The balance of power between startup founder and venture capital investor has changed – and the rules of the courtship reversed. Falling software costs and better management mean Software as a Service (SaaS) startups are accessing less funding, keeping their capital and more often finding success on their own. This is good news for startups as they are independently building the engine of their companies and only accessing funding to purchase fuel to run it.
The shifting fortunes of investors means they need to bring something other than cash to the table. Now more than ever, VC investors need to compete by offering strategic partnerships through expertise and hiring with industry contacts. Money does not bring value, value brings money – and this is the mantra for both startups and investors moving forward in the brave new world of SaaS investment.
SaaS and startups: a revolutionary relationship
The past decade has seen the balance of power between SaaS startup and investor evolve largely thanks to cost and experience. SaaS has fundamentally changed how startups are built and this process has become easier in recent years. Firstly, the move from buying and owning elements has shifted to renting, thus forcing costs down. For example, the cloud makes it possible to solve problems in highly efficient ways without on-site infrastructure.
Secondly, startups are simply smarter. Teams today have better frameworks and learned the mistakes of startups before them. Further, domain experts know exactly what problems to solve, meaning less iteration to getting a product fit for market.
These converging factors means startups are less likely to accept investor funding for the sake of it. This is buoyed by companies who find success with little support – case in point video conferencing company Zoom, who recently filed publicly to reach $330 million from less than $160.5 million of funding in total. In fact when they raised their series A, they were already profitable. Most of the funding taken is in their bank account as is indicated by their S1.
The truth today is that startup founders do not need a lot of capital to build SaaS anymore – a great result for founders as they get to keep more of their startups as they grow.
Why SaaS startups are winning big
The fact that SaaS startups are finding success on their own means they are becoming more efficient than ever. This translates to founders with more ownership and control, which leads to additional capital for scale and more options for founders.
Whatever amount the founders own is what the investors cannot, and whatever investors control the founders cannot. Founder must carefully choose when – if at all – it is best for them to access outside funding sources. Keep in mind that if the startup founders create a profitable machine, it can often be much better for the founders to hold off on investment until money is only needed to run the working machine.
In the past, a lot of money was required to get to market and that meant giving up equity. However, with these converging factors, investors must work harder to convince startups to take their offer. Thus, the power equation shifts from investors to founders.
The actual money in funding is becoming less important – with the current paradigm preferencing investors who can offer value hires and strategic partnerships. Money does not bring value, value brings money. The best advice for startup founders right now is to continue making it hard for investors. Make them earn their investment rather than giving it to them on a silver platter. Ensure that they are the best for the job by making them prove it.
What are savvy investors doing?
For investors, this means they need to find ways to add value to prospective SaaS startups. This could be through assisting with team hiring, building industry partnerships, getting large customers through the doors, or acquiring senior talent when they scale. This is no longer just about money – it’s the expertise that investors bring to the table.
The equation has changed, and both parties expect different propositions. Startups want investors with connections and knowledge, while investors want startups who know their product and know their direction. It is a tug-of-war, with startups in prime position to get the best bang from their investor’s buck. Investors need to prove themselves worthy to take ownership. If they can add value, they can also assist in helping the startup craft a bigger, faster, stronger engine, rather than just the gas for ownership.
There is a new equilibrium between investor and founder – and without a doubt the hunted are now becoming the hunters. This is a great situation for founders as generally they get to keep more control of their startups. Meanwhile it is the investors who simply have to compete harder and smarter than ever before.
The fact of the matter is that investors must differentiate or die. Funding has become a commodity which adds value to any given startup. The days of dumb money are done – startups today demand something more to get their SaaS operation to the highest level possible.
Published May 9, 2019 — 02:30 UTC