The Risks of Venture Capital Funding for Growing SaaS Companies

Venture Capital Can Pose a Productivity Challenge

venture capital fundingWhile venture capital funding (along with other models) provides resources that allow you to make improvements or changes, it’s not guaranteed that your SaaS business will become more productive as a result. In fact, raising venture capital funding can often have the reverse effect: when those funds come in, there’s often pressure to start spending them right away.

Logically, it follows that if those funds would allow you to make changes or achieve goals sooner, the money should be spent ASAP. But that simply isn’t the case. It also doesn’t help that venture capital funding can provide more than what your business needs. The problem is that when resources are spent on things like hiring, tools, and other perceived needs faster than normal, the planning and follow-through that should come afterward is often missed.

Hiring too quickly means training, onboarding, follow-up, and retention fall further down on the agenda. As a result, employees are left in the dark with minimal guidance on what they should be doing or learning. And just like your other business expenses, personnel have a cost. The more time they spend not producing revenue-generating work, the more you’ll start to see what they’re really costing the business.

The same goes for new tools for your team to use. While startups are typically small, meaning pricing for various tools won’t be too high, there’s still a similar planning and follow-through that should accompany rolling out a new platform. Whether it’s time entry, productivity, communication, or a development tool, there should be proper training and support for your team to do their work easily. But if the platform is rolled out, and the next day you’re on to the next thing, it’s going to cost you in the long run.

Growth is Important, But So is Profit

Similar to the perception of spending too quickly, growing SaaS companies face another challenge: growth over profit. It ties in closely with the perception to spend quickly in that by focusing on doing, obtaining, or launching things that will accelerate growth, profit will also be accelerated, and the time horizon will be reduced.

But when you spend venture capital funding quickly, you’re putting the pieces into place, but you’re not necessarily becoming more profitable. Your expenses will start eating into the revenue you’re generating. Your profit margin will drop, and your burn rate will go up. And soon, you might be right where you started: looking to raise more venture capital funding.

Focusing on growth isn’t wrong, but a healthier focus might be on sustainability before growth. Find ways to stabilize your subscriber base and existing revenues. Improve customer retention to reduce churn and maintain (or grow) revenue while evaluating your expenses to reduce burn rate. Profitability isn’t necessarily required for capital (through VCs or other providers). But focusing on these foundation-setting tasks will help you get your current house in order before building on with venture capital.

Also, a caveat: every business and situation is unique. Your existing revenue and subscriber base may already be well solidified and satisfied. But make sure your foundation is set before you start to build upward.

All of this is important to understand as early as possible for young, growing SaaS companies. Venture capital funding has its place and uses. It is not a bad thing. But just like other forms of funding, it has its risks. SaaS business owners must be prepared to avoid the pressure to spend quickly and must keep themselves in check.

This is a classic “tortoise and the hare” example. A focus on steady, profitable growth will serve you well, rather than an explosive growth approach. Before you receive your venture capital funding, plan how it should be used and what should accompany that spending internally. This will help ensure you continue to benefit as you proceed on your growth journey.

Explore Your Funding Options

Venture capital is a strategic option for growing SaaS companies, but it’s not the only one. Debt financing provides you with the funding you need while ensuring you remain in complete control of your business. And with a potentially higher return for owners exploring future exit options, it’s one worth considering. Fill out the form below if you’d like to learn more about non-dilutive debt financing.