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At Bigfoot Capital, we wanted to know how early-stage companies think about capital as a component of their business. To do so, we decided to ask 30 SaaS Founders their thoughts on raising money and venture capital.
In this article, we break down the questions asked and the insights shared on raising capital for SaaS businesses. Let’s go!
Key Takeaways from SaaS Founders
The key takeaways below show how each of the Founder identified themselves as a business owner, along with their main focus in the business:
- Product: 70% of Founders characterized themselves as at least partially product focused, with 1 in 4 describing themselves as solely product focused.
- Generalist: 40% of Founders see themselves as generalists
- Sales and Marketing: 25% included sales and marketing as a focus.
- Operations: Only 10% listed operations as a core focus and 0% listed it as their sole focus.
Note: 83% of the group had started more than one company with almost 60% on their third company.
Raising Capital for Your SaaS Business
Question: How do you think about capital for your business?
The answers were a bit all over the board, but over 25% of the group noted that they see capital as fuel to accelerate growth for their company.
Nobody expressed raising capital as a core component of their business.
In their own words
- “Like I do about blood for my body… and food”
- “I view it as oxygen that gives us time to capitalize on opportunities”
- “Our goal is to build the business first and use capital to accelerate and improve it. Building a profitable business is a priority.”
- “Good if you have a real business model and want to scale, but only want to take it when I really need it and when it’s a good deal. Hate the “We raised XX million so we’re successful” idea that’s so prevalent in tech”
- “Want investors to come in with relationships, not just capital.”
Experience with Raising Capital
Question: What has your experience been in raising capital?
Not all of the Founders we interviewed have raised capital. The ones who had primarily did so via accelerators and angels.
Only about 25% of those we talked to raised venture capital.
The common theme: raising capital is a time consuming and difficult process to navigate.
In their own words
Some had good experiences:
- It’s situational and having a founder track record helps.
- “Varied between easy and PITA [Pain in the Ass].” — 4-time Founder
- “Generally easy as a repeat founder, but time-consuming to get the valuations I want from people outside my immediate network.” — 5 time Founder
- “Mostly positive. Had to hustle and didn’t find many early-stage investors in [my state]. Mostly tire-kicking local angels. Had to go out of state to find real money.” — 2-time Founder
- “Good, but wish I had known more of the mechanics, early on.” — 1st-time Founder
Some had not-so-good experiences:
- It’s a slog. “It’s more work than anyone can imagine, but I managed to do it.”
- VC is not the only path:
- “I spoke with and met with VC’s who didn’t think our market had big enough potential. But I didn’t have [the] time or desire to fundraise full-time for 6 months to right the right person who would believe in us and land a deal. We spoke with some mentors who recommended we continue bootstrapping, so we cut expenses and are making it work with our revenue.”
- “Not great in general. We’re a very focused tool and don’t have an Uber-like “take over the world” story. The economics for VC don’t fit what we are as a company, so it generally was a struggle.”
- Confusion: “It’s been incredibly difficult and the traditional VC route has proven to be tricky to navigate. Most don’t respond, are inconsistent with their stated philosophies, and the definitions of the various rounds are inconsistent at best.”
- The Warning: “Most “groups” and people are not legit. They are simply trying to make money from startups (as in fees, etc). Finding real investors is difficult and there are a lot of weeds to dig through.”
Venture Capital
Question: In your own words, how would you describe venture capital?
The Founders we spoke with tended to see venture capital for what it is, fuel for growth for a specific type of company, namely one that has aspirations to and actually could become enormous.
Although, many referred to it as a “necessary evil”.
In their own words
- “A necessary evil that can be greatly helpful.”
- “Necessary evil in some cases, massively helpful game-changing in others.”
- “A painful but necessary distraction to getting things done.”
- “A means to an end.”
- “Smart people that are good to work with.”
- “Kind of like a game. You have to play by certain rules, hone your networking/sales skills, and hopefully find luck on your side. It’s an interesting industry where you can find great people and value if you hustle and trust the process.”
- “I like the way they work. Fast decisions, good questions. Mostly reasonable. Though they are all different, so tough to generalize.”
- “Understand what you’re going after and getting into.”
- “Great, but scary if you don’t understand some of the expectations and dilution.”
- “Use it sparingly to accelerate a company to a specific outcome (or not), if you’re willing to sacrifice some optionality for outcomes/company direction.”
Debt financing, Lender, or both?
Question: What do you think of when you hear the words “debt financing” and/or “lender”?
“Real estate and non-tech industries. “Lender” in particular makes me think of scams although lending isn’t inherently bad.”
The Founders’ theme was that debt is generally for companies that are non-tech and are cash flowing or have assets to serve as collateral.
This is a common misperception as it’s generally been the case, but that’s changing (at least we hope so given that we provide debt capital to tech companies that aren’t cash flowing for a living).
There were mentions of its value, specifically around not having to take equity dilution, but words like “expensive money,” “exploitative,” and “skiddish” were also in the mix.
In their own words
- Fear:
- “That I’m going to lose my house and ability to send my kids to college if I take it.”
- Interest:
- “This is definitely something that we are going to consider as—for the right business at the right time—it is a great source of funding that does not dilute your equity.”
- “Debt is a great tool to grow a business and finance growth.”
- Legacy Thinking:
- “Generally old way of thinking, not in touch with higher-velocity, high-margin SaaS, and/or internet businesses. Probably wouldn’t apply to us because we don’t have traditional collateral to secure debt.”
- “A little skiddish as it doesn’t sound like a true partner for your business. Although could be an option if you have steady cash flow and want to retain ownership. I see it as a compliment to a venture capital raise.”
Summary
When it comes to raising money, SaaS Founders recognize that venture capital is not the only way. That narrative is pervasive and misleading for the vast majority of Founders. VC’s fund <1% of the companies they look at.
As a debt capital provider for early-stage SaaS companies, we’ve got our work cut out for us to help early-stage Founders see the light 🙂
That’s part of the fun in it after all.
