SaaS Funding: Venture Capital advantages and disadvantages

Everyone wants their business to take off. So if there’s one thing that no Software as a Service (SaaS) company can afford to do, it’s rest on its laurels. In their constant battle to deliver value for users and stay one step ahead of the competition, SaaS companies need to exist in a state of constant self-reflection and self-improvement. This strive for excellence will help minimise churn and lay the groundwork for sustainable, and profitable growth.

But if that were easy, everybody would be doing it.

Growth requires investment, and it’s hard to generate the revenue you need to improve your product on your own without putting a serious stranglehold on your cash flow. Young SaaS companies often need to turn to external investment sources to get the funds that takes their business to the next level. One of the most common of which is venture capital.

Venture capitalists are typically wealthy and successful business people who are willing to lend their resources to promising companies by forming Limited Partnerships with them.Most of the time, this means that they will provide capital to help accelerate businesses’ growth and enable them to expand their operations in exchange for the promise of a return on their investment. Venture capitalists frequently also serve as mentors, lending their experience and expertise to help guide young businesses towards successful growth and thereby a healthy ROI.

Needless to say, venture capitalists expect to see a swift and healthy return on their investments and will only consider businesses that can convincingly demonstrate that they’ll get it.

Venture capital is an inherently risky pursuit. As such, venture capitalists like to be as risk-averse as possible and know what to look for in a business to assure themselves that their investment will be in safe hands.

One of the first things they look for is a large potential market, which is why B2B SaaS is a popular avenue for venture capitalists. However, they also know how competitive a market SaaS is and they’ll expect you to demonstrate that you have a strong competitive advantage or an innovative and disruptive product. In other words, you need a unique value proposition. They’ll also expect you to have strong management skills and for you to be amenable to any advice and guidance they offer.

So far, so reasonable.

But while venture capital can be a great avenue for growth-hungry SaaS startups, it is not without its caveats. Here, we’ll look at some of the advantages and disadvantages of venture capital.

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Venture capital can certainly be advantageous and may give your company the shot in the arm it needs to conquer the market and leave competitors in your dust. Here are some key advantages of venture capital.

They see the potential in you that other investors won’t

Banks and other lenders tend to have trouble thinking in non-monetary terms. As such, new and relatively unproven businesses can find it difficult to convince them to part with their money. Venture capitalists, however, have a much better understanding of how business and your market work. As such, they’re apt to see the potential in you which other lenders might not be able to perceive or quantify.

Gives you more

Venture capital quite literally gives you more. They have more resources than many other kinds of lenders and, so long as you’re able to prove yourself, may also be more forthcoming with them. Not only does this mean that they’re likely to give you more money to spend, but they may also be able to provide non-monetary resources which could prove every bit as useful.

Guidance and mentoring

No matter how exceptional your product, it can be difficult to get users within your market to perceive the value within it. This can lead to slow adoption and fast churning. Venture capitalists can give you the guidance, mentoring and support you need to build on your existing knowledge and skills and overcome barriers which might have prevented you from being all that you can be.

Networking opportunities

You don’t get to be a venture capitalist without building an impressive list of contacts in the business community. And if someone is interested in lending you venture capital, it’s likely because they have a firm understanding of your industry and your business’ potential to be a dominant force within it. What’s more, they’ll likely be able to get you in the room with people who can help to make that happen. This might include marketing teams, branding experts or software developers who can work with your existing in-house teams.

While venture capital can certainly be advantageous to startups, it’s not a one-size-fits-all remedy for all your business woes. It’s an agreement that should be entered into carefully with a clear understanding of the advantages and the disadvantages.

Here are some potential disadvantages to venture capital.

Lack of agility

When your operation is fully autonomous, you can expect to be able to make strategic changes to your operation fairly quickly with few checks and balances hampering you. VCs, however, will likely want you to run any major decisions past them, and this could result in levels of beauracracy, a lack of agility and potential loss of opportunity.

Surrendering control

Most of the time B2B SaaS startup owners expect complete autonomy over their operations. They expect to be able to do everything their way, and answer to no-one. But that’s simply not a luxury most venture capitalists will allow. They will expect to play an active role in the day-to-day operations of your business to ensure your business is a success, and ultimately so they get a return on their investment.

High expectations

As the old saying goes, there’s no such thing as a free lunch. And a VC will expect to see you doing all that you can to repay their investment as quickly as possible. And this can invite added stress and irritation on top of all the trials and tribulations that come with running a business.

Their reputation is your reputation

A VC can be the helping hand that raises you to new heights of success, or they can be a weight around your neck that drags you down. And just as they will do their due diligence on you to ensure that their investment is safe, you should learn all that you can about them.

As well as making sure that their personal reputation is unimpeachable, you must also look into the health of other businesses in which they’ve had a controlling interest. Has their influence caused them to deviate from their mission statements? Have they remained consistently profitable and demonstrated sustained growth?

When you align yourself with a venture capitalist, their reputation is your reputation so there’s no such thing as too much transparency.

Ultimately, the only one who can determine whether venture capital is right for your business is you. It has some clear and tangible benefits, but the wealth of knowledge and resources comes with a price: diminishing control. However, when you know all that there is to learn about the VC in question, have a good personal relationship with them and can take advantage of their knowledge and expertise without surrendering too much control you can make venture capital work for you.