Entrepreneurship is usually a pretty exciting journey, whether alone or with a co-founder. The opportunity to attract venture capital through a seed round or Series B round to let your big SaaS idea shine is as exciting as it gets.
Understanding what venture capitalists and mentors look for, what they can do for you as a B2B SaaS product, how valuation works and which metrics most appeal to private equity firms is key to optimizing your potential in this journey.
Let’s dive deep into the strategies behind the best VC funded SaaS startup ideas today.
What is a VC funded startup?
A VC-funded SaaS startup is an early-stage business utilizing the capital gained during a fundraising round to cover its initial operational, hiring and marketing costs.
Venture capital is an external investment made by specialist businesses into early-stage SaaS startups and similar enterprises, following valuation. To win over venture capitalists, a SaaS business has to showcase innovation, disruptive ideas, or remarkable potential in market performance metrics.
VC funding most famously targets technology and fintech SaaS venture ideas, but venture capital firms also invest in other industries when extraordinary opportunities arise.
Is Venture Capital funding right for you?
Scaling up any SaaS startup is challenging, no matter how optimal your market fit and growth strategy. Becoming a VC-funded SaaS startup is a big commitment, meaning it pays to go into any agreements with open eyes.
Pros & Cons: VC Funding
Pros of venture capital for your SaaS startup include:
- The financial freedom to grow your early-stage business faster
- Increased marketing visibility and publicity
- Better venture capital confidence going forward – a successful Series A funding round is likely to unlock an even bigger Series B
Cons of venture capital for your SaaS venture include
- Performance-related milestones that will lock you out of capital if not met
- Disastrously unsuccessful SaaS startups can end up liquidated altogether
- Venture capitalists have far more control over negotiations and the overall direction taken by your business model
Things to Consider Before Looking For VC Funding
A VC-funded SaaS product never happens by mistake. Venture capitalists and mentors are slow and methodical in how they invest their funds, and entrepreneurs should keep in mind that they will likewise be expected to be meticulous in their data, bookkeeping and market fit analysis during valuation.
Is your growth strategy secure enough that your enterprise can weather the wait while venture capital firms analyze your potential? Are there tangible assets and provable concepts behind your pitches, or are they based on smokescreens and hyperbole? Do you enjoy a fruitful relationship with your co-founder that will help your valuation and fundraising efforts?
Venture capitalists field countless SaaS venture enquiries day after day, and no seed round for fundraising will get off the ground if they recognize even a hint of a weak link in your value chain.
Consider also if you’re comfortable with the level of pressure that may come from the KPIs that venture capitalists will place on your organization’s growth. While seldom unreasonable, they heighten the cost of the failure of your SaaS product to a pronounced degree, and you need to ensure you’re ready to tackle difficult questions if the worst should happen to your SaaS venture.
VC Funded SaaS Startups to Watch in 2022
SaaS companies are enjoying plenty of success in drawing venture capitalists’ attention, from seed round funding to Series B growth injections.
There’s no one business model that guarantees successful valuation and VC funding, but one thing these businesses have in common is a solid market fit and highly disruptive growth potential. Mentors and co-founders are always excited by these opportunities.
2022 has seen numerous early-stage startups secure VC funding, including:
- HR startup Zimyo
- Scheduling system Calendly
- Payment gateway Stripe
- Billing software Chargebee
- AI platform Ada
The SaaS startups that are seeing the most success with VC funding in 2022 continue to not only be those businesses looking to solve the communication and logistics issues of employees working from home – but also the coordination of payments and subscriptions that enable B2B SaaS firms to flourish.
By its very nature, SaaS business models require flawless service, strong co-founder relationships, intuitive interfaces and robust cybersecurity – none of which comes cheap. While the opportunities of this competitive market are undoubtedly massive, so too are the challenges entrepreneurs will face in sustaining their business in this sector today.
Firms That Invest in SaaS Businesses
From Silicon Valley to New York City, from London to Tel-Aviv, venture capital firms are located all over the world. It quite literally pays to do your own research into which venture capitalists and mentors best suit your SaaS product business model and modus operandi.
However, entrepreneurs have a huge range of venture capital firms to make contact with during their valuation and incubator phases – right through to Series B fundraising and beyond.
Leading venture capital organizations worldwide who specialize in helping SaaS startups to grow include:
- Bessemer Venture Partners
- Sequoia Capital
- The SaaStr Fund
- 500 Startups
- Matrix Partners
- Shasta Ventures
- Andreessen Horowitz
- LTV Fund
Becoming a VC-funded SaaS product is an exciting journey, but also requires a lot of attention to detail and advanced knowledge. As you advance into your next seed round and consider which venture capitalists are right for your business model, consider some of the most frequently asked questions about VC firms below.
Should you be raising funds?
The viability and growth metrics of your business model go a long way towards defining your optimal growth strategy. Because software companies are participating in one of the world’s fastest-moving industries – technology – there is often added pressure on entrepreneurs to get SaaS startups up and running fast.
