February 11, 2019

Here’s What to Expect From SaaS Financing in 2019

Here's the good news: 2019 is shaping up to be a good year for SaaS financing, whether you’re a founder or a capital provider.

Here’s What to Expect From SaaS Financing in 2019

According to recent reports, the SaaS market is expected to grow at over a 21 percent compound annual growth rate (CAGR) over the next few years, culminating in a market worth of over $185 billion. Traditional investors (angels/venture capital/private equity) and newer financing sources (alternative finance/debt providers, family offices) are well aware of this continued market momentum and are ready for increased competition to be the financing partners for the companies riding this next wave of SaaS growth.So, what does this mean for today’s SaaS Founders in 2019?

SaaS financing options will continue to diversify

There is so much capital sitting on the sidelines that needs to be invested that it necessitates innovation from investors. Founders, this means you will have access to more capital with more options than ever before.In 2019 we’ll see more alternative financing sources in the market, especially at the earlier stages, where angel and venture capital have been the only sources. The seed VC market may have dried up, but that’s actually a good thing, as it has shined a light on the opportunity for capital providers willing to look with a different lens. We’ve been investing in seed-stage SaaS companies for two years and over the last six months we’ve been seeing more and more companies that are a viable fit for usAnd the competition will go up a notch — that means capital providers competing with each other to fund promising SaaS companies, Now is a good time to revisit that pitch deck and tighten the screws.It’s also a good time for investors to think about changing up their game plans.As one VC puts it in reference to the growing alternative SaaS funding market: “if you want to stay in business, you need to understand changes instead of fighting them back.”In 2019 even VC’s may start offering debt-based capital. In fact, they may have to just to say competitive.

Now is the time to SaaSify your business

If you’re selling B2B software and not utilizing the SaaS business model, now’s the time to make the shift. This does not mean you need to turn off your existing revenue streams, but you should develop and execute on a plan to SaaSify your revenue mix.Potential funding sources and, to an increasing degree, prospects demand it. So, rather than continuing to grow a business model that’s not suited for today’s markets, go ahead and invest the time to modernize.  This takes time, so the longer you wait, the farther behind you fall (and the more explaining you’ll find yourself having to do).You will feel some short-term pain, but you’ll reap the long-term benefits, especially if you’re seeking outside capital. You will fit inside the SaaS box, which enables investors to pattern match by comparing you to other SaaS investments they’ve made, rather than having to spend too much time trying to understand how your business operates. They won’t bother.

Founders will have to diligence new forms of capital

With the proliferation of new capital structures, Founders need to be maniacal about asking the right questions and doing the right analysis to determine what available capital best fits their business (and why). Information asymmetry abounds, to the benefit of investors, so you need to dig hard.You should always push for open conversations with potential capital providers. If they’re hesitant to share details around how they structure their investments (including their structuring math and what it means for you), provide you with portfolio references or spend ample time with you upfront, they likely will not be a solid long-term partner.If a potential capital provider cannot explain every term in their offering to you such that you can understand what you’re really signing up for and at what cost, walk away. This should not be acceptable and is a red flag. Sure, there are some new structures out there you may not be familiar with, but, at the end of the day, if they’re overcomplex and obtuse, it’s generally for a good reason, which is to benefit the investor.The market competition will force investors will need to operate transparently. We’ve already started to see this from VCs and alternative financing sources, and we believe this will only continue. Sure, you’ll get some shysters looking to seize upon market opportunity, but the market should weed them out. Founders – you have the opportunity to get savvier and pickier with how and when you take on capital.Investors – be upfront and clear about your terms (no crazy term sheets) and how you’ll support entrepreneurs.

2019 is about potential

It’s no longer the days of one size fits all when considering how to finance a SaaS company. 2019 will be a big year for Founders and investors alike as we find new ways to work together to mutually grow our businesses.Our investment focus is as an alternative investor in early-stage, SaaS companies with $1M-$5M in revenue. We estimate that there is a $5 billion investable market opportunity in our segment alone (excluding angel and venture capital). What’s really exciting is that there’s really only about $200 million of nonangel / VC capital actually available to these early-stage companies, so 96% of the opportunity is not yet being addressed. That will certainly not be the case five years from now.We will not be the only investors interested in stepping in to fill this demand, which means more SaaS companies will have access to financing that fits their business.