#SaaS: A landscape of the growing number of alternatives to VC funding

Written by a VC 😂

Since I started to cover the rise of SaaS companies which don’t necessarily want to take the VC path (or cannot), I regularly get asked to share the name of companies providing alternatives to Venture Capital. Clearly, this landscape is starting to evolve fast, and I meet more and more people who are working on new approaches to finance bootstrapped / profitable SaaS companies. As a consequence, I’ve decided to share a list that I will update regularly.

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⚠️⚠️⚠️⚠️⚠️⚠️⚠️⚠️ By no means this list is an endorsement of any company mentioned⚠️⚠️⚠️⚠️⚠️⚠️⚠️⚠️. Before selecting any financing option you should definitely get informed as much as possible, conduct proper reference checks (contact companies of their portfolio and ask them to share their experience), understand deeply the financing model offered, and get the advice of competent lawyers.

If you’re wondering why a VC is writing about that topic, the short answer is that I believe the financing environment for startups (especially in SaaS) is evolving fast due to the “commoditization of capital” (more and more capital available). And if you want to stay in business, you need to understand changes instead of fighting them back.

I’ve segmented the list into three stages:

  • Financing options when you are pre Product / Market — Fit.
  • Financing options when you are post Product / Market — Fit.
  • Exit / acquisition options.

1 Pre Product / Market — Fit

Pre PMF is when you are still at the idea stage or that you have a first product, but little revenue (between 0$ and a couple of $k MRR).

In my opinion this is the most “challenging” stage when it comes to financing your SaaS. Beyond traditional VCs there are still very few options available for entrepreneurs.

Why?

Simply because it’s at that stage that investors take the most financial risks. And when you take a lot of risk, you need to have a potential huge upside to cover it. It’s the reason why the VC system “works” here: investors finance early stage startups knowing that the majority of them will fail, but the losses will be covered by the few companies which succeed. At least it’s what the theory says (in reality most VC funds lose money).

You quickly understand the difficulty to find a balanced model to finance pre PMF bootstrapped SaaS without taking equity: it’ll be hard for investors to cover their losses if they don’t benefit from their big winners.

On that segment, the two main approaches that I see emerging are:

  • Accelerators for bootstrapped businesses.
  • “Profitable compatible” angel investing.

1.1 Accelerators for bootstrapped businesses

Think of “YC for bootstrapped businesses”. Incubators will provide a bit of money with mentorship and sometimes operational support to help you build your company.

1.2 “Profitable compatible” angel investing

The second approach, which I think will become more common, is to raise with business angels with terms favorable for bootstrapped companies. Instead of raising angel money with “VC terms”, this new model offers the possibility to return the money back to the business angels through revenue distribution. Basically, if your startup turns out to be “non VC compatible”, instead of keeping your business angels in your cap table, you can buy them out through revenue distribution. Ex: “after 3 years we can buy back our equity, at a price guaranteeing you a +40% return on your initial investment” (I’m just throwing random numbers here).

This is definitely a very interesting model which I think will be democratized among business angel networks. The caveat is that you likely need to be an experienced entrepreneur (or proven talent) if you want to raise with these terms. It won’t be easy for a first time entrepreneur to pull this out.

2 Post Product / Market — Fit

Post PMF means that you are at least at a couple of tens of thousands of dollars MRR. You’ve validated that you have a product that customers are ready to pay for, and that you understand how to sell it.

If you manage to reach that stage, you’ll have more options to finance your company without taking VC money. Let’s be clear, I’m not saying it’s easy. We’re still very early, but most of the new financing vehicles I see in that space are targeting SaaS companies which have found their model and need to finance growth.

In that perspective, the two main alternatives to VC I see emerging are based on:

  • Equity & revenue distribution.
  • Debt.

2.1 Equity & Revenue Distribution:

(Stealth 1–3 are three companies working on that model, but haven’t made it public yet. I’ll update the list when it’s the case.)

This is where things start to get a bit more complicated, but also more interesting. The problem with the traditional VC model, for founders who don’t want to build a unicorn, is that it offers no flexibility: you take money from VCs in exchange of equity with the aim of becoming a huge company that will return this money through an exit (IPO or acquisition). There’s no other path.

Some investors are working on models which offer more flexibility, and take into account the fact that if you end up not building a fast growing unicorn, they can still make money and you can part ways in good terms.

You’ll probably wonder how this is achieved. Well, the current solutions often consist of a mix of equity and revenue distribution. The investor will lend you money that:

  • Will be converted into equity in the case you later raise money with VCs, a.k.a your company turns out to be growing fast and you choose on the VC path.
  • Will be returned in the form of revenue/profit distribution in the case you want to stay independent and don’t plan on raising with VCs.

From the investor perspective it means that if a company turns out to be a “unicorn type of company” he’ll be able to benefit from a significant upside (since the money they lent is converted into equity). If it’s not the case, they’ll still be able to get their money back, without waiting for an exit to happen, through the revenue generated by the startup.

It sounds really cool on paper, but this model is actually not easy to execute. As with any financing path, you have to be really careful of the conditions you sign. As usual, the devil is in the details.

2.2 Debt

I probably don’t need to explain to you what debt is. What’s important to understand is that the SaaS model is great for debt financing since there are many metrics on which debt providers can assess the quality of a business, and hence the risk they’ll take.The increasing number of debt providers for SaaS businesses is a sign that the market is mature.

That being said, the majority of debt providers require that you break the $100k MRR threshold before lending you money, and most of them are focused on the US market.

3 Exit / Acquisition

I mentioned in the intro that I often get asked “Hey Clément! Do you have a list of alternatives to VCs to finance my bootstrapped company?”, but I also regularly get asked “How do I sell my SaaS and to whom?” What’s interesting is that even for this situation there seems to be an increasing number of options available for SaaS founders.

The companies I’ve listed above share the same model: they acquire profitable SaaS companies and let their various specialized internal teams (marketing, product, sales) grow them. They basically pool resources for their portfolio of SaaS.

This model has always existed in the form of PE (Private Equity) firms, but what is interesting to notice is that these news players, unlike traditional PE, don’t hesitate to buy much smaller SaaS companies. For instance SureSwift Capital acquires SaaS companies in the tens of thousands of dollar of MRR range.