Funding for SaaS: 7 Stages You Need to Know (And the important metrics investors look at)

Business owners typically focus their energy on customer acquisition and retention. But regardless of the growth stage of your SaaS company, you need some financial backing at your disposal. Therefore, raising capital is a core part of building a profitable business. As a SaaS founder, you must lay the groundwork by doing your research and thinking realistically about how much investment you will need to not only keep your business running, but also expand and develop.  So, what options exactly do you have when it comes to raising capital for SaaS?

In this article, you will learn everything you need to know about the different SaaS funding rounds, the important terms and the key metrics investors look at in each round.

In a startup world, you can’t just get plenty of cash and feel set for good. Every startup requires funds to convert its innovative idea into reality. That is why startups go through several funding rounds and prove that their idea deserves an investment.  

Each funding round is designed to raise enough capital to grow further which can take as long as a year. Below are the different stages of SaaS startup funding:  
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• Pre-seed  
• Seed
• Series A
• Series B
• Series C
• Series D and beyond
• IPO

Startup funds go to people or groups of people to raise money for their new business, which allows the company to grow. When investors help to fund a startup, they do so hoping that they can make a return on their investments in the long term. Depending on how much an investor has invested in a business, he/she may also be granted an opportunity to make business decisions that have an impact on how the company operates.

So, the basic idea of SaaS funding is that when the startup begins to make a profit, the investors will get their initial investment back, and also the extra slice of equity for taking the risk. The riskier the business model, the more return the investor expects.

Bootstrapped startups (startups that are entirely financed by the founders) have usually very limited budget and resources. Therefore, funding rounds are crucial when it comes to accelerating the growth of a SaaS startup.  

The major role of a funding round is to provide capital to bring the business off the ground. After all, the process of evolving an idea into a product or a service requires an immense amount of time, money, and effort.  

Another advantage of having investors is that they can help you expand your professional network. Since both your objectives will align, the investors will be interested in pushing you in the right direction and introducing you to the right people.  

In addition, once you have investors on your side and they are ready to invest money in your idea, your credibility increases. The overlooked fact is that the value additions that an investor brings to the table are as essential as the money they inject into the business which increases the chances of success.

The capital-raising process typically takes much longer than anticipated, so founders should be prepared for that. The individual length of each fundraising process is hard to predict because the timeframe and complexity of raising capital depend on the stage and sector of the business, and the team running it.  

A general rule of thumb is ensuring you are prepared for at least 5 to 6 months before receiving an investment. A quick raise may take just about 3 months whereas a long one may take around 9 to 10 months. If you’re going over 9 months, it’s likely time to take a step back and rethink why it does not work.  

Once the Series A round has been completed, your startup will usually have working capital for 6 to 18 months. When you reach a Series B or C round, you may be working more towards 15 to 20 months between capital infusions.

Let's have a look at the different stages in more detail.

The majority of startups begin by using personal funds. Yes, it can be risky, but it allows for complete control of the business. This method is called bootstrapping, which is an approach that entails starting your company with little to no outside capital.  

The most common sources of bootstrap financing are personal investments, accelerators, angel investors, equity-free funding programs, micro-venture funds, and government grants.  

Another very popular method nowadays for SaaS startups to raise alternative funds is via crowdfunding campaigns. It is especially suited for startups trying to turn an idea into a viable business and young companies aiming to grow their venture. While you have complete control over your firm, the downside is that your resources are limited. Once you need a team, bootstrapping might not be enough.

Pre-seed funding is often the earliest stage of funding and it is the process of receiving the initial funds necessary to launch operations, test your MVP, and refine the value proposition. In other words, pre-seed startups tend to be associated with the early prototype stage, prior to launch, and product-market fit. However, at this stage, you should still be able to generate revenue and show investors that your idea has potential.  

Once you have raised your pre-seed round, you're engaged in a race to get to product-market fit and raise the next round (the Seed round) before you run out of money.

Since pre-seed is the riskiest stage of a SaaS startup, the founding team is going to be the center of any investor valuation. “Is the founding team trustworthy”, “do they have resilience to proceed even if things get difficult” and “do they have a vision regarding where the company is heading to” are just some examples investors think of in this stage.

In addition to the founding team, the value proposition and business model play a major role for investors in this stage.

Seed funding usually comes from angel investors, friends and family members, and the original company founders. At this stage, you should be looking for a capital injection for research and development and to scale initial sales. Simply, this stage is generally when a product and go-to-market strategy are being built and developed.

Here is one of the most important metrics that investors are interested in seeing during seed funding.

Monthly recurring revenue (MRR) refers to the predictable total revenue generated by your company from all the active subscriptions in a particular month. By giving an accurate picture of how much revenue potential your company has, MRR delivers valuable insights into sales and cash flow dynamics.  

MRR is a metric that forms the foundation for calculating customer lifetime value (CLV), and detailed MRR analysis can help figure out a diverse set of extra revenue streams.

Receiving Series A funding is an important milestone for SaaS startups and signifies the move from a startup to a scaleup. This funding usually comes from more sophisticated investors, high-net-worth individuals, and early-stage venture capital sources.  

In addition to receiving money that is far more than a seed round, startups must show they have not just a great team, but a minimum viable product (MVP) and prove that there is really a product or market fit. In fact, to get to Series A, the startup needs more functional experts in engineering, product management, marketing, content production, and operations.

Raising Series A funding is a challenging stage for any SaaS startup. For many new companies, this is the first time in their financing lifecycle when they are asked to show their actual metrics to investors. Here are the 3 metrics that investors look at during Series A funding.

