3 Ways That SaaS Vendors can Survive the VC Funding Drought
Driven by rock-bottom interest rates and a rush of digital transformations, 2021 was a record year for SaaS venture capital (VC) investment. Fast forward six months, though, and things are looking very different.?
Labor and supply costs are surging, inflation is up, and interest rates are rising. Mix in a disruptive dose of geopolitical unrest, and it’s easy to see why VC funding dropped a full 19% in the first 3 months of the year.?
Technology firms have been particularly hard hit by this reduced deployment of capital. According to Carta, an equity management platform, Series A funding of SaaS start-ups was down 38% in Q1 2022 compared with the quarter prior.
To withstand this abrupt market recalibration, SaaS brands will need to do what they can to avoid raising VC capital. In the coming months, the process of going to investors will be harder, valuations will be lower, and founders will have to dilute their own stake more in order to raise cash.?
?So what’s the answer? The smartest SaaS leaders are seeking new strategies to ensure the continued viability and near-term growth while laying the foundations for future success once the slowdown passes. Here are 3 key steps that software vendors can take to keep their businesses growing — even when VC funding runs dry.?
During times of economic uncertainty, careful financial planning is of paramount importance. An early-stage start-up’s budget will, ordinarily, be used as part of their investor sales pitch, but it can also be an important strategic tool. A well-crafted budget acts as a company’s commercial roadmap through a crisis, helping to keep decision-makers and stakeholders on the same page.?
Careful planning is also crucial when it comes to liquidity — something that can rapidly run out during a funding drought. When drawing up budgets amid a slump, the sharpest businesses prepare for multiple scenarios, allowing them to speedily pivot if market conditions suddenly shift.?
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With VC considerations on hold, tech start-ups have more time to listen to user feedback and tailor their services accordingly. This is especially important during periods of economic turbulence, as SaaS clients will themselves be taking a close look at budgets and outgoings. The best software solutions reflect real-time customer needs, so leaders must be willing to adapt, even if that means pivoting in new directions.??
That’s especially important when it comes to pricing and payment strategies. With purse strings being tightened, software providers are also going to have to be more flexible in how they bring new customers on board, and give buyers options such as usage-based pricing or Buy Now, Pay Later options in order to align with customer needs and support buyers through the new challenges they’re facing.?
Even with capital-efficient budgeting and smart pricing options to keep customers coming back for more, SaaS vendors will need access to new sources of capital in order to grow their businesses. For the most creative SaaS vendors, the VC slowdown presents an opportunity to explore other, tech-enabled funding options.
Most SaaS businesses don’t realize that their recurring revenues can be leveraged to fund growth with no dilution. The secret is intelligent automation that can provide an immediate tranche of funds based on future secured bookings, closing the gap between anticipated revenue and cash on hand —?and giving SaaS vendors a new source of funding that doesn’t require dilution or going back to existing investors.?
Weathering the storm
There’s no escaping the fact that these are challenging times for digital start-ups. But amid financial adversity, there are almost always opportunities — businesses just need to know how to identify and leverage them in order to weather the storm.??
The downturn in VC SaaS funding isn’t a singular thunderclap, but part of a broader trend that has some time to run. SaaS companies that realize this, plan budgets accordingly, engage meaningfully with their customers, and seek out innovative funding alternatives will fare best over the coming months.
At Ratio, we’re committed to delivering the innovative pricing, payment, and funding services needed to grow SaaS businesses —?visit the Ratio website to learn more.