SaaS business owners are often drawn to venture capital investors without considering other funding options. There are a number of reasons for this. The sheer popularity of venture capital, the perception that VC funding will make a company successful, the higher appetite for risk, and so on. In the end, SaaS owners are trading important aspects of their businesses and roles in exchange for capital.
Whatever their reasons for raising venture capital, we felt it was time to comment on this subject — not only to give current venture-backed SaaS companies a potential alternate route to achieve their short and long-term financial goals, but also to prepare newer SaaS companies that might be looking for investment now or in the future.
Venture Capital Funding Doesn’t Always Produce the Intended Results
A common assumption is that once a startup receives venture capital funding, it should pour that money into things that have worked in the past or things that owners think should be prioritized, like hiring. Coupled with the fact that VC funding is often significant, companies can quickly find themselves feeling pressure to spend a lot of money as quickly as possible. This pressure can make companies inefficient — or worse, it can put their success at risk.
When companies spend heavily on what they think will grow the business, the focus isn’t on managing that growth. For example, maybe $100,000 is spent on marketing that brings in a fair amount of new customers. But what about afterward? They’re using the platform and are paying for it, but when they need support, a small customer success team (if it exists) will struggle to keep up and provide great service. This can lead to lost customers and, as a result, lower revenue. Soon, you’re right back where you started.
Also, just because a VC provided a significant upfront infusion of capital doesn’t mean that it all needs to be spent right now — or at all. In fact, some companies didn’t spend any of their venture-raised capital (e.g., eBay). While that’s dependent on the business and its product or platform, a more tempered, thoughtful approach to spending VC-raised funds can help growing businesses focus on more profitable channels over the long term, even if those channels are smaller.
How Successful Is Venture Capital Funding?
When you’re researching raising venture capital, you may come across some startling figures in terms of venture capital success rate. They’re often very low. While VCs won’t typically advertise this as a percentage, what will be displayed is a portfolio of successful companies. It’s important to recognize this distinction. According to research by Shikhar Ghosh at Harvard Business School, as many as 75 percent of venture-backed startups fail.
This isn’t because of the VCs themselves — they know the risks and are willing to invest capital for those that want it. It’s because of the model and the pressures it can impart, leading to the 75 percent in Ghosh’s research. But so many young companies think they’ll be the exception to the rule. If raising venture capital is something you’re considering, an equal amount of consideration should be applied to how to use that money — and how often it needs to be used.
Hedge against the pressure to immediately use those funds, not only to stay focused on your goals, but to protect against the sudden absence of needed capital. And remember that VC funding typically results in that investor filling a board seat, meaning they’ll have some say in how the capital they invested is to be used.
And one thing to consider when raising venture capital funding: your exit options are limited. This is because of what venture capital is — trading equity for capital. When you (and any business partners you might have) own 100 percent of the company, the door is wide open. However, when you give up equity in your company, your choices go down to three: sell, raise more money and risk further ownership dilution, or go public.
Why Debt is the Flexible Financing SaaS Companies Need
With productivity, efficiency, and long-term strategy challenges to face, just how viable is raising venture capital? Plenty! It all boils down to your comfort and appetite for the risks involved. Not every startup knows what the future holds — there can only be a strategic plan pursued through effective execution and hard work. If you’ve already raised venture capital or have been considering it, it’ll be up to you to make it work.
Of course, your VC partners will be there to advise you. They want your company to succeed just as much as you do because they’ll get a return on their investment. To support you, they can make valuable introductions and connections to both potential partners and new customers. They will be there to provide feedback and decision-making (that must be considered due to their ownership stake in your company) on multiple aspects of your business that you may or may not have the most experience in.
Despite the benefits, always keep the risks in sight. Coupled with the challenges that go with giving up equity and potentially a board seat, it’s in your best interest to consider multiple growth capital options.
Debt financing is one of the most flexible financing options available. Whereas VC investors may provide more funding than you need, debt financing will provide what you need based on where you stand and what your goals are. A small VC-backed SaaS company might receive a substantial capital infusion at the cost of 15–30 percent of its equity, but a debt-financed company will get an ideal loan that can actually be repaid — and with a better return for owners should the business be sold down the road.
And keep in mind, debt financing can be used strategically as a complement to or bridge between VC funding. It all depends on your goals. Some organizations even used it to buy out equity investors and employees with stock. If you already have a VC investment, or are just starting to explore your options, we’d enjoy learning about your business and the opportunity to discuss how our non-dilutive financing can help you achieve your goals.