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How do SaaS Companies Achieve Growth With Debt Funding?

While no two SaaS companies are the same, there are always lessons to learn from the top performers on how they allocate their budget and how they prioritise that spend. At Fuse Three we regularly see SaaS companies seeking further growth and their use of debt funding for the best performers follows regular patterns.

Achieving SaaS growth with debt funding

 

Keep overheads down

Essentially how you spend boils down to your product, your size and your market. You want to find ways to lower your spend on cost of goods sold – from hosting, support, consulting, to third party software. The best performing SaaS companies that we have worked with are those spending less on overheads relative to their peers, this enables them to maximise their spend on activities which are growth focused.

 

Investing wisely – be customer focused to drive growth

The top performers reinvest the cash saved on overheads on those touchpoints that interact with the potential and existing customers directly: sales, marketing, customer success and product. Achieving high growth rates requires investment in customer acquisition. As we’ve discussed before, churn rates can dramatically impact the performance of your SaaS company. Investing in customer success to retain customers becomes just as important as client acquisition

Top performing SaaS companies, almost without exception, have competent and well funded
marketing departments.

 

Cost of Goods

If your product demands a high portion of spend, think of ways to streamline the product and reinvest those saved dollars back into growth. The top performers all have low COGS which they pump back into sales and marketing.

 

Top performing traits:

  • Customer success – top performers invest heavily into customer success, they win customers and keep them, maintaining low churn rates. They understand the importance of retention as they scale and the significance this has on revenue.
  • Invest in Marketing & Sales – reinvest as much as you can in your sales and marketing to drive user acquisition and increase your market share.
  • Economy of scale – those SaaS companies with above $10m in revenue achieve higher economies of scale in sales and marketing, this allows further focus on Customer Success which doesn’t benefit from scale in quite the same way.

 

The top performers know the true financial value of allocating budget on customer touchpoints, reducing churn and building a strong, long term customer base. Making use of debt funding to do so allows SaaS companies to achieve high growth without diluting ownership, maximising performance and future valuations.

5 Simple (But Important) Metrics To Remember For A SaaS Valuation

If you’re a CEO or CFO of a SaaS business that needs to develop and grow, acquire another company, or prepare your business for a trade sale, then getting a valuation of your SaaS business to achieve your business goals can be challenging.

 

If that’s your situation, then giving lenders, investors and buyers a measure of your strength, stability and growth with these tried and tested metrics may be just what you need.

Before we get into that, you should know to attract lenders, investors and buyers to the potential of your business, you need to answer their questions about risk and return.

And another thing. Lenders, investors and buyers calculate your SaaS company’s worth based on the current value of your future cash flows.

With this in mind, the metrics I’m going to share with you answer their questions, because they demonstrate your predictable, recurring revenue as well as steady and incremental growth.

Let’s get started.

 

  1.   Revenue

As a SaaS business, your subscription-based model is typically built around receipt of recurring revenue. 

As such, lenders investors and advisors know you expect revenue realisation to take place over the lifetime of your customers, and therefore, your profits to expand significantly over time.

For this reason, when valuing a SaaS business, they tend to use Annual Recurring Revenue (ARR) to get a grip on monies received every year for the life of a subscription (or contract).

Of these include:

 

  1.   Sustainability 

Predictability is the name of the game when it comes to assessing your long term viability. 

Your SaaS business model costs are front-ended. So when assessing risk and return, lenders, investors and advisors want to know if your SaaS business delivers a valuable and sustainable service. More importantly, you won’t lose customers.

To measure sustainability, they look at SaaS business’s year-over-year and month-over-month growth. In particular, the metrics they’ll want to see include:

  • Lead generation
  • Conversion
  • Customer engagement
  • Usage
  • Customer and revenue churn
  • Renewals

 

  1.   Scalability

Next, lenders, investors and potential buyers want to know how efficient your SaaS business is at converting capital into new customers. Also, how much money you need to achieve your business goals. Because of this, they want to see and understand your:

  • Go to market strategy
  • Customer acquisition channels
  • Sales efficiency metrics
  • Customer acquisition cost (CAC)
  • Customer Lifetime Value (CLV)
  • How much capital you consume to grow ARR

 

  1.   Market

In addition to that, your TAM (the total size of your addressable market) gives lenders, investors and potential buyers a metric to understand their revenue opportunity. And of course, perceived risk.