Doing so takes capital, and a lot of it – which is what makes aligning with venture capitalists so appealing. However, you must always remember that no venture capital organization is going to offer VC funding on a whim or ‘just because’.
Venture capitalists are in business to make profit – and that means VC funded SaaS startups enjoy a tremendous headstart versus self-funded enterprises, but are also under additional pressures when it comes to delivering results post valuation.
This isn’t just about your market fit or sales metrics – venture capital firms need to see demonstrable results as time goes on. Underperforming businesses or drama between one co-founder and another are liable to see their SaaS venture fundraising halted, or perhaps even facing penalties and other disadvantages.
Entrepreneurs should never be afraid to fail, of course, but this added layer of challenge definitely needs to be kept in mind when you consider if VC funding is right for you. This is another reason why mentors are so useful in this journey.
What does a VC do?
Venture capitalists identify and enable the growth of promising early-stage startups in numerous industries – and increasingly, SaaS startups are a focal point of their attention.
VC-funded SaaS startups receive added impetus behind their growth, but the value that venture capital organizations truly offer entrepreneurs is also felt in their business acumen, networking links, and increased visibility in the public eye.
VC funding unlocks the potential of a promising SaaS product that much earlier, with financial incentives locked to key performance indicators that your startup is expected to meet over time.
Venture capitalists expect to make profits on the investments that they choose, and they are very careful in measuring the valuation of both a given organization’s market fit, as much as the capabilities and leadership qualities of the entrepreneurs behind the business too.
What is the difference between a VC and an angel investor?
While venture capitalists and angel investors are both powerful ways to grow SaaS startups with additional funding and business expertise, an angel investor is someone with which your professional relationship will often be a touch more personable.
That’s because angel investors are high net worth individuals and business mentors who are looking to leverage their wealth into further profits, or simply see it put to use doing good in the world via businesses for which they feel a strong connection.
Venture capital organizations utilize corporate finances to mobilize funds towards VC-funded SaaS startups. By contrast, angel investors invest in a business in order to obtain a percentage stake in the company – often with the intention of deriving profits in the coming months and years, after valuation and fundraising.
Because of that more personal motivation, angel investors often put more time and energy into directly helping a SaaS venture grow and succeed. Because they own equity in your business, bought with their own personal wealth, they are as motivated as you are to see your company succeed.
Angel investors come from a variety of backgrounds, and it’s in your best interests to get to know them personally to establish trust when going into a partnership of this kind. They work to ensure you and your co-founder understand the full extent of your fundraising journey.
They could be entrepreneurs who have made it big through their own ingenuity and are ready to help the next generation to succeed, or they could be high net worth individuals who have inherited fortunes they want to put to good use.
How do I fund a SaaS startup?
Understanding the best way to welcome more VC funding into your SaaS product growth journey means understanding where in that growth journey your company currently is.
Keep in mind that this also means that a younger organization will have more to prove to venture capitalists than a SaaS venture that has a firmly established track record.
If you’re in your valuation phase, seed round, or even the pre-seeding phase and are literally only now getting your ideas off the ground, you will need to be incredibly diligent and thorough in your presentations, metrics, market-fit analysis and forward growth strategy in order to raise capital.
For most SaaS companies, Series A VC funding is a pivotal moment. In fact, it can be something of a trial by fire for even the most promising of entrepreneurs – venture capital firms see thousands of pitches and business ideas a year, and you will need to demonstrate your differentiation down to the finest detail.
However, the payoff is that you unlock powerful resources to grow your team, market your business, experienced mentors, increase your customer base, and empower your research and development.
Any SaaS startup reaching Series B funding and beyond have secured a level of legitimacy and confidence from venture capitalists. By this stage, entrepreneurs are able to provide a solid track record of attained KPIs and impressive growth metrics to investors. For most SaaS companies, Series B is when you’re securing the funding to go from startup to scale-up.
The end goal for many SaaS startups, and the VC firms pushing them forward, is the launch of an IPO. This welcomes retail investors into the fold, and a place on the stock market that cements your SaaS product as a major enterprise around the world.
What are the costs of a VC-funded startup?
No entrepreneurs ought to move into securing VC funding believing that they are out to score free money for their SaaS venture. In reality, venture capitalists are not only providing the monetary means to grow a business to the next level – they are also providing expertise and networking opportunities.
Costs that should be kept in mind include:
- Operational expenses
- Marketing expenses
- Legal expenses
- Accounting expenses
- C-Suite salaries and benefits packages
- VC funding partnership expenses
- Software and technology expenses
- Travel and meetings to report growth metrics to VC firms
- Management fees as agreed with your venture capitalists
If you’re detail oriented, work well with your co-founder, have a solid understanding of your overall market fit and business goals, and can convey the opportunities open to your SaaS venture accurately to VC firms and mentors, there’s no telling how much fundraising potential you’re set to unlock.