Just as SaaS lenders and venture capital firms will vet you to determine if your business is the right fit, so too must you vet them to determine if they’ll help you meet your goals — or hinder you. If you’re looking to accelerate your growth, build out your team, extend your runway, or achieve another critical financial or operational goal this year, it’s essential that you identify any potential SaaS investor red flags upfront to avoid the headaches and unpleasantness that come with a bad partnership.
The last thing you need is to move forward with a venture debt or equity-based investor without ensuring you fully understand their requirements, preferences, or capabilities. While some SaaS investor red flags are obvious and you wouldn’t move forward if you encountered them, others such as the full impact of warrants, what their due diligence process is like, and what their partnership philosophy entails are more subtle. It can be difficult to see the full ramifications of a misstep until it’s too late.
Here, we’ll explore several SaaS investor red flags that you should watch for — particularly if you’re looking to accelerate your momentum, maintain the freedom to use growth capital flexibly, avoid ownership dilution, and benefit from a more successful exit down the road.
Questions to Ask and Why They’re SaaS Investor Red Flags
What’s Their Approach to Partnering with SaaS Companies?
If you’re ready to scale your business to the next level, leveraging the insights and experience of funding providers that have worked in this industry is critical. Depending on the VC or debt funding firm you’re considering, you might gain that expertise regardless of the avenue you choose. And while each funding source has its advantages and considerations, what matters is that you do in fact get that partnership. The last thing you need is to work with a firm that provides investment and walks away. Whether they’re sitting on your board or maintaining constant communication, work with a firm that invests more than just capital in your growth and success.
At River SaaS Capital, we go beyond our venture debt financing and provide additional support for other areas of your business — including business development, operations, logistics, marketing, and more — to help you build a strong foundation for growth.
What’s Their Funding Structure? Is It Flexible to Support Your Goals?
As a scaling SaaS company, it’s advantageous to have growth capital that you can use flexibly to meet your needs. Whether you choose equity or debt, ensure you understand the terms around how the capital can be put to work. Those terms should support your ability to achieve your goals. On the equity side, remember that you’ll have another perspective and voice at the table that has to be considered. With venture debt, you can benefit from capital designed to accelerate sales and marketing while also choosing from a few different loan structures.
What’s Their Due Diligence Process Like (and How Fast Can They Close)?
Depending on the funding source you choose, the due diligence process can be a significant SaaS investor red flag. While there’s nothing necessarily wrong with a long process (typically found in equity deals and extending from several months to a year or more), it means you have to wait to start using your capital. Also dependent on your funding source is the investment required in legal fees for reviews. With certain funding types, the amount of documentation required can fill binders. With venture debt, however, an investment can be closed in anywhere from a few weeks to a couple of months at most. You’ll still have to provide documentation, but many SaaS owners cite greater efficiency, less paperwork, and less cost vs. other sources.
Do They Require Warrants?
Warrants are a financial mechanism in which a company agrees to provide lenders or investors with the right to buy shares of a certain stock class for a specific price up to an expiration date. If a lender or investor decides to buy, this is called ‘exercising’ the warrant. They are often used as an incentive by companies to get investors to invest, but the bottom line is that they allow that investor to own a portion of your company. One of the key aspects of venture debt financing, especially at River SaaS Capital, is that it’s not equity and is designed to help you grow on your terms. By giving an investor or lender this option to take an ownership position, that benefit is lost.
Be Confident in Your Choice of Investor
River SaaS Capital has partnered with numerous SaaS companies looking to take their growth to the next level. Led by an investment team with decades of experience in the SaaS and start-up worlds, we understand the risks you’re taking to achieve your goals. That’s why we designed our venture debt financing solutions to be as flexible as possible — providing you with choices for structuring the loan, enabling the use of tranches to help you avoid paying more interest, and staying in close partnership with you along the way to provide guidance and advice.