To understand your TAM, you need to:

  • Demonstrate your market’s potential for growth
  • Identify the competition
  • Be clear about barriers to entry
  • Show the potential for product upgrades, upsells and pricing optimisation

 

  1. Ability to transfer ownership and exit

Beyond that, it’s a good idea to maximise the value of your <exit plan><Link to exit plan blog>. You see, SaaS companies that can demonstrate a long term strategy, including contingency plans, show how they’re a risk worth taking, and thus their value increases.

 

To sum up

Demonstrating predictable, recurring revenue, as well as steady and incremental growth, is key to getting a SaaS valuation that’ll attract lenders, investors and advisors.

Of course, the best way to get an idea of how much your SaaS business is worth is to speak to a specialist broker. 

You see, a specialist broker will be able to calculate your annual rate of return (ARR) and advise on applicable growth levers, based on its assessment of your business and previous transactions.

I’m ready. Are you?

 

And finally

If you’d like advice about getting a valuation of your SaaS business, drop me a line, and we’ll set up a time to chat.

Take 3 minutes to learn about SaaS growth funding options

So you want to grow your SaaS business?

You know your SaaS company business model positions you perfectly for both domestic and international growth.

Additionally, global acceptance of cloud software, reliable broadband and mobile networks together with a robust digital payment infrastructure make scaling up easy right?

But here’s the thing. Most SaaS products are inexpensive. And if you offer a ‘freemium’ version, you need a lot of customers to pay the bills and to finance your growth.

Then there’s the problem of getting the right SaaS funding. You may think your options are limited.

You either go down the VC route and end up giving away your equity in exchange for capital.

Or you jump on the bank merry go round. And endure a continuous cycle of pointless discussions, resulting in covenant laden and restrictive term sheets.

So what’s the SaaS funding solution?

If you understand the growth stages of a typical SaaS company, you can plan your capital needs accordingly.

Indeed, SaaS growth funding planning is vital. Because it buys you the time you need to source alternative financing options, more suited to SaaS business models.

What’s more, you can source SaaS funding options that work either on their own or alongside existing equity and bank debt.

Let me show you how this works:

Take 3 minutes to learn about SaaS growth capital options

Stage 1: Pre-Startup and Startup SaaS companies

Once you’ve established demand; your next step is to identify and validate a target audience and channels.

At this stage, it is likely you’ll make initial hires.

Your objective is to secure your first paying customers. Then to keep them and to make them profitable.

At the same time, you’ll want to identify a repeatable sales process.

Elsewhere, you’ll want to start building relationships with advisors and business financiers.

 

Growth finance options for a pre-startup and start-up SaaS companies include:

  • Bootstrapping
  • Seed money and angel funding
  • Series A funding from a VC firm
  • Venture debt with significant VC backing

 

Stage 3: Scaling up your SaaS company and reaching profitability

By now your SaaS company has:

  • Established a product and market fit
  • Proved the product/service concept

What’s more, you’re driving traffic, leads, and more importantly conversions.

As a result, you have an established revenue stream, and your SaaS company is on a clear path to growth.

But you’re still burning cash. So you need to scale your business and move it into profitability.

This is the point when you realise scaling is expensive. Indeed, your costs increase as you grow your customer base. Moreover, it’s not unusual for costs to be higher than revenue.

 

Growth finance options for Stage 3 SaaS companies include:

  • Series B funding from VC investors
  • Beyond that, now is the time to explore private debt fund finance such as venture debt to give you a cash runway to your next funding round and to ensure that you keep your equity.

 

Stage 4: When your SaaS company reaches maturity

Congratulations! You’re running an efficient operation that delivers a tried and tested product/service consistently at scale.

But your work isn’t over yet.

You still have expenses to cover. And you may find you have to compete with new entrants in your market.

On top of that, your growth is slowing.

Now is the time to think about:

  • Expanding internationally
  • Mergers and acquisitions
  • Exit and IPO strategies

 

Finance options for Stage 4 SaaS Companies include:

 

To sum up

As your SaaS company grows, so will your capital requirements.

Sadly, we often see SaaS companies suffer growing pains because they wait until it’s almost too late to secure the finance they need to transition through growth stages.

Don’t let this be you.

Talk to a private debt fund broker early about SaaS business growth finance options.

How to avoid equity dilution of your SaaS Business

It’s not easy developing a SaaS business. Hitting customer acquisition targets, retaining customers, responding quickly to user needs, there is a lot you need to worry about.

This all costs money, which leads to a dilemma. Should I dilute my equity?

As a SaaS business, you may choose to dilute your shares if revenues are low and you’re in the early stages of development or if your business needs to invest a considerable amount of money. However, if you’re a SaaS business generating over £1.5m in annual recurring revenue , what are your options?

