Whether you’re seeking preliminary financing for your Software-as-a-Service (SaaS) startup, or you need additional funding, there are several types of investment strategies open to you. However, not every investor will suit your business when it comes to introducing a new product to the market. So to help your SaaS startup find the right fit, we’ve compiled a rundown of the pros and cons associated with 6 different types of investors.
1. Friends & Family Investors
Many small business owners turn to friends and family for the money they need to fund their new startup.
Not only are personal acquaintances a common and convenient source of funding, securing a loan, gift, or equity investment from your own network first will show later investors your business plan is solid enough to warrant the financial support of those closest to you.
PROS
- Greater flexibility than other types of investors (family or friends may accommodate low-to-no interest rates, low-to-no loan security, lower rates of return, or longer repayment timeframes, for example)
CONS
- Can be tough to keep personal investors at arms-length in terms of business involvement
- If your business can’t repay the money you owe, your personal relationships could suffer
Pro Tip: When dealing with friends and family especially, it’s important to lay out your business plan succinctly, outline financial risks clearly, and record investment terms and amounts in writing.
2. Angel Investors
As wealthy individuals who fund startups in exchange for equity, angel investors provide capital to early-stage SaaS businesses during pre-seed and seed funding stages. They aim to earn a higher rate of return than they would from more traditional investments.
PROS
- Angel investors often share knowledge, skills, and connections with the companies they're funding to help foster success
- Higher risk tolerance means funding is available before most institutional investors are an option
- If your business fails, you won’t have to pay these types of investors back
CONS
- Increased pressure to succeed accompanies the higher rate of return promised
- Giving up equity equates to giving away a portion of future earnings and profits tied to the sale of your business
- Equity entitles investors to weigh in on how your business is run
Pro Tip: Make sure you and your angel investor are on the same page when it comes to terms of control. If the idea of giving up equity is a concern, you may want to explore bank or business loans instead.
3. VC Investors
Venture capitalists (or VCs) invest in startups at various funding stages—from seed to series C+. In exchange for sizeable sums of money, they assume a substantial level of control.
PROS
- VCs are often easier to track down and investigate than angel investors
- Significant market expertise and connections from a VC can help put you in touch with potential clients, business partners, and additional investors
CONS
- With large amounts of money at stake, securing venture capital can be challenging
- It may take months to land a meeting and raise funds
- Because VCs rely on business gains, you must be willing to sell your business at some point
4. Venture Debt
As a type of debt (as opposed to equity) financing for growth-stage, VC-backed startups, venture debt or lending typically involves securing a 3 to 4-year loan from a technology bank or dedicated venture debt fund.
PROS
- Can mitigate equity dilution and help your business build credit
CONS
- Tough for new startups to secure given the level of revenue required
- Loan and interest payment obligations may inhibit expanding operations
- Your personal assets will be at risk if you fail to repay your loan
5. Accelerators and Incubators
Both accelerators and incubators are highly selective and competitive sources of business funding and support.
Accelerator programs
Accelerator organizations will often provide startups with seed funding, mentorship, office space, and supply chain resources in exchange for equity. These 3 to 6-month programs are essentially fast-paced, high-intensity business development projects.
PROS
- Can help new startups grow quickly
- Include support networks comprised of other startup founders
- Provide access to investors, financial advisors, and accelerator program alumni
- May help your business stand out through association with graduates who have gone on to establish recognizable brands
CONS
- Pressure to fundraise and scale quickly isn’t ideal for bootstrap startups seeking slower growth over the long term
- Must be willing to exchange equity for short-term program privileges
Incubator programs
Similar to accelerators in terms of what they provide, 1 to 5-year incubator programs focus more on sustainable, rather than fast-paced growth, in a co-working environment where startups can thrive. Incubator programs often operate as nonprofits, which is why they don't always require equity in exchange for support services.
PROS
- Provide early-stage guidance on building and assessing startup success
- Sharing a coworking space alongside other startup founders can make meeting your business challenges easier
- Access to investors is coupled with sales-pitch and fundraising training
CONS
- Less access overall to capital and mentoring compared with accelerators
- Highly structured and monitored programs may be difficult for independent startup owners to endure
6. Government Funding
Most government funding for startups and small businesses takes the form of grants or tax exemption programs.
Government grants have a distinct purpose attached:
- Some are aimed at specific business sectors or teams (like women-owned companies, for example)
- Some are geared toward explicit objectives (like providing hiring funds for SaaS startups)
- Some, like Canada’s IRAP program, fund and support businesses pursuing technology-driven innovation
As for tax exemptions, programs like Canada’s SR&ED (Scientific Research & Experimental Development) allow some SaaS companies to reduce operating costs through investment credits.
PROS
- Available to a wide range of companies
- Sharing equity isn’t required
- Large grant amounts can rival those of VC firms and don’t need to be paid back
- Provide credibility in terms of validating your expertise and securing future funding
CONS
- Application processes for government agencies can be rigorous and highly competitive
- Grants often require a budget and written proposal with no guarantee of acceptance
- Many funds come with spending restrictions and reporting requirements
While many types of investors may be ready and willing to support your SaaS startup, you should weigh your options carefully—and explore every alternative available to you—before committing to the funding you need.