4 Strategies to Secure Funding for Early-Stage SaaS Startups
Securing funds in the early stages is often challenging for startups. Hundreds of startups are on a similar journey. In a bustling ecosystem of software technology where SaaS startups are sprouting, it can be tough to seek venture capital, get a loan, find angel investors, or even bootstrap.
One way to boost funding potential for your SaaS startup is crafting a minimal viable product (MVP) when pitching to potential investors. This helps investors see immediate value and showcases the business’s functionality, vision, and ability to execute.
A startup must invest resources to understand its users' needs and pain points. For starters, an impressive customer onboarding experience is an early touchpoint in the customer journey that sets the tone for the entire user experience. It ensures a seamless transition for the user, minimises churn rate and drives user engagement.
Investors prefer to see an efficient onboarding process that clearly indicates that your startup understands its target audience. Raising capital gets easier when you showcase that your business can deal with potential roadblocks and is committed to ensuring customer success from the beginning.
Thus, startups prioritising an impressive SaaS customer onboarding experience and compelling, customer-centric UI/UX will resonate well with investors, thus building their confidence in the venture.
These elements together can clear the path to garnering investment and establishing a strong financial foothold.
Let's explore the strategies early-stage SaaS startups can leverage to secure funding.
Venture capital (VC) financing is a common source for startups, particularly in the technology and SaaS sectors.
When you are looking to acquire such funding, consider following these steps:
- Research potential investors and look for VCs who have invested in similar industries or stages of development.
- Next, create a compelling pitch deck that clearly articulates your business plan, growth strategy, and the problem you're solving.
- Here, try to leverage the networking to get introductions to VCs.
- And then try negotiating terms. If the VC is interested, they will likely propose terms, and negotiation will ensue.
When preparing for the VC meet, prepare the following beforehand.
Valuing your business is crucial for determining how much equity you give away based on the investment.
This can be done through various methods, including:
- The comparative analysis involves looking at similar companies' valuations.
- Discounted cash flow analyses are based on forecasting future cash flows and concessioning them to present value.
- Using market multiples to value the company.
Sorting VCs based on their investment stage and funding history
Maximise your chances of getting the funding by approaching VCs who align with your startup's stage and industry.
Try sorting them based on the following:
- Investment stage: Some VCs specialise in early-stage funding, while others focus on later stages.
- Funding history: Look at the VC's previous investments to understand their interests and investment patterns.
- Industry: Choose VCs with a history of investing in SaaS or similar sectors.
Prepare executive summary and pitch deck
An executive summary and pitch deck are essential when approaching VCs. Document a concise overview of your SaaS business, including its mission, product, market opportunity, competitive landscape, and financial summary.
Once done, consider creating a visually appealing presentation that includes key SaaS business details like common problems of your prospective customers and how your SaaS product offers a solution. Also include the business model market analysis consisting of an industry overview, team information, and financial projections.
Pre-seed funding is an early stage of startup fundraising, typically considered before the formal seed funding round. SaaS startups may use this funding to develop a prototype, conduct market research, or work on the other foundational aspects of getting the startup off the ground.
Let us now check out how your SaaS startup can prepare for the pre-seed funding.
Create an MVP
An MVP of your product demonstrates your concept rather than just an idea. You are showcasing a tangible piece of software to possible investors that serve the basic purpose of the full-fledged product you intend to build.
For this, develop a basic version (the bare bones of your SaaS product) that illustrates its core functionality. It doesn't need branding and design considerations but should effectively communicate your unique value proposition.
Show product-market fit
SaaS investors would always appreciate your homework on finding the product-market fit. It assures them that there is a demand for your product in the target market. Conduct market research to identify your target audience and their needs. Accordingly, align your product's features with those needs, and gather evidence (like user surveys or beta testing feedback) to show that your product meets real market demand.
Leverage a customer database or onboarding feedback
Lastly, get clear feedback from potential users that help build credibility, showing that your product is feasible and highly desired in the market. Engage with potential customers through interviews, beta testing, or early sales. Through this, collect and analyse the information to refine your product and demonstrate to investors that you understand your customers.
Leveraging intellectual property rights (IPR)
IPR refers to the legal rights that grant creators (SaaS founders in this case) control over their intellectual creations.
SaaS startups can apply to acquire IPR for any of the following intellectual properties:
- Software and algorithms: If your software includes unique algorithms or code, it could be eligible for protection through copyright or patents.
- Design and user interface (UI): Protect unique designs and UI elements through copyright.
- Brand and logo: Leverage trademark registration to protect your SaaS startup's brand name, logo, or other identifying marks.