How to avoid dilution of your SaaS company

Venture Debt

In many cases, venture debt is an ideal alternative to equity. The debt world sees SaaS companies favourably as their revenue mix is mostly annual recurring revenue (ARR).

As ARR increases, estimated future cash flow increases, therefore increasing the valuation of your  company.

Many SaaS companies don’t consider debt as part of the capital structure, but it is often essential.

 

Extending the runway

Debt funding saves you a lot of money in the long term because it delays you from diluting equity when your company is fast growing.

Look at it this way, the longer you wait to dilute equity when your company is fast growing, the higher the value of the shares will be when you eventually raise money. Debt keeps you growing fast until your next raise.

 

Fuse Three

At Fuse Three, we provide debt finance to ambitious tech businesses across Europe. We work with over 100 private debt funds. We are specialists in going out to the market and driving the best deal to get favourable quantum, cost of capital, covenants, and equity warrants.

 

Why not go to a bank?

Although banks have most likely the cheapest debt. They’re often strict when it comes to covenants. Running a SaaS business is often a bumpy ride, and having strict covenants attached to your bank debt is restrictive. Banks may not provide you with the quantum you need. Fuse3’s minimum deal value is £1m and we have provided companies with up to £15m. As well as this, banks don’t recognise your Intellectual property and annual recurring revenue, whereas our funds use these as leverage to drive a cheaper price.

 

Workload

Growing a SaaS business is hard. 100% of your focus needs to be on developing  your company, so you don’t want to waste time talking to debt funds as this takes valuable and unnecessary time out of your day.

Fuse3 has good relationships with Private Debt funds; it is all we do. So let us focus on driving up the best deal and securing funding, so that you can focus entirely on growing your company.

 

Summary

As a SaaS business. You are under a lot of pressure to grow, retain your customers, and respond to user trends, Fuse3 can help provide the funding for this while keeping you 100% focussed. Not only this but extending the runway can save you thousands of pounds through limiting your share dilution.

If you’re interested, let us know, and we will organise a call with one of our co-founders to discuss further and issue a term sheet free of charge.

What can we learn about funding from the martech landscape?

While it seemed like a trend that would never end, recent research is showing a big decline in going down the venture capital route with many tech companies opting for alternative funding methods instead. Why?

A deal with a VC may have appeared a better choice in the past due to low initial cost of capital, but taking on a VC brings with it a lot of stipulations. For one, as a business owner you dilute your ownership of the company, secondly, the VC’s aim is to sure your company is going triple their investment within seven to 10 years. Not always an easy task.

Funding Tech Companies

Martech Landscape

The Martech landscape encompasses a vast range of companies operating very different technology stacks and providing a variety of essential services to their customers. One estimate for the growth of the sector suggest there are 39% more companies in the space. They range from:

  • Advertising & Promotion
  • Content & Experience
  • Social & Relationships
  • Conference & Sales
  • Data
  • Management

 

The most intriguing fact for us in this vast group of tech companies is this number: 44.2% are private businesses with less than 1000 employees – without VC funding. That’s incredible to consider they are bootstrapped, self funded owner managers with majority shareholding.

This is a clear signal that the playing field for Martech has changed, no longer is the success of their companies connected to the portfolio of their VC’s, the market has opened up and allows them strive for success off the back of bootstrapping, and perhaps with the help of alternative finance that has no adverse effect on shareholdings.

Pay back

Martech owners have started to discover some of the downsides of taking VC money, take a look at Buffer, a social media sharing platform, that paid $3.3m USD to buy out the VC’s that had invested in the company. Video software company Wistia also took a bold step to raise $17m in debt to buy out investors as well.

Buffer’s co-founder Joel Gascoigne said: “Often, the VC path means a lot of sacrifices for several years. Founders push their teams in the hope it will work out, but it’s not guaranteed”.

The martech sector is leading the way in embracing alternative finance options for funding their growth. There are myriad funding options available for tech companies to reduce their dilution when accessing the necessary capital to scale up.

 

VC setbacks

For those companies funded by VCs, it’s often the investors that receive the majority of the money in an exit rather than the owners, meaning all the work you do goes to their benefit.

Tech companies and their VCs can find themselves operating with different priorities. VCs typically operate their 10 year life cycle plan with the aim of a quick exit, restricting the strategic growth options many tech companies would be better off pursuing. Some VCs will want to extract value and avoid commercial models which will generate the greatest growth opportunities for the founders.

 

The rise of the bootstrapped (SaaS) Company

It’s fair to say that in today’s market, there is far more information and market knowledge accumulated for kicking off a startup, there are more people offering advice ‘who have been there’.  This has meant that bootstrapping has greater feasibility and seeking finance via alternative options to venture capital is highly advisable.

