August 12, 2020

Why do small SaaS businesses take funding?

jackneatab

I've been seeing a lot about funds lately. @sahil just started one, @robwalling and @tylertringas have TinySeed and Earnest Capital. I don't know much about them and I'm genuinely curious why a small bootstrapped SaaS would seek funding.

Costs to start up and run while you look for product market fit are usually pretty low and it seems like the amount these funds invest is fairly small. Is it the mentoring and team that makes them so valuable? Or is it that your costs outpaced your growth in the early stage?

I think it's really cool that these exist, and it's great that there's funding out there outside of the VC route.

I'd love to hear from anyone who's taken or applied for funding and what you were looking to get out of it. Or if you've considered it and opted not to. Thanks indie hackers!

  1. 12

    Good question. The money is useful, but out of the couple dozen companies we've funded I'd say it's not the top reason.

    The most common reasons I hear for small SaaS companies taking non-venture money from funds like TinySeed are: ongoing advice from both us and our mentors (https://tinyseed.com/people), access to our network, and built-in community and accountability with ambitious, like-minded founders.

    With that said, here are a couple examples of how companies have been spending their funding in ways that help them grow faster: hiring ahead of revenue (usually a developer or marketer), paying for a costly certification (like SOC 2) that allows them to bring in more enterprise clients, increased ad spend (again, spending ahead of revenue in a channel that's working).

    1. 1

      Wow that is a killer lineup!

  2. 7

    I wouldn't raise money unless that money is preventing you from building what you want in the timeframe you want to build it. Most businesses don't raise VC and most shouldn't. But a few more should, and more options are better!

    1. 1

      Interesting, that clears it up, thank you! The piece I was missing was the recommendation where money is the bottleneck, which most bootstrapped SaaS won't fall into. And yes, I agree, it's awesome that people successful in the space are helping others succeed!

      1. 1

        I think it depends on how much you can/want to dip into savings. If you need to invest a lot up front in building out tech or acquiring customers, your company might not be profitable for a few years. Depending on life situation

  3. 3

    I'd echo what @robwalling said here. We are part of the 2020 TinySeed batch and access to mentors was a huge motivation for us to apply (and ultimately accept). We wanted to have access to experts without the time or trial & error of finding the right people for all the things outside our wheelhouse.

    Peer accountability has been an unexpected piece that we didn't know we needed. Being transparent with our numbers, wins, and losses on a regular basis provides honest feedback and fresh perspectives.

  4. 2

    Here's a longer post: https://earnestcapital.com/why-would-bootstrapped-founders-raise-capital/

    But the main reasons for the money side seem to be:

    #1 my favorite reasons is a check that let's a founder go from side hustle, nights & weekends to full-time focused on their business. This can often save 6-12 months of stress.

    #2 hiring someone on a full-time salary before you're sure your revenue can cover it. Often you really need a support person, marketer, or additional developer and you know it will change the trajectory of the business but you don't yet have the ability to make a solid offer. Cash in the bank can give you the confidence to make that offer.

    I agree with Sahil in general that you should consider whether money is actually a bottleneck, especially if you're thinking about millions of dollars, but I'll say that pretty much any early-stage business likely has a good use for let's say an extra $150k in the bank... even if it just sits there as a cushion and let's you think a little more long-term about the business rather than month to month.

    Agree with Rob's take that when we talk to the founders we have invested in at Earnest Capital (https://earnestcapital.com/), they mostly don't cite the money as the top reason to do it. Having investors and a community of mentors behind you to knock own roadblocks, thing through tough choices, recruit awesome talent, refer a good lawyer/CPA, and back you up in a hard negotiation is all really valuable and the best version of this is when they have real skin in the game and are invested in your success (more on that: https://earnestcapital.com/mentorship).

    If you're an indiehacker and you don't need that much investment and you don't plan to keep raising more and more rounds, then owning 85-95% of your company vs 100% is not likely to matter that much in terms of economic outcomes. Most of the bootstrapper-friendly funds (including some early VCs like Sahil) are not going to want a board seat or any kind of control either. So the choice to raise some funding, in my obviously biased opinion, makes sense for a lot more people than it did when the only option was raising tons of VC, owning a small % of your company and reporting to a board OR bootstrapping.

  5. 2

    For us, it increased our optionality, which is something that as a founder is a really valuable commodity. Taking a bit of money helped us grow faster and solidify the company's footing. Now we're a much bigger company, profitable, and have lots of paths we can take. I'd also echo the network/mentor aspect that Rob pointed out...it was huge for us in our year in TinySeed.

  6. 1

    We're also part of the TinySeed 2020 batch and firstly, what others have said here is also our top reasons: Accountability, access to a network and the money to really let you move from a side hustle / nights and weekends to full time.

    But i'de like to add something extra here that I didn't realize the full effect of until we got accepted into TinySeed: Having a startup (even one that is profitable and can pay you full time) Is great! Full stop. However, when you accept funding it ads a level of earnestness and significance to not only to myself and my co-founder but to friends, family and customers.

    For example, before being funded I would talk with friends & family, tell them how we're a profitable company, maybe rattle off some big logos and they would say oh that's nice! (Same with customers) However, now, when we say we're profitable, experiencing strong growth AND that we've successfully raised funding, it becomes that much more impressive. It ads an extra layer of validation and further proves how serious we are. From a business perspective, customers (if they ask), certainly feel like they are dealing with a serious company that is in it for the long run.

    The point being is that I did not know this was something that was beneficial, (in fact, one could say this is superficial) but the reality is, it has an effect! Again, just simply telling customers, "we're venture backed" is huge! I know it ads significance to customers from their perspective.

  7. 1

    One reason to take funds is to recruit a partner, who helps to grow the businesses.

    A founder once told me, when looking for funding, try to look for investors that has the connection to help get more customers.

  8. 1

    We're part of the 2020 TinySeed Batch, and our main reason for joining wasn't the money as much as it was access to the mentorship, as well as the community of other founders at similar stages of their journey.

    The amount of assistance that has come not just from TinySeed, but from the other companies in the accelerator has been a huge bonus for us.

    I'm also a single founder, so having people around who can give good sanity checks to our ideas and progress is incredibly valuable.

  9. 1

    We recently received £50K grant funding, so slightly different in that we didn't have to give away any equity. But, we sought the funding so we could accelerate the development and to be able to work on the project full-time.

    Without the funding, I'm sure we'd have developed the platform but it would have taken longer or wouldn't be half as good. I've been able to bring on another developer, a designer, copywriter, lawyer and an accountant. It's levelled up our team.

    I'd be seeking further funding to help get us through the next 12 months where we've projected to become self-sufficient. But like others have said, it's also building connections and relations with people that have already succeeded and are where you want to be. I can only see that as a positive.

  10. 1

    From the experience of companies I know it's to scale the reach through marketing and bigger team — you need some serious cash to make that happen :-)

  11. 1

    I really didn't understand this until I realized I didn't have enough resources to execute Tractific. It's exponentially harder to pull off higher technology startups without VC funding. Hope we can make it though!

  12. 1

    I believe it is because the more money you have the more employees you can pay (or better ones) and the more people working towards a single goal the faster and better results you'll get.

    It is not the same having a developer doing the whole work than having a specialist in web design, UX, email marketing, back-end... etc.

    Then, as others say, advertisement.

  13. 1

    Good question I have also thought about this often

  14. 0

    I'd hope most take it for development rather than marketing, I help a tonne of SaaS companies every day through https://consultily.com with their marketing and full-scale automated outreach/marketing campaigns can be put in place for sub $400 per month.

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