How SaaS Startup Funding Works and Tips to Land It

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Oct 30, 2023 · by Alisher Akbarov
How SaaS Startup Funding Works and Tips to Land It

Understanding ‌funding for SaaS startups is a difficult task that requires knowledge of investor relations, pitch perfection, and strategic alignment. In this article, we explain the essential elements of securing investment, from understanding how funding works to closing investor agreements that drive growth.

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Contents

What Startup Funding Is
How Startup Funding Works
Types of Startup Funding
Funding Valuation
Startup Funding Rounds
How to Create an Investor Pitch
Ways to Close an Investor Agreement
Find the Right Investors!

What Startup Funding Is 

Funding for startups is essential to getting young and innovative companies from idea to reality. 

Startup funding refers to the financial resources that entrepreneurs and early-stage companies secure to initiate, develop, and grow their business ideas into viable and sustainable enterprises. This funding is crucial for covering various expenses such as product development, marketing, operations, hiring, and infrastructure costs. 

Startups often seek funding from a range of sources, including individual investors (angel investors), venture capital companies, crowdfunding platforms, accelerators and incubators. 

How Startup Funding Works 

The process of getting startup funding consists of creating a compelling business plan, refining a pitch that highlights the value proposition and potential of the startup, and engaging in negotiations with potential investors. 

The funding stage often occurs in rounds. Different funding rounds, such as seed, Series A, B, and so on, correspond to specific stages of a startup’s growth, each with its own objectives and investor expectations. 

Often, in exchange for funding, an investor is getting equity – a part of your company. So, as a startup founder, you must find a balance between securing the necessary resources and maintaining a controlling stake in your company. 

Startup funding is a very important component of the entrepreneurial journey, making innovative ideas turn into successful and impactful businesses.

Infographic of how startup funding works

Infographic of how startup funding works by Adioma

Types of Startup Funding

Funding for startups has a wide selection of financing options designed to meet the various requirements and stages of new businesses.

Angel investment is a common early-stage option. It involves high-net-worth individuals injecting capital into startups in exchange for equity or convertible debt. Uber, Airbnb and Spotify all benefitted from angel investment.

Venture capital is often considered a key source for growth. It involves investment from professional firms seeking substantial returns by acquiring equity and actively supporting startups. Capital and guidance from venture capitalists were key factors in the early success of many innovative companies, such as Amazon and Facebook.

Crowdfunding platforms enable startups to ask for small contributions from a large pool of individuals, often pre-selling products or services. Oculus, Allbirds, Monzo used crowdfunding as a source of capital.

Seed funding provides initial capital to fuel product development and early operations, while Series A, B, and subsequent rounds follow when startups achieve milestones, scale, and expand. Apple, Google and Intel went through seed funding.

Strategic partnerships, where established companies collaborate or invest in startups, offer expertise and resources, propelling growth. Microsoft and Dropbox, Lyft and General Motors created win-win partnerships.

Accelerators and incubators provide not only funding but also mentorship, networking, and resources to nurture startups. Companies such as Stripe, Reddit and Twitch used accelerators to drive growth.

Each funding type accommodates unique circumstances, aligning with the startup’s growth plan and objectives.

Funding Valuation

Funding valuation is how much money a company is worth before an investment is made.  Every funding round involves a new valuation. The valuations take into consideration market size, company potential, current revenues, and the quality of the management.

Investors have different ways of assessing startups, but they usually share several factors:

  • Market Scope – the financial size of the company’s trading market. 
  • Market Share – the startup’s share of the market. For example, 0.10%.
  • Revenue – a rough estimate of historical and predicted income, calculated by multiplying the market size by the market share.
  • Multiplier – a multiple that investors use to estimate startup’s value. For example, 10x or 12x revenue.
  • Return – the increase in value based on a percentage of the money invested, which is estimated by looking at the potential growth in the size of the market, the market share, and the income.

This is how a valuation-by-stage model might look like:

Table of a valuation-by-stage model for startup funding estimaion

Startup Funding Rounds

Startup funding rounds represent distinct stages in a company’s financial journey, each having specific goals and investor expectations. 

Seed

The initial round, known as the seed round, typically involves securing funds from friends, family, and angel investors to develop a viable prototype or proof of concept. Seed money can assist a startup in covering the costs of its initial operations, such as conducting market studies and creating new products. Having access to seed funding helps a startup decide what products to produce and who its intended customers are. Seed startup funding is also usually used to bring on a core team to accomplish these objectives.

You can raise seed money of $200 000 to $2 million at up to $10 million valuation. 

Series A

As the startup gains traction and refines its product, it moves on to Series A funding, where venture capitalists invest larger sums in exchange for equity, aiming to fuel market expansion and solidify the startup’s position. 

