and experimentation when you’re being backed by VC.
2. Angel investors
Angel investment is provided by a single individual as opposed to a firm or fund.
Angel investors are ideal for startups looking for their first big investment (otherwise known as the seed stage, which we’ll get to shortly). But more recently in the investment space, angels (particularly the so-called “super” angels) have begun to play a decisive part in later funding rounds, too.
This type of funding is especially effective when the company’s mission is well aligned with the angel’s own priorities and experience. It usually requires giving up less ownership/control, too, as the investor stake will often come in the form of convertible debt or ownership equity.
Incubators and accelerators are appropriate funding choices for businesses at both ends of the scale spectrum.
Incubators are designed to aid the growth of very-early-stage (seed-stage) startups. The assistance provided will involve making a financial investment in your company, but incubators will also offer assistance in the form of training, expertise, experience, and a network of other supports during your company’s early stages. It is a founder-centric method of investment with an open-ended structure.
Accelerators, often run by private funds, are aimed at providing later-stage startups a platform to scale up. Where incubators are focused around founders over an indefinite period, accelerators are focused around “cohorts” or teams rather than individual founders (as is the case with incubators); accelerators provide fixed-term funding opportunities, usually in the form of group programs that include mentorship and training. Unlike incubators, accelerators are highly structured and often broken down into five stages: awareness, application, program, demo day, and post-demo day.
4. Revenue-based financing & MRR Lines
More and more SaaS companies have begun leaning away from exponential early funding, in favor of more gradual growth that allows them to retain a greater degree of control over their operations. Revenue-based financing is one option.
A loan provider assesses a business’s accounts and its ability to consistently bring in revenue. Then they endow the business with a loan that is tied to the business’s overall revenue. The amount loaned and the rate of repayment will depend on the company’s monthly recurring revenue (MRR).
A loan that uses your MMR as the collateral base is much more appropriate for a SaaS business than assets (which a SaaS business is unlikely to have in numbers) or profits (which a young company is unlikely to have initially). This kind of loan is also known as an MRR line and is SaaS funding at its most direct.
There is no loss of ownership or equity whatsoever; the only condition is that, as with any other loan, you pay it back with more gradual growth. However, you are also spared the many other forms of nonfinancial investment (network assistance, operations, and financial advice, etc.) that you receive from other SaaS funding types.