Revenue run rate (also known as annual run rate) is a forecasting method that allows you to forecast the financial performance of your SaaS company over the forthcoming year based on past revenue information. This metric can be an excellent way to create performance estimates for businesses that have only been running for a short period of time.  

This metric is not to be confused with annual recurring revenue (ARR) — revenue run rate can be used for any type of revenue model while ARR is for businesses with subscription revenue.

Gross margin is a crucial metric that investors take into account while determining valuation since it is a reliable sign of scalability for SaaS businesses. It’s expected that SaaS companies will have higher gross margins because they produce no physical product, so there is relatively little cost associated with production.  

A very minimum gross margin is around 25% for SaaS startups, but anything above 40-50% is considered good. It is a metric that answers if a company can profitably build a product. Remember that gross margins often change dramatically over the lifecycle. They can be low when a startup is starting out but these numbers are expected to increase after the product-market fit is achieved.

The lifetime value of a customer (LTV) is the net present value of all the cash that a customer will pay for as long as they stay a customer. Customer acquisition cost (CAC), on the other hand, is the total sum of money you spend to get one paying customer.  

Most SaaS investors like to see LTV:CAC ratios in excess of 3-5x. That means that your LTV should be 3 to 5 times as large as your CAC.

Series B funding occurs after the company has already been developed through Series A funding but now needs to expand further. A company attempting to acquire Series B funding will have already proven itself on market. It will have a high amount of active users and user activity but may need to still establish itself to truly begin growing revenue.

Here are the 2 of the most important metrics in Series B funding.

Year-over-year (YOY) growth is a form of financial analysis that enables startup founders to monitor and assess their performance over a specific period. This analysis is typically used to compare the revenue growth rate from the previous year to the present. Viewing YoY revenue growth allows investors to see how a particular variable grows or falls over an entire year rather than just monthly or quarterly.

Understanding where your SaaS revenue is growing and shrinking is crucial to scaling your SaaS business. Gross MRR churn rate refers to the percentage of total monthly revenue lost from contracts that your customers canceled. This metric tells whether the SaaS business is healthy, as it is a precise signal of product market fit and right targeting.  

SaaS companies must try to reduce MRR churn rates as near to zero as they can, or even better, achieve negative MRR churn. One interesting fact about net churn is that it can be a negative number, which is a good thing for your SaaS business.

Businesses interested in scaling, such as those looking to enter new markets, may seek Series C investment. Series C funding may also be used by successful startups that are facing short-term challenges that need to be tackled.

Customer retention rate measures the number of customers a company retains over a given period of time. It’s expressed as a percentage of a company’s existing customers who remain loyal within that time frame. SaaS businesses must aim for as high a retention rate as possible. In reality, SaaS companies aim to hit more than 85%.

Monitoring retention metrics is critical for both investors and businesses to understand lifetime customer value and to quantify the efficacy of a business’s marketing strategy and customer service strategy.

Customer churn rate is the number of customers or accounts that stop doing business with a company over a given period of time. It’s also known as the rate of attrition and is a critical customer success metric for any data-driven SaaS company.  

Monitoring churn helps you track how satisfied customers are with your product or service. If high numbers of customers leave after trying your product, you may have issues with usability, customer service, price, or product fit.

Series D and later rounds are the least common but also the largest overall. Startups decide to raise investments through Series D funding when they come across untapped potential to tap into before going public, or they failed to hit the targets they had set in the previous round of financing, or prefer to remain private for longer.

For SaaS businesses, gross margin is the term used to describe all revenues and direct production and distribution costs incurred by a business over a particular time period. Because it focuses on the costs a company incurs in manufacturing and selling each additional unit of its service, SaaS gross margin varies from the profit margin.  

Over 75% is a respectable benchmark for a SaaS company. Investors start to become alarmed at anything below 70%, which prompts them to dig deeper into numerous other KPIs.

The gross revenue churn rate represents the losses resulting from existing customers either canceling subscriptions or stopping renewals. The goal of subscription-based businesses is to maximize their recurring income, which is accomplished by maintaining a low rate of customer (and revenue) churn.
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This metric does not consider an increase in revenue or in the number of existing customers. Instead, it assists you in determining your revenue leakage. Gross revenue churn is the opposite of growth — it is money lost period-over-period from customers that were previously acquired using precious growth capital.

An initial public offering or IPO is the realization of a dream for many SaaS founders, executives, and board members. IPO is not only a milestone, it is also the entrance for businesses into a new stage — life as a public company — that possesses its own particular opportunities and challenges.  

Speaking of IPOs, there are several benefits of IPO investing. In the first place, it is an opportunity to get in on the action early. By investing in an IPO, investors can enter the ground floor of a company with high growth potential and rapid profit in a short time period.

The risks are quite simple: You run out of money. Bootstrapping means that you pay for everything yourself. But once you have to pay a team, it can add up quickly. The big advantage is that you own everything because you have no investors. Bootstrapping is best suited to Micro SaaS companies, where only the founder and maybe a few other people are involved. As your team grows, you need a clear plan for funding.

Yes, SaaS startups can use crowdfunding campaigns as an alternative method of raising funds (without giving away equity). This method is particularly suitable for startups in the early stages of growth, as it allows you to gather financial support from a wider audience.

But it's important to carefully plan and execute a compelling campaign. Although more and more people are using crowdfunding these days, it's not something you can do in 10 minutes. You need to plan it carefully.

The road to raising capital for SaaS is a steep and winding path but not impossible. It is important for SaaS founders to think several steps ahead when weighing their options for raising capital. Before you try to get an investment, think of which metrics investors look at, what your vision and your long-term plan is, and what growth potential investors can find in your company.