 

Funding tech companies

The recent advances and growth of the martech sector demonstrates the trend we are seeing across the technology industry as a whole; there are a variety of funding options available depending on the company’s MRR, growth and exit intentions. These funding options often come in the form of debt, giving additional non-diluting options to business owners looking to scale up and reach their next growth milestones.

 

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The Rise of Regtech and Legaltech

With the rise of financial and legal regulatory complexity since the crash in 2008, it was inevitable that it would one day find solutions as its own technological entity, and here we are looking at the new tech hot topics: Regtech and Legaltech. Solving the problems of an increasingly complex regulatory environment in a digital world and following on from the growth and success of fintech, the rise of regtech and legaltech seeks to make use of technology to shoulder their regulatory burdens.

 

Regtech in Action

You only have to make an online purchase nowadays to be met by a message from your bank asking security questions to make sure it is indeed you and not a fraudster shopping with your card – that is Regtech in action.  The whole point of Regtech is to ensure “in the moment” checks, that are fast and comply with FCA regs, which in itself, is a complicated spider’s web of local and international laws. This is where Regtech solutions step in to alleviate the pain of compliance by assisting firms to keep on top of requirements by integrating them smoothly into their processes.

 

Benefits of Regtech

We’ve seen a surge of companies stamping themselves as Regtech players, and why not? As we’ve said above, there is a massive network of laws and regulations that could drive any company mad with continual updates and reporting. To be presented with a Regtech Company offering tailored solutions, directly fed into your technology stack to ensure compliance is too good to turn down.  

The benefits to regtech are endless:

  • Fraud prevention – real time checks to prevent fraud
  • Identity verification – technology for KYC (know your client) checks fraud and protects sensitive data
  • Risk management – solutions that ensure all risk components are met
  • Regulation compliance – systems that interpret relevant regulations to suit services
  • Cybersecurity – a major source of concern for financial institutions is cyber attack

Together these individual actions would take hundreds of man hours, making Regtech a very attractive proposition.=

It’s not just companies that stand to benefit from Regtech, customers can now step through KYC with ease knowing that firms can offer advanced cyber protection for sensitive personal data.

 

Where does Legaltech come in?

A traditional and conservative industry with very little change in operational and customer facing procedure for the past five decades; encouraging the uptake of legaltech has been considered challenging. However with increasing time pressures imposed on lawyers and the exponential increase in the use of electronic documents; legaltech has largely been developed to aid law firms with their practice and case management, document storage, accounting, billing and electronic discovery.

 

The future is bright

There is a bright future ahead for companies developing regtech automated systems which simplify the world of regulatory assessments and control management, all the while ensuring compliance and protection to both company and customer. And even with the growing demand for regtech, it’s still a relatively unknown sector.  The sheer level of regulations that have to be accounted for and corresponds to a firm’s services is a monumental challenge that is highly in demand.

 

Funding growing technology companies

This sector is a melting pot for finance options, with keen support available for high growth technology companies. Technology companies looking to fund their burn and growth have traditionally had to rely on equity investment due to being deemed too risky and not fitting the model to receive bank debt. Alternative finance however provides many opportunities to raise debt. Private debt funds understand the growth and commercial models of rapidly growing tech companies, and are happy to provide debt financing.

 

Fuse3 work with our global network of lenders to raise growth funding for our clients, seuring high quantum debt with no covenants, no personal security and flexible capital structures to provide the best funding solutions. Get in touch to see how we can help you.

 

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SaaS Funding: The Importance of Churn Rates

While many companies focus their attention on future cash flows, for a SaaS company it’s equally important to keep an eye on your churn rates, how do they compare to your growth rates, how might they influence future growth? What impact does this have on your SaaS company?

What if we told you that for every 1% increase in retention, your company’s value could increase 12% in 5 years? So, it makes sense that for every percent drop in retention, the value of your company could fall by a seven figure sum. This could severely affecting any potential valuation of your company and the avenues available for future growth.

Churn Essentials

Churn has a dramatic impact on your valuation drivers – MRR, growth rate, contribution margins, addressable market – which compounds over time.

Churn is measured as a % of your total business lost in a given period i.e. lost monthly customers cash value over a period of 12 months.

Churn can be measured a number of ways, but this is the simplest formula: Let’s say your customers generated £300,000 in MRR in year one, so how much did those customers generate in year 2? If they came in lower at £250,000, then your retention rate is £250,000/£300,000 or 80%, thus your churn rate is 20%.

