More Options for Financing SaaS Companies

Once upon a time, back in the last millennium, there were two ways of financing a software company: you raised money from friends, family, fools and angels; or you pitched VCs for funding.

Then the world changed.

It became much cheaper to start a company with the rise of commodity web hosting and a whole range of services that meant that someone with some coding experience could start a company simply and cheaply. Of course, scaling was a different matter, but the explosion of self-funded SaaS companies that have emerged over the past two decades is clear evidence that the rules are different now.

There is still an overemphasis, in my view, about the importance of venture capital in the ecosystem. It is easy to understand why. VCs have money and budgets to support PR for themselves and their portfolio companies and it is in their interest to promote the narrative that growth requires venture capital to support it.

For many companies, however, venture capital is not the best option.

It can be a powerful tool but it also comes with responsibilities and potential downsides for founders. Perhaps surprisingly, innovation in finance in the software sector has not been as rapid as the speed of innovation from businesses and business models though it is changing.

Alternatives to venture

In the US and Europe, venture debt (debt finance alongside a venture investment that is repaid with interest but without diluting equity) has become a well established source of growth capital.

Revenue based financing has also become more common in the US in the last five years or so. Revenue based finance is driven by the relative predictability of the cashflows of SaaS and subscription based companies and allows an entrepreneur to access non-dilutive capital for their growth based on the expected revenue that their company will bring in over time.

Europe lags behind but is catching up

Although growing in the US, it has taken some time to become established in Europe. That is changing as the US market becomes more mature and finance companies look to expand their offerings to other markets.

Capchase, who participated and supported our recent European conference, are a good example of this.

Founded by serial SaaS entrepreneurs who had felt the pain of constant fund-raising as their companies grew, they started European operations this year.

Their aim is to make revenue based finance available to companies that would otherwise not be able to access it. AWS and others made building websites and apps simpler than before. Capchase levers the tools that entrepreneurs use to run their businesses to make accessing capital simpler and easier for far more people – from small ($250k ARR business) through to those with revenues of $100m+.

More data and better processes mean quicker decisions, from understanding your possible options, through having money in the bank.

Three Metrics

If you put three core metrics into the calculator below, you can see what could be available to you.

Before you do. Guess what they are.

No cheating…