Beyond VC: New Funding Options for SaaS

Struggling to secure venture capital or bank loan funding? Here’s why revenue-based financing might be the best move. 

SaaS is one of the fastest-growing industries in the world, and it’s showing no signs of slowing down. As a whole, the industry is worth $172 billion as of 2022 — a five-fold growth since 2015, when it was valued at $31.5 billion. As more businesses and consumers incorporate SaaS into their daily work, this growth is expected to continue. Some experts are even predicting an 18% compound annual growth rate over the next several years.

This explosive growth means that traditional funding sources for software companies are becoming increasingly saturated. New startup owners in the SaaS industry may find it more difficult to secure funding through conventional means because the competition is fierce. Fortunately, the SaaS financing landscape is changing, and new options are now available to startup owners.

Traditional Funding Sources

There are several types of traditional funding options for SaaS companies:

Venture Capital

One of the most common sources of funding for software companies is venture capital. This involves giving up equity of the company in exchange for funds.

In order to secure funding from a venture capital firm, a company needs to have a solid business model that shows promise of massive (and rapid) growth. It also helps if the company’s team has connections in the tech and finance industries.

Bank Loans

Another common option for software companies is to secure a bank loan. To be approved for a loan, the company or company founder needs to have a strong credit history and collateral. They also need to be able to demonstrate that they can repay the loan in a timely manner. Bank loans involve taking on debt and paying interest.

Government Grants (Research)

Governments around the world offer grants to businesses that are engaged in research and development. This type of funding is usually available to companies in the early stages of growth, and can be a great way to secure funds without giving up equity or taking on debt. However, it can be incredibly hard to find and get approved for grants because they are usually only offered to businesses in specific niches that aid in the advancement of scientific and technological research.

A New Funding Source: Revenue-based Financing

Revenue-based financing (RBF) is a newer type of financing that is becoming increasingly popular among SaaS businesses. While it is not ideal for every business’s situation, revenue-based financing for software companies has many perks that traditional venture capital, bank loans, and grants do not have.

Benefits of RBF

Here are some of the unique ways RBF can be beneficial for a company:

It’s Perfect Between Funding Rounds

RBF may not be the best for early-stage startups that need a large amount of money to kick themselves off the ground. This is because RBF often offers smaller sums of money than venture capital and requires a reliable stream of revenue. 

It’s the mid-level startups that can best use RBF as an additional financial support between VC funding rounds. Since RBF doesn’t involve a long process to secure capital, it’s a great way to get some extra funds in a short period.

Founders Retain Full Control

RBF requires companies to repay their loan in the form of a fixed revenue percentage. This means it doesn’t involve giving up company equity, so the owner retains full control over their startup and doesn’t have to worry about giving away any decision-making powers to investors.

This can be an especially appealing perk for founders who want to maintain a high level of autonomy in their company.

It’s Ideal for When You Need Cash Flow To Fuel Growth

Sometimes, the overall trajectory of a company is promising, and you know it will be profitable soon. However, you still need supplemental cash flow in order to expand and grow the way you want to—and you need it quickly.

RBF is ideal in these situations. You can quickly secure small-to-medium sums to help you reach your goals without having to dilute your ownership of the business or going into debt.

It’s Perfect for Businesses Who May Have Revenue, but Aren’t Profitable

Many companies that use RBF are not yet profitable, but have a steady stream of revenue. This is because RBF only requires a business to have a consistent revenue flow—unlike other financing options, such as venture capital and bank loans that factor in profitability or near-profitability.

Is RBF Right for My Startup?

While RBF is gaining popularity in a multitude of industries, SaaS and e-commerce companies make up the majority of RBF recipients. If you run a SaaS company, it’s a good idea to search for a SaaS-specific RBF provider who understands your needs as a SaaS provider, like Novel Capital.