The software-as-a-service (SaaS) business has grown in recent years, with entrepreneurs around the world starting new SaaS companies at a rapid pace. However, launching a successful SaaS business needs big upfront investment. Many aspiring SaaS businesses struggle to secure the funds they need to turn their plans into reality. So what exactly do SaaS companies need funds for when starting their businesses? Here is an overview of the key prices and investments needed in getting a SaaS business off the ground.
Product Development
One of the first and most important investments for SaaS entrepreneurs is creating the real web-based software product. This includes things like hiring software developers and engineers to code and build the application, buying infrastructure and tools to make and host the software, and investing in product design. The costs of product development often represent the biggest part of initial funds needed, sometimes running into the hundreds of thousands for more complex SaaS goods. But without investing in making the real program, there is no business.
Market Research
Before coding ever starts, SaaS entrepreneurs need to do in-depth market study to prove their ideas. Market research helps founders understand customer pain points, define market positioning, study the competitive landscape, size the potential market opportunity, and gather user comments on early product ideas. This research is important, but conducting interviews, surveys, competitor analysis, and data aggregation can be an expensive process. Market research bills can quickly add up, especially if outside experts or firms are brought in to help.
Talent Acquisition
Another big cost driver early on is finding talent. Even if leaders are technical and make the first product version themselves, they quickly need to start building an engineering and product team. On top of coders, they need to bring on designers, product managers, customer help reps, marketers, salespeople, and other jobs to scale the business. Top talent, especially coders, can be very expensive to hire and keep. Funding is important for SaaS entrepreneurs to draw and keep the talent they need to grow.
Marketing & Sales
Once the product is built, entrepreneurs need cash to get the word out and gain buyers. Marketing platforms like search engines, social media, email, and content marketing all have linked costs. As companies grow, it becomes even more expensive to gain customers, often needing paid search, retargeting ads, trade shows, and sales teams. The costs of marketing and sales can represent the largest recurring spend for many SaaS businesses. Securing funds early on is important to have the power to drive growth through marketing and sales.
Hosting Infrastructure
SaaS companies require hosting facilities and tools to build, launch, and run their software platforms. This means getting reliable servers, setting up cloud-based infrastructure, working in DevOps and web development tools, and integrating payment systems. While infrastructure costs are relatively low early on, they rise quickly as user numbers grow. Ongoing building costs can shift resources from other areas if not properly paid.
Support & Operations
As customers start using the software, SaaS businesses need to build out their support teams and operational capabilities. This means having staff committed to onboarding, teaching, supporting, and keeping customers. It also requires setting up tools and methods for handling the full customer lifecycle. Delivering a positive customer experience is key for SaaS businesses, but support and success operations costs deplete resources quickly.
Compliance & Security
SaaS businesses have a responsibility to keep customer data safe and maintain compliance with laws. Funding is needed for data security tools, equipment, and people required to properly handle security and compliance. Adhering to standards like ISO or SOC2 is a condition for selling to business buyers. Staying on top of compliance is not cheap for most SaaS businesses.
General Operating Costs
And finally, amidst all this, SaaS businesses have to keep the lights on by paying general running costs. This includes things like office space, tools, legal, accounting, utilities, insurance, and wages. Although not directly tied to growth, these costs build quickly and can burn through funds fast without proper budgeting.
Securing Enough Funding
All these costs add up quickly, requiring SaaS businesses to secure enough funds to fuel their ideas. Underfunding any of the above areas can seriously hinder progress and risk long-term survival. The exact funding amount rests on the concept, team, target market, and goals. But most successful SaaS companies raise at least low seven figures to get off the ground and support the first 1-2 years of business.
Some entrepreneurs self-fund their SaaS companies through savings, loans, or bootstrapping income initially. But most will end up getting outside funds through routes like:
- Venture capital – VC companies provide multi-million dollar funding in return for stock shares. This is normal for high-growth startups.
- Angel sponsors – Wealthy people provide thousands to millions in seed funding for early-stage companies.
- Bank loans – Banks or lenders provide debt financing that must be paid back with interest.
- Grants – Government or nonprofit grants provide small business funds without taking stock or asking repayment.
- Crowdfunding – Platforms like Kickstarter or Indiegogo allow startups to raise smaller investments from a big group of contributors.
Each financial source comes with tradeoffs in terms of amount available, dilution, repayment terms, speed to close, and level of involvement. SaaS entrepreneurs need to explore all choices to find the right blend of cash to fund their companies. The mix often changes over time as companies hit new goals and growing stages.
But regardless of where the funding comes from, SaaS entrepreneurs need sufficient capital to build and sell their goods, hire talent, cover running costs, and fuel growth. Undercapitalization is one of the top reasons SaaS companies fail. Doing market research, making projections, pitching boldly, and bootstraping parts of the business can all help entrepreneurs secure the necessary funds. With proper funding, skilled founders with compelling SaaS ideas have a good chance of building successful, high growth companies.
