The best rule of them is to seek financing when you’re ready. While there is no definitive answer, but here are a few common scenarios that can help guide you.
Scenario 1: You have a Minimum Viable Product (MVP) but cannot develop it without funding.
Scenario 2: You have an MVP and a plan for growing it.
Scenario 3: You cannot grow further on your own.
Angel investments involve a single individual as opposed to a firm or fund. These are ideal for SaaS startups looking for their first big investment (i.e. seed stage) and is especially effective when the company’s mission is well-aligned with the angel’s own experience and priorities. Angel investments typically require giving up less ownership and control as the investment will typically come in the form of convertible debt or ownership equity.
Venture capital is best suited for SaaS startups that are deemed to have either a high growth potential or a strong enough track record of recent growth that suggests that investing now will result in a much larger payout later.
While VC may be the glitziest and most prestigious source of funding for SaaS companies, a VC investment comes with a lot of expectations and pressure. Receiving a VC investment also involves giving up a large ownership stake to your investors while also giving up a certain amount of control of your business as well. There is much less room for failure and experimentation as investors expect a significant return on investment.
Incubators are designed to help very-early-stage startups. This involves making a financial investment in the company, as well as assistance in the form of training, expertise, experience, and professional networks. Incubators involve a founder-centric method of investment with an open-ended structure.
Accelerators, on the other hand, are aimed at providing later-stage startups a platform to scale up. These are focused around teams or “cohorts” rather than individual founders. Accelerators provide fixed-term funding opportunities, typically in the form of group programs that include mentorship and training. As opposed to incubators, accelerators are very structured that are often broken down into 5 stages:
Here is our list of incubators and accelerators for SaaS startups.
Revenue-based financing has been growing in popularity as more and more SaaS companies lean away from exponential early funding in favor for more gradual growth that allows them to maintain control and ownership of the company. As a form of minimally-dilutive growth capital, it is a perfect solution for SaaS and other subscription-based models. The flexible monthly payments are designed to accommodate the natural ups and downs of the company’s revenue without demanding equity.
For more information, read our Founder’s Guide to Revenue-Based Financing.
Also known as venture lending, venture debt is an attractive financing option for early and growth-stage SaaS companies. While it is most often used by VC-sponsored companies, some lenders, such as Flow Capital, consider non-sponsored companies as well. Typically structured as a fixed term loan, venture debt involves fixed monthly interest payments with terms that typically last anywhere between 1 to 3 years.
For more information, read our Founder’s Guide to Venture Debt.
Net Monthly Recurring Revenue (MRR) Growth Rate is the month over month percentage increase in net MRR. MRR changes as new revenue is added or customers churn, upgrade, or downgrade. Net MRR Growth Rate shows the net variation of those factors from month to month.
Why Do Investors Care About Net MRR Growth Rate?
It demonstrates how fast the company is growing and is key to the foundation of a healthy business.
Industry Benchmarks:
Growth rates will vary depending on company stage, but averages will fall between 15-45% for year-over-year growth. Companies generating annual revenues of less than $2 million will generally have much higher growth rates.
Net MRR Churn Rate measures lost revenue month-over-month after factoring any revenue from existing customers. Lost revenue may come from cancellations or downgrades while revenue from existing customers may come from upgrades or expansion.
Why Do Investors Care About Net MRR Growth Rate?
A Net MRR Churn Rate as close to 0% as possible, or better yet, a negative MRR churn rate, shows that more revenue is coming in from existing customers than is going out from downgrades or cancellations.
Industry Benchmarks
Gross MRR Churn Rate is the percentage of revenue lost from cancellations or downgrades, estimating the total loss to the company. The inverse of this metric is Gross MRR Retention Rate, which calculates revenue retained month-to-month.
Why Do Investors Care About Net MRR Growth Rate?
This metric indicates if a business is healthy. Companies should aim to have a low Gross MRR Churn Rate. A high churn rate is a red flag to investors.
Industry Benchmarks
Expansion MRR Rate calculates the additional recurring revenue generated from existing customers through add-ons, upsells, or cross-sells.
Why Do Investors Care About Net MRR Growth Rate?
Investors use Expansion MRR Rate to help indicate if the company can deliver increasingly more value to customers while monetizing that value. This is especially apparent in later stage SaaS companies where a significant portion of their growth stems from existing customers.
Industry Benchmarks
The rule of thumb is to increase Expansion MRR Rate to exceed Gross MRR Churn Rate. When expansion exceeds gross churn, you will see a negative Net MRR Churn Rate.
Average Revenue Per Account (ARPA) indicates how much the whole of your customer base is bringing in to you on average. As a SaaS business, this metric is very valuable as it has a vital interaction with Customer Acquisition Cost (CAC) by setting benchmarks for how much you can afford to spend on acquiring new users.
Why Do Investors Care About ARPA?
Investors may use ARPA to look for new customers booked in a month. Plotting a trendline can show the average price point new customers have chosen.
Industry Benchmark
Although ARPA will vary depending on your product and pricing, you can focus on internal benchmarks such as ARPA from previous periods.
Lead Velocity Rate is the growth percentage of qualified leads month-over-month. This metric shows how many potential customers you are working on to convert to become actual customers.
Why Do Investors Care About ARPA?
Investors look at Lead Velocity Rate to predict your future revenues and estimate what growth will look like in the next few months.
Industry Benchmark
Start with a target MRR Growth Rate then calculate the total number of qualified leads you need in order to hit that amount of revenue. Using MQL to SQL Conversion Rate to Win Conversion Rate will estimate how many leads will close.
The Customer Acquisition Cost (CAC) Payback Period is the number of months it takes to earn back the money invested in acquiring customers.
Why Do Investors Care About CAC Payback Period?
Investors will look at the CAC Payback Period to measure the company’s capital efficiency. The shorter the payback period is, the more profitable the company will be.
Industry Benchmark
The benchmark for startups is 12 months or less. The average for high-performing SaaS companies is a 5-7 month CAC Payback Period.