At this point, it is essential to create a business model that will bring in sustained income over time.

Generally, Series A investments are in the range of $2 million to $15 million, but this amount can differ due to a variety of reasons. From the beginning of January 2023 to the end of May 2023, the average Series A funding was $22 million. The pre-money valuation of startups that are going through Series A funding rounds is often up to $50 million.

Series B

Subsequent rounds, such as Series B, C, and beyond, follow as the company scales operations, enters new markets, or diversifies its offerings. These rounds involve increasingly larger investments from both existing and new investors, often encouraged by the startup’s demonstrated growth and revenue.

Investors offer financial support to startups to enable them to expand their market reach. By that time, startups have already accumulated large amounts of customers and have shown investors that they are ready to take on more ambitious projects.

The median value of Series B companies in 2022 was $35 million, with an average of $51 million.

Series C

Startups participating in Series C funding should have built up a solid customer base, revenue streams, and history of growth. These startups seek out extra financing to help them create new products, branch out into different markets, and even buy businesses. In Series C rounds, investors are expecting to receive back more than twice the amount they put in.

The average Series C funding is estimated to be $72 million, with the median being $55 million. The pre-money valuation for a startup that is securing Series C funding is typically around $68 million.

D, E, F… You can continue with the alphabet until you achieve your goals and are ready for IPO. No rush! Look at Stripe, it announced Series I for more than $6.5 billion with a valuation of $50 billion in May 2023.

How to Create an Investor Pitch

Table of investor pitch contents

Table of investor pitch contents by Crunchbase

Creating an effective investor pitch for a SaaS startup requires a strategic combination of clear communication, value proposition emphasis, and strong market understanding. 

  1. Briefly describe the problem your SaaS solution addresses within the B2B landscape and highlight the pain points it alleviates. 
  2. Clearly explain your product’s unique features, benefits, and how it differentiates from existing solutions. 
  3. Back your claims with data and case studies that showcase successful implementations and measurable outcomes
  4. Outline your go-to-market strategy, detailing your target industries, customer segments, and distribution channels. 
  5. Create a thorough financial forecast that outlines revenue strategies, estimated expansion, and the possibility of generating profit.
  6. Address potential challenges or objections head-on, showing how your team’s expertise and adaptable approach mitigate risks. 
  7. Present a convincing vision for the future, emphasizing scalability and potential opportunities. 

Throughout the pitch, try to find a balance between technical details and a story that resonates with investors. Be sure to illustrate the value your  SaaS startup brings to the market.

Ways to Close an Investor Agreement

Negotiating an investor agreement for a SaaS startup is difficult, but with the right approach, it can be done successfully and on win-win terms. When a soft agreement is achieved, schedule a formal ‌‌‌meeting to finalize ‌startup funding.

  1. Summarize the main advantages of your SaaS solution and emphasize the advantages of the partnership for both parties.
  2. Provide a thorough description of the agreed-upon investment terms, including equity stake, funding amount, valuation, and any other relevant details. 
  3. Address any last-minute questions or concerns the investors might have. 
  4. Demonstrate confidence in your team’s ability to execute the business plan and achieve milestones. 
  5. Emphasize your dedication to open communication and collaboration throughout the partnership, forming a sense of trust and mutual support.

Find the Right Investors!

Image of a dart hitting bull's eye representing funding of the right investor

To find the right investors for your SaaS startup, you need a strategic approach. 

  1. First, clearly define your business’s unique value proposition, target market, and growth plan. 
  2. Research and identify investors with a track record in the SaaS industry and a genuine interest in technology solutions. 
  3. Attend industry events, conferences, and networking gatherings to connect with potential investors and establish meaningful relationships. You can check out SaaS Events for 2023-2024 in our article here.
  4. Use online platforms, such as angel investor networks, venture capital databases, and crowdfunding platforms, to identify individuals or companies aligned with your business goals. 
  5. Craft a compelling pitch that highlights the market opportunity, competitive advantage, and growth potential of your SaaS startup. 
  6. Tailor your outreach to each investor, showcasing how their expertise and resources correspond with your business needs. 
  7. Talk to investors individually to see if they’re interested, before having a formal conversation.

It’s important to find the right investors who will share your vision, as they will bring valuable insights to the table, and contribute to the success and growth of your SaaS startup.

Conclusion

All in all, understanding how funding works for SaaS startups and applying effective strategies can help turn your idea into a successful reality. From the early stages of securing initial funds to later rounds that help your startup grow, there are various ways to get the support you need. Apply for financing and lead your startup to success.

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Amal Abdullaev

Co-founder at Comfi

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Alisher Akbarov

Alisher Akbarov

Co-founder, COO

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