 

How does Churn impact your SaaS business?

  • Compounding effect of churn – the biggest impact churn has is on revenue, compounding interest is in reverse in this scenario, which can become very big over time.
  • Growth rates – churn can have a huge impact on your company’s growth rate to the point where high growth SaaS companies are worth 6 -12 times annualised revenue whereas slow growth companies can achieve only 2 – 4 times annualised revenue. It makes a big difference!
  • Revenue predictability – churn can have a drastic effect on the future cash flow predictions. If your future cash flows are unpredictable, higher discount rates are applied thus driving down the value of your company. 

 

For every 1% increase in retention, your company’s value could increase 12% in 5 years

 

Know your competition

‘Keep your friends close and your enemies closer’ is the saying… and this rule should apply to knowing what your competitors are doing; if they doing something well, how you can emulate it?

Factors driving churn are multiple: choosing your target customer base; better on-boarding, relationship management etc. It’s finding the sweet spot that works for your company and evolving it.

 

What are SaaS companies doing to manage churn?

  • 4 out of 5 have a C-Level or VP in charge of customer success. Even startups with less than $1m revenue have someone overseeing customer success.
  • Retention is the highest priority  – acquire new customers and keep them.
  • Companies who pay more attention to churn saw an improvement on future cash flow predictability.

 

Summary

No two SaaS companies are the same and how they manage churn and retention is what sets them apart. If churn is an issue, you need to implement changes immediately, because the compounding effect it has on revenue over time can have a drastic effect on business.  

What is important to understand is the quantifiable impact of churn and how to manage it. At the end of the day, you do not want to be looking down the barrel of a 7 figure drop in your company’s value.

Having an understanding of  churn rates and how this affects your customer acquisition model is important when thinking about the future growth of any SaaS company. Investing time and resources in reducing your churn rate can pay off hugely in the future for a growing business.

Fuse3 supports SaaS companies in accessing growth finance, often to invest in customer acquisition and success and achieve continued, strong growth.

Get in touch if you would like to see how your churn metrics affect available debt financing for your SaaS company.

 

Funding Growth for SaaS Companies

 

Software as a Service / SaaS, as a model for technology business is massively expanding; it is estimated that the sector will double in size over the next two years.

This is driven by SaaS technology models having huge potential with opportunities for recurring revenues, the ability to build market share without exposing clients to large upfront costs and flexible development models.

Funding Growth for SaaS Companies

Developing a technology business is expensive. SaaS businesses going through rapid growth need to hit customer acquisition targets, retain their customers and respond quickly to user needs. This requires significant investment in the form of sales and marketing teams, customer satisfaction managers and specialised technical departments.

 

SaaS technology companies typically have two avenues to seek funding:

  1. Equity

  2. Debt

 

Equity

Trading shares in your technology business for cash is the most common and well reported option available for financing the growth of a young start up. Where revenues are low and simply too small to service a loan equity makes sense. However funding the growth of your SaaS business with equity can quickly become expensive, diluting your share in the technology you worked hard to build can massively devalue your reward should you cash out.

 

Debt

Debt is ideal to be used as strategic, low cost growth capital which can complement existing equity financing. Provided you can service the interest of a loan, debt gives you a much cheaper opportunity to fund the growth of your company. Smart use of debt funding is vital in allowing companies to achieve rapid growth between equity rounds, expand into new markets and achieve profitability.

 

Choosing the right loan

As CEO or CFO,  your job is to steer the company in the right direction and make the best financial decisions to give your company the capital it needs to advance in this ever competitive arena, so choosing the loan that has the best benefits for the company is your priority. We’ve worked with both VC backed and Owner Managed businesses and understand the challenges and politics faced when structuring your funding.

 

SaaS Deal Overview

We recently secured a £3.5m SaaS loan for a leading AI Solutions provider that required finance for growth and expansion and to cover existing debt obligations. The client had strong IP and good recurring revenues which put them in an ideal position to seek debt funding. Consequently we found them multiple offers for a number of loan options that included venture debt, IP secured finance and a term loan. Presented with a number of options the client ultimately chose SaaS Finance as the terms and structure from the lender presented them with very reasonable covenants and repayment period.

 

Fuse3 works with many pre-profit SaaS companies that are leveraging recurring revenue streams and their IP in order to raise funds without needing to raise equity. Talk to us to find out how we can help structure the right loan for you.

 


To get a quick overview of venture debt, read Russell Lerman‘s interview: Venture Debt Explained in 7 Questions

Talk to us to find out if you qualify – it could be now or in the future

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