At a Glance
To Fundraise at opportune moments is extremely important for any SaaS enterprise to continue the growth momentum. To close the fundraising round successfully, the SaaS enterprise must ensure an optimal structure for the fundraising. Closing the funding round successfully requires SaaS enterprises to plan the entire process to perfection with a deep understanding of valuation methods. Here is an in-depth dive to help structure the fundraise.
(getting funded) It’s a guaranteed lifetime addiction to entrepreneurship.
Brad Hargreaves, Co-founder, GA
On any given day, you will find at least one news item about a company that got funded! This is the new world we live in. Just in the first two months of 2021, 48 companies have received over 1.7 Billion Dollars in funding, albeit in different stages and different ways, but the underlying factor remains that they now have cash in the kitty. As a new start-up gaining funding is a very good way to ensure growth and longevity. However, it is not a sure shot.
Funding includes finding capital on offer, negotiating the equity that investors demand, or finding investors willing to invest. One crucial aspect for funding any kind of SaaS enterprise is valuation. Valuation refers to an analysis that determines the worth of any kind of business, company, organization, etc. Start-ups fundraise wholly or partially depend on the start-up valuation as investors often negotiate based on the valuation.
Another crucial aspect that SaaS start-ups must focus on for the impending fundraise is funding. With SaaS start-ups registering impeccable growth in the last few years, various new funding options have emerged for the management to choose from. Bootstrapping, venture debt, angel funding, debt are some of the available options. Read on for a detailed guide to help you structure your fundraise.
There are different methods that start-ups can use for valuation. Some of these methods include:
This is one of the simplest methods for valuation. In this method, a start-up finds a similar company or business that is comparable and uses that company’s valuation to arrive at the valuation of the start-up.
In this method, the start-up conforms to the investor’s preferences to acquire the funding. Valuation is not done based on any of the start-up attributes, rather on the habits of the investor.
The scorecard method of valuation is based on the comparisons between an investment opportunity and an average start-up in the area. The investors base the investment based on different factors that are scored to arrive at a number that determines whether the investment is a good decision or not.
Venture Capital Method
With the Venture Capital method, investors will be able to work backward from the return they intended and calculate the value and the equity requirements of a funding opportunity. This valuation method gives investors the ability to exchange the investment for equity in the hopes of a profit.
Discounted Cash Flow Method
In this valuation method, the start-up gets its valuation based on predicted cash flow in the future, after which it is discounted. The discounting process is based on the time value of money and the risk that the cash flow may fail to materialize.
This is another comparative valuation method wherein public companies’ data is used to compare to the early stages of start-up funding. With this method, investors get an idea about the company’s Enterprise Value, which approximates the cost of buying it and its earnings.
After the start-up valuation is completed, start-ups need to decide how to raise funds and capital. Some of the common ways that start-ups typically use to raise money include:
This is the most common way that start-ups are launched. It involves the entrepreneur using their funds to launch the start-up. Bootstrapping includes the raising of funds through friends, family, personal savings, crowdfunding, etc. This is usually the first step taken by start-ups as attracting investors from the start is difficult and may not be successful. Bootstrapping also allows start-ups to alleviate the need to depend on external funds, which eventually attracts investors.
Another way that fundraise occurs is through the exchange of equity. Investors provide the required funds in exchange for a part of the start-up. This happens when the investors are angel investors or venture capitalists. The most common way to structure an investment is through regular equity investments and convertible notes.
This is another common way to receive funds for a start-up. In this way, the start-up takes loans from banks, investors, or other finance companies to launch the start-up.
Start-ups must remember that the fundraising process is carried out through a combination of multiple methods and funding rounds throughout the functioning of the start-up. This is because start-ups are looking for various sources to receive the required capital to ensure the start-up’s launch and success.
There are multiple steps in the funding structure that start-ups need to get the required funds. These steps are crucial to the funding structure and act as a funding playbook for new start-ups to follow. The different steps are: –
1. Structure The Fundraise
The fundraising process should be structured properly to have an organized plan of action for acquiring the funds and what method of the funding landscape is used.
2. Investor Selection
All investors are not equal in terms of the different types of investors and their preferences. Start-ups need to determine which investor has similar preferences and whether they are looking to invest in a start-up of any kind. The start-up must ensure that they approach an investor who has preferences that align with the business or company to receive the funding.
3. Craft The Perfect Pitch
Before approaching an investor, start-ups must ensure they have the perfect pitch that highlights the most compelling parts of the company or business that is both concise and persuasive. The pitch that start-ups come up with must involve information about the business model, how problems are solved, and the financial projections.
4. Investor Outreach
When approaching potential investors, start-ups must ensure they do so in a manner that will result in an investment. Therefore, reaching out to investors must be done methodically. Start-ups must understand how the pitch process works, how to be introduced to new investors, how to pitch through emails, and the right way to contact investors.
The fundraising process for any start-up may be daunting. Therefore, every start-up must have a clear and concise plan to carry out that will result in them receiving the funding they require to launch their start-up. However, if you can ensure your product will still grow without funding, then you’re definitely on the right track. Investors are interested in increasing the speed of a roll out and that would make you even more attractive!