The pros and cons of various ways of obtaining growth capital
Financing your software as a service (SaaS) business can be a tough job. There are different ways to do it, and depending on the needs of your business, you may use different options at different times in your growth path. In this blog, we explore the different funding options for growing B2B SaaS companies.
Bootstrapping a B2B SaaS company is the process of starting and growing your business without raising outside capital and is usually considered the best way to get a business started. However, it can be difficult to grow a company if you are bootstrapping because you don’t have access to outside funding sources. It is the safest, simplest way to get your business up and running, but can often be a very slow process. It does, however, give you full creative control and allows you to grow the business the way you want without other people interfering. You are free to make your own choices and possibly pivot your idea as you test and validate your MVP, without any investor imposing their own interests on you. Moreover, it is difficult to get a business loan or find an investor without clear historical figures, so you will probably start off bootstrapped at least until you have a solid case that you can present to the bank or an investor.
Venture capital is a popular funding option for growing SaaS companies (and sometimes seems to be the only option founders look at). Venture capitalists often target companies that are in the early stages of growth: fast-growing startups and scaleups with innovative technologies. SaaS companies can be particularly attractive to venture capitalists because of the predictability of a viable subscription business model: they can see how much money a company is making and how it is growing over time. The aim is for them to invest in your business and use that money to build and expand your business, so that they can then exit at a higher price than they entered. By giving up part of your equity, you allow a group of people into the management and future of your company, which can be both an advantage and a disadvantage at different times.
Factoring is essentially a very old way of financing, which has now been reinvented because of the large number of companies with subscription models, and especially SaaS companies. How it works is that you sell your future contracted sales to such a company, and they pay you, say, 95-98% of the value of those sales. In other words, the future revenue of an existing contract is paid out immediately for a small fee. With the predictability of a subscription-based business model, this is a very strong way of funding, because you can bring forward your future revenue and have it immediately available to you. This provides you with capital that you can put directly into further growth, without having to dilute ownership of your business.
Bank financing is still a much more traditional way, i.e. simply taking a loan from the bank. There are many different companies that use this, from young, innovative companies that already have turnover and a positive cash flow to established names. It is generally a good way to obtain capital that will enable the growth ambitions of a company without diluting the ownership of your company. You receive the loan against an interest rate, but after repaying it, you still have full control of your company.
Crowdfunding can be done in the form of loans or shares. A big difference with a loan or investment with a professional investment office is that you put your proposition and the amount to be raised online. In this way, you try to enthuse small investors who, when they have joined forces, eventually come up with a large loan or buy a large chunk of your shares. It is an interesting form of financing for businesses to look at, but it often works best for products that are innovative or otherwise generate strong sentiment among mainstream consumers. You will have to take into account that this will make your financing process look more like a mass marketing campaign as compared to when you’re dealing with investment companies.
Private equity tends to focus on more established companies that already have a proven track record. The investment company invests or buys the company, for example, because the current owner is retiring and there is no successor for the company, or if a well-run company wants to expand throughout Europe all at once and needs capital to achieve that. The investment company will then run it together with the management.
Grant opportunities are also always interesting to explore. This is something that many companies overlook, but governments have many different subsidy measures for all sorts of different fields and applications, and it is very interesting to keep an eye on whether there is something in there that meets the criteria for your company. A good example is the Kit Digital programme of the Spanish government, in cooperation with the European Union, of which The Sales Strategist is also a partner. Through these grants, we can help Spanish companies in their path to digitalisation with financial support from the EU. As a partner in the Kit Digital programme, our Spanish customers can benefit from a bonus of up to €4.000 when working with us on the digitalisation of their company.