There’s no question that the SaaS industry continues to experience strong growth and is projected to maintain this trajectory for the foreseeable future. In fact, the cloud market is predicted to overtake on-premise software by 2025, with a current total of 2.7-trillion-dollar market valuation that is still expected to rise. With these impressive figures, investors are on the lookout for SaaS companies that have the potential to quickly bring massive and sustainable ROI to the table.
So what exactly pulls venture capitalists into the SaaS space?
Venture capital firms are no longer just looking for explosive growth in the companies they fund — they want clear, reliable revenue streams that can help companies achieve profitability earlier in their growth cycle. Subscription-based SaaS companies fit the bill perfectly, creating an attractive opportunity for VC firms.
SaaS Companies’ Undeniable Appeal to VCs
SaaS companies are capital-efficient and have an incredible time-to-value element. For this reason, VCs are attracted to SaaS businesses in their entirety and not just for specific products or features.
Furthermore, SaaS companies have higher annual revenue growth, and with a quickly established customer base, there is considerable potential for an increase in valuations. For example, a VC will invest $50M in a SaaS company, they will have the opportunity to gain around twice as much high-margin ARR when compared to a non-SaaS company.
Simply put, the appeal of SaaS businesses to customers is what makes them appealing to VCs.
Strategies to Secure VC Funding for Your Business
Of course, just because the industry is attractive to VCs doesn’t automatically make every business fit for a venture-backed investment.
Philippe Botteri, a partner at well-known venture capital firm Accel, emphasized the importance of being clear about your sales and marketing model when communicating with a potential investor. “When I invest in a SaaS company, the capital is the fuel for the sales and marketing engine,” Botteri says. “But you don’t put fuel in an engine that doesn’t work, so be ready to explain how the engine is working.”
Here are other strategies to get you started:
- Adapt your business plan for a VC audience. As Botteri suggested, having a clear plan in place before meeting up with a potential investor increases your chances of winning a deal. Be ready to frame your business plan in a way that resonates with potential VC investors and speaks to their needs and objectives.
- Do your research. In the same way that a VC firm will research your company, take the time to learn about them. How are they interested in your market vertical? Will they be able to support your goals for growth? Do they have experience working with companies in your niche or industry?
- Build your network. After you’ve researched the firm you want to work with, the next step is to find a way onto the inside track. It goes without saying that in business, relationships are crucial. Who do you know that can make the introduction to the right people? And, if you don’t know the right people, create a plan on how to make connections that will open the right doors.
- Go beyond pitch decks. A thoughtful, engaging pitch deck is crucial — but also the bare minimum. You don’t just want to present your business plan, you want to capture the imagination of your audience — the investor. If your pitch doesn’t excite the room, then you’re going to walk away empty-handed. Therefore, it’s important to include video, interactivity, product demonstrations, or other tools that increase engagement with your pitch. You’ll know your audience before going into the room, so understand what will motivate them to write the big check.
Understanding why SaaS businesses are attractive to venture capitalists will empower you to lead your organization in a way that will speak to potential investors. Focusing on the sustainable growth and reliable revenue streams VC investors are looking for will help position your company for the scaling and growth needed to achieve lasting success.
Photography by Shannon Rowies via Unsplash