With all the success and publicity around Software-as-a-Service (SaaS) companies, a number of new startups have emerged. Of course, SaaS valuations for market leaders have been exceptionally high, helping fuel the creation of more startups. Only, there are a number of SaaS startups that have raised angel rounds but don’t have enough traction to raise a Series A round. This is also related to the Series A crunch whereby the number of VCs has gone down while the number of angel investors has gone up, resulting in a lower percentage of angel-backed startups raising money from VCs.
Let’s look at an example scenario:
- Startup raised $500,000 from angels
- Spent 18 months and burned all the cash
- Generates $100,000 in annual recurring revenue from 50 customers
- Added $50,000 in annual recurring revenue in the last 90 days
- Needs $30,000/month to break even
This is a tough, common situation. It’s clear that there’s a decent level of product / market fit with 50 paying customers. Yet, only $100,000 in annual recurring revenue, making it far from having a repeatable customer acquisition machine. The good news is that by adding $50,000 in new annual recurring revenue in the last 90 days, assuming no churn, in another 12 months the startup will be break even a $300,000 run rate. So, one way to look at it would be how to get a $200,000 bridge loan to get to break even and have time to figure out how to accelerate growth so as to raise a Series A round.
For startups that have raised a seed round and are having difficulty raising a Series A round, the most important thing is figuring out how to grow revenue quickly and paint a picture of how putting in $1 of investment yields revenue growth of $1+ (again, assuming almost all recurring revenue and high renewal rates). If there’s no growth story and no customer acquisition machine, investors aren’t going to get excited about investing.
SaaS startup funding with limited traction is hard, and it’s especially difficult between an angel round and a Series A. As Guy Kawasaki says, sales solves all problems.
What else? What are some other thoughts on SaaS startup funding between an angel round and a Series A?