How to Fund a SaaS Startup Without Venture Capital February 12, 2019

How to Fund a SaaS Startup Without Venture Capital

 One of the most common questions we hear from entrepreneurs is, “How can I launch my SaaS startup without venture capital funding?” As entrepreneurs ourselves, we've asked that same question and we know how challenging it can be to get a startup off the ground. While venture capital is certainly one way to fund a SaaS startup, it's not the only way. Keep reading for our advice on SaaS startups sans venture capital.

Consider a Niche

Since you won’t have a big bucket of venture capital money to use for building and marketing your new SaaS app., nailing down a niche is going to be essential. Once you've isolated a target, dive deep to understand:

- What specific value your application is going to provide for them that no other application in existence can provide. If similar apps exist, how is yours different, better, more valuable?

- What are the bare minimum features you'll need to develop and include to deliver the value above?

- Once built, where and how are you going to attract subscribers?

Consider building small focus groups of potential customers to learn more about their wants and needs. Establish use cases and look for ways to set your application apart from the competition.

While focusing on a niche doesn't solve the startup funding problem, it may enable the launch of a tighter, less feature-rich application designed to serve that specific target. Focusing on a niche may also create opportunities to generate revenue out-of-the-gate from vertical market advertisers and (potentially) higher paying subscribers. Focusing on a niche also creates greater opportunity for referral subscribers. 

For example, let's say you've come up with a big idea for a fitness app which will transparently design specific workout programs based solely on a person's heart rate. Someone in great shape with a strong heart rate would be assigned more challenging exercises. If that person's heart rate exceeded a certain threshold, the rest of their workout would automatically be "re-routed" like your GPS. A person in poor shape would be assigned very simple exercises and work their way up.

It's a great idea, right? Everyone and their brother, mother, sister, neighbor, etc. could benefit. So why not get this out to the world? In short, there are a million fitness apps out there already. Even though yours is a great concept, you're going to have an extremely difficult time rising to the top of that very crowded space.

What if, however, you only targeted and focused on people who were so out of shape that their health was at risk? Your app would only require the simple exercises designed for that specific target. You could market it through weight-loss centers, dieticians, physical therapy centers, senior centers, etc. And while others could eventually benefit from it, by selecting a smaller niche, you're more likely to find subscribers and success.

Shy Away From Highly Competitive Sectors (or Be Smart About Jumping in)

Speaking of crowded spaces, would you rather be a small fish in a big pond, or a big fish in a small pond? Little fish get eaten by competitors who are building bigger, better, faster, more feature-rich SaaS applications every day. The harsh reality is that, without big funding behind it (and even that doesn't guarantee success), your application stands little chance of survival in a crowded, highly competitive space.

For example, let's say you've come up with an amazing idea for a next generation CRM platform. How do you plan on taking market share from companies like Salesforce, Infusionsoft (now Keap), Zoho, Hubspot, etc.? The CRM space is crowded and highly competitive. That in itself doesn't necessarily mean you have to scrap your great idea. What it could mean, though, is starting smaller and proving out your concept. Perhaps look at developing and marketing a lite version of your CRM as a plugin to a platform like Wordpress? Or focus on one or two great enhancements to another existing platform which allows for third-party product integration.

You'll stand a much higher chance of making your big idea a reality by focusing on where and how you can make a small splash in a big pond, or you can simply find a smaller pond. By removing the need to build big from day one, you offer yourself the opportunity to bootstrap fund your new venture and build on it through cash flow from your subscribers.

Crowd Source

Entrepreneurs who truly believe in their vision (the way we here at Metisentry believe in ours) are a passionate bunch. We love what we're building, we love the idea of what's possible, and we love talking about and sharing our vision with anyone who will listen.

If you truly believe in what you're doing, and have just enough money to craft and protect your business plan and idea, why not use your passion and ask those who will benefit from what you're building to help fund your venture? It's why companies like Kickstarter have been so successful. Get creative with your promise to early investors and adopters. Research the types of startups who have met their funding goals. Look at what they did and how they separated themselves from the crowd. Use your passion to create excitement around the benefits of your SaaS application before it's even built. Better yet, build a lite version to show potential subscribers and investors that what you're promising is viable.

Why is Venture Capital So Important Anyway?

The venture capital question probably comes up in the SaaS space more than it does in other industries because of Silicon Valley. The dot-com boom of the late-90's saw billions in private equity being handed out to anyone with a decent idea for the web. Even today, 17-years after the tech bubble burst, there's still a lot of private funding happening in Silicon Valley and in other tech-centric parts of the country. It's almost as though we've been socialized as an industry to marry tech startups and venture capital. And while every new SaaS startup would probably love funding rounds in the millions, is that capital really necessary to get your startup off the ground? More importantly, what would you be giving away to get that money?

As a new business owner, it's important for you to understand that a great idea has little actual monetary value, and taking on investors early in the life of your business is going to cost you the most. Once your business is established, though, and starts generating revenue, the overall value increases and so does your ability to seek better funding terms.

Lastly, we're in no way trying to demonize private equity, or say you shouldn't ever pursue it. In fact, private equity can be enormously helpful, especially when you start considering acquisitions or need capital to reach the next level or stage of your company's growth. What you gain by bootstrapping your SaaS startup is a stronger position when it does come time for you to consider private equity funding options. You've proven your model, you're showing revenue from a subscriber base, and you're in a much better position to negotiate favorable terms for your business while retaining as much or as little control as you see fit.

Hopefully these tips will get you thinking more seriously about how you plan on funding your SaaS startup. If you'd like to talk to someone on our team about your big idea, or have questions about funding it, don't hesitate to reach out. When we work together as a team, we win together as a team (cliche, but true.)

If you're interested in learning more about SaaS, check out our eBook, "Plan, Build, and Grow Your SaaS Application." It's free, so click below to download your copy, then when you're done reading it, let us know what you thought. We'd welcome and appreciate your feedback.


Marling Engle

Written by Marling Engle

Metisentry president Marling Engle wrote his first line of code as a curious nine-year-old, and his life has been dedicated to tackling tough problems with software ever since.

Marling founded Metisentry in 2006 after graduating summa cum laude from Kent State University with an MS in Computer Science. He, and his young company, quickly earned a reputation for delivering elegant solutions incorporating high performance, highly-scalable web development, image processing and signal analysis, data mining, and software/system security.

Over the next decade, he started and grew additional ventures, including StationCheck, a SaaS product developed and incubated by Metisentry; while simultaneously expanding the company's capabilities and geographic reach through mergers and acquisitions.

Today, Engle leads Metisentry's team of open-source experts in creating and growing value for client partners through services spanning the entire SaaS product lifecycle.