- Unique business processes: If your SaaS startup develops a novel method or process, it might also be patentable.
It is possible to raise investments by selling any IPR to your investors. Also, you can acquire different types of investments since investors would like to put their money into a unique product.
Below are the IPRs that you can apply for your SaaS business.
Patents can protect inventions, algorithms, or unique processes for a specified period, usually 20 years.
A typical patenting process for your SaaS business will require the following:
- Search for existing art: Ensure that the invention is unique by thoroughly searching existing patents.
- Prepare and apply: A patent application must describe the invention in detail and explain why it is novel. Consult with a patent attorney, submit the application to the relevant patent office, like the USPTO in the United States, and follow up as needed.
What do investors look for?
If a SaaS startup has patented a unique technology or process, it shows innovation and differentiates the company from competitors.
Investors will thus look into it as a sign of potential market pioneering and are more likely to invest, knowing that the technology is protected against unauthorised use by competitors.
Copyright protects original works of authorship, such as source code or graphical designs of your SaaS products.
A typical process will involve the following.
- Creating document: Maintain detailed records of when the work was created.
- Register the work: Though unnecessary, registration with the relevant governmental office (such as the U.S. Copyright Office) can offer additional legal protection.
- Include copyright notices: Place a clear copyright notice on the work to inform others of your rights.
What do investors look for?
By owning the copyrights to core parts of the software, a SaaS startup can prevent others from copying or distributing their work.
Investors are more inclined to invest in a SaaS startup having copyright since it offers them exclusive control over its creative assets, adding to its overall valuation.
Trademarks protect symbols, names, and slogans that help identify and differentiate your SaaS products.
- Search existing trademarks: Verify that your brand name or logo is not already used.
- Register the trademark: Apply with the appropriate governmental agency, such as the USPTO in the United States.
- Monitor and enforce: Keep an eye on the market to ensure others are not infringing on your trademark, and be prepared to enforce your rights as needed.
What do investors look for?
Investors may view strong branding (protected by trademarks) as a sign of market presence and customer loyalty, increasing the company's attractiveness as an investment opportunity.
Trademarks can help build brand recognition and trust. A well-known brand can be a valuable asset with a certain value for investors.
Angel investments are typically made by affluent, seasoned investors who provide capital to startups in exchange for ownership equity or convertible debt. They are crucial in early-stage startups, especially SaaS companies looking to scale fast.
Here's how and when to look out for them:
Angel investment network
Consider this network as communities of angel investors who come together to find, fund, and support startups. These networks often hold pitch events and provide platforms for startups to connect with potential investors.
How: You can join networks like Techstars by attending public events and engaging with investors.
When to approach?: Usually, after your SaaS startup has developed its minimum viable product (MVP) and needs funding to grow and scale.
Gust connects startups with angel investors and venture capital firms.
How: Your SaaS startup can create profiles, share pitches, and engage with investors on this platform.
When to approach?: Once your startup has a solid business plan, product, and market validation, get listed on Gust to raise funds for scaling up.
Crunchbase is a platform that provides information about startups, including funding rounds, investors, and industry trends.
How: Use this platform to research potential investors, connect with them, and gain insights into the investment landscape.
When to approach?: Visit this platform to seek external funding and understand who invests in similar companies and industries.
How to Prepare for Angel Investments?
SaaS startups must have basic ideas of their product goal, outline how funds will be used, and remain open to advisor collaboration.
Here are other things that should be considered.
I. Define and set target timelines
Clearly outline the goals and milestones you plan to achieve with the angel investment. Also, commit to a timeline for when you plan to achieve these goals. Ensure the timeline is realistic and aligns with the startup's needs and the investor's expectations.
II. Show how you plan to use funds
Create a transparent plan detailing exactly how the funds will be used, and they will be used for product development, marketing, hiring, etc. Also, explain how their investments will help your SaaS business grow, providing a clear picture of potential returns for the investor.
III. Onboard advisors or stay open to onboarding (new) one
If advisors are already involved, share their expertise and how they contribute to the startup.
Moreover, many angel investors like to be actively involved or may suggest experienced industry professionals as advisors. Be open to this collaboration since it helps value and credibility to the business.
Over to You
From showcasing your brainchild through an MVP to giving your startup wings with angel investments, securing early-stage funding for your SaaS business is a thrilling roller coaster. If you are wondering when a startup should consider fundraising, remember that it is not just about the money but building relationships, sharing visions, and setting the stage for success.
Whether you embrace the wisdom of VC financing, the spark of pre-seed funding, the protection of IPR, or opt for angels, your perfect strategy will be a mix of all based on the stage of your SaaS startup.