As a SaaS entrepreneur, you’ve surely thought about the possibility of getting venture capital (VC) money to turbo-charge your business growth.
A great deal of disruption has hammered away at the tech sector recently, but data collected in a new report from Silicon Valley Bank showed that 44% of CFOs expect fundraising to reach 2021 levels again in just a few years.
SiliconAngle reports:
"While the top end of the VC market may suffer in 2023, the good news for those entering the market is that the report predicts seed-stage startup valuations and deal sizes will continue their ascent and reach new annual highs, despite a slowdown in total deal value and count."
Who wouldn’t like some of that cash? And it surely has SaaS written all over it!
But before you barrel ahead with crafting your pitch deck, stop and think twice about whether VC is the right choice for your business.
The right funding will help your company grow strategically and sustainably. What that means depends in large part on your vision for your business and your life as the head of it. VC has some major drawbacks, after all.
5 Reasons to Think Twice About Raising Venture Capital
1. You want money at a reasonable cost
VC money is not free money. These funders give you big dollars, but in exchange they take a big ownership stake in your business. Equity turns into the most expensive form of capital when your business succeeds. In fact, VC costs an average of more than 25 percent a year.
Many entrepreneurs take VC money when their equity isn’t very valuable, then eventually realize the true cost of that decision later. In the end, in many cases it may have been more financially advantageous to grow using different sources of funding to minimize share dilution.
Check out our Startup Equity Dilution Calculator before you raise another equity round.
2. You want to keep control of your company
VC funders like to get their fingers in your pie. Their funding usually comes with mentoring and guidance, which can be helpful but can also means they control your business more than you’d like.
After all, VCs only get their money back when your business is sold or goes public, so they have an interest in guiding you toward that liquidity event. That means targeting extremely fast growth. You have limited ability to push back if you feel this path isn’t right for your business.
3. You want your funding to support good management
Are you ready to put a pile of cash to effective use quickly? It can be harder than you think to fully leverage a large investment — you might waste resources, make poor decisions to accommodate the cash, or fail to satisfy customers when you grow too fast.
All of these possibilities are bad for your company, and the problems may well be compounded by dropping productivity and morale that often result from troubled management. Think carefully about how much money you really need and can actually manage before seeking funding from VCs.
4. You want to focus on running your business
Getting VC is an exhausting process — preparing financial documents, attending investor meetings, giving presentations, going through negotiations. At the end of it all, you’ve got 18–24 months of runway before you need to get back on the VC hamster wheel to find your next infusion of cash to sustain your growth.
For every two years you spend actually running your company, you have to spend another six months pursuing VCs. If you need — or want — to stay completely centered on running your company, VC money may not be the best type of funding for you. At least not at this stage of your journey.
5. You want sustainable growth
Most VCs are looking for those people with the big dreams — the founders who knew from day one that they wanted to design a unicorn. Most startup founders are ambitious, yes, but relatively few truly have the kind of ambitions that VCs are looking for.
Most want to build a solid, profitable company and spend their days running it. They like to build step by step and stay in control. If that’s the kind of founder you are, then taking VC money will feel like you’ve been swept up by a tornado.
Alternatives to VC
Unless you’re set on astronomical growth, there are many other viable ways to fund your SaaS startup.
Bootstrapping allows you to keep complete control and all your equity, but limits what you can do. Bank loans, loans from family and friends, crowdfunding, and angel investors give you more leeway but come with various strings attached or require set payments regardless of your fluctuations in revenue. And then there’s revenue-based financing like we offer at Lighter Capital, which allows you to keep control and equity in your company, repay in proportion to your revenue, and still grow assertively.
If you’re interested in VC but not ready to take the plunge, you can use other funding, such as revenue-based financing, to grow your company and increase your valuation in order to get a better VC deal when you’re ready to pursue that option.
Find the right fundraising strategy for your startup
Most entrepreneurs see venture capital as the holy grail of funding solutions, but fewer than 1% of U.S. startups ever raise a VC round.
There are other startup funding options, and some of them might be more advantageous for your business. This guide will help you decide what kind of capital to raise, when to raise it, and what you need to get it.