31 -SaaS Funding Options, with Shawn Flynn
On this episode of the podcast I interview Shawn Flynn about SaaS funding. Shawn regularly works with incubators, accelerators, angel groups, VC, local governments, and institutions to promote economic growth. He has helped several companies land and set-up operations in Silicon Valley as well as Silicon Valley companies set up offices, partnerships, and funding relationships overseas.
He is also the founder of Silicon Valley Successes a television show that features entrepreneurs and people that work with them and is the host of The Silicon Valley Podcast where he has interviewed some of the biggest names in tech industry.
Show Notes
How Shawn Started working with founders
He lived in China for five years and he had three companies; two of them failed while one succeeded, but the one that did okay his partner bought me out. In beginning of 2013, I came back to the US and found out he wasn’t employable.
He eventually started working at a startup called Connect Group Enterprises as an account executive. He got to know a Roger King, an angel investor who is the founder of Bay Angels in the Bay Area.
He met Roger and asked him if he would like someone to vet companies for him and Roger told him that he was not going to get paid. He was excited about the opportunity to acquire knowledge so that wasn’t a major concern to him.
He got to sit in the room during the pre-screen process where the angel investors will tear apart companies and asking great questions.
After a period of time. he eventually became the investment director of the group and he started to do deal flow agreements between the angel group and tiny incubators and accelerators that were opening up in Silicon Valley.
Through these meetings a lot of the groups started to ask about his background and when he told them he lived in China, they were interested in him and he ended up leaving the group and working with one incubator accelerator that gave him a nice offer.
Up until the trade war with China, he was helping companies set up offices and facilities in China.
He was working with startups to expand to other countries apart from China such as Germany, Israel, Korea and other parts of the world.
He realized that people had the same questions on various issues such as IP protection, accounting principles and other issues so he decided to create a podcast and tv show that would serve as a reference library to address people’s questions.
What kind of funding options are available for SaaS founders?
There are various options available if you are creative enough. You have friends and family that can write maybe small checks. There are individual angel investors or their syndicates which are groups that come together.
Universities have angel groups, alumni groups or something of that nature. You can go through the crowdfunding route. It could be crowdfunding for equity or just crowdfunding where you give people a nice t-shirt or pen with your company name or whatever you promised to give them for supporting you.
If you have any personal assets you can get SBA loans although this is rare for startups because they don’t have those assets to loan against in the beginning.
Sometimes you don’t need as much money as you need if you can sell, there are people that can only get employees if they pay market rate. And there are other people that can get employees based on selling a dream and they have incredible engineers working in the company because they believe in the CEO, the company and the product.
You can also have a day job and work on your hustle at night and during the weekends.
When you eventually get to the point where you actually have revenue coming to the door that is usually when you have the best chance or a good time to raise capital.
A lot of startups will try to raise $100,000 to even start but it is pretty rare for someone to write a check for you based on an idea on a napkin. It is important to have some traction.
He refers to traction as a repeatable business model that just needs money to scale. You need something that you have already proven to market, had a few customers that are paying you, figured out the average cost of acquiring new customers and based on your results you can show a rough idea of the model that you can successfully operate with.
When you are at this stage then you can have some leverage in a conversation.
What kind of funding is good for my SaaS? Do I also need to consider how much I need in order to determine the kind of funding to choose?
A lot of people often say you should hold off on funding as long as possible because the longer you hold off, the less you would have to give up to get it.
If you are unemployed for about 5 years and living at home in the basement, you are probably going to give up almost all of your company to get anything. On the other hand if you have an amazing pipeline, purchase orders, sales, clients that have signed contracts for a specific amount of time you won’t need to give up nearly as much.
If you are at an early stage, one way to get funding is through accelerator programs, you might have to give up quite a bit of your company for some of these programs. You might give up 7% for $125k or 5% for 100k, the range usually varies.
Accelerators typically have different stages of companies they are interested in, some of them are interested in just an idea, for some of them you need traction, some are interested in later stage companies while there are corporate accelerators that may have a certain niche of companies, they are interested in.
Growing your network of investors might be a way of discovering a good way of recieving funding for your company.
You can go to pitch events online, you can go through zoom, start a pitch on Eventbrite and connect with the people in the audience or on LinkedIn, ask the host or judges questions. Your alumni from University and chamber of commerce are other groups that have high net worth individuals or people that can introduce you to them.
You can also go on websites such as Angellist or Crunchbase and find out people that have invested in companies similar to yours and just start reaching out to these guys.
Building out your LinkedIn network is also helpful.
A better answer might not be what is the best source of funding for you because it is so broad but what is the best way to build your network to the funding.
What is the difference between incubator and accelerator?
You have a shared workspace, an incubator and an accelerator. He added shared workspace was added because a lot of people think wework is an incubator, it is just a shared workspace.
In a shared workspace you just rent a desk and that is it, there is no other real benefit, they might offer beer on tap or a ping pong table. You have an office you get for so many hours of the month.
An incubator is a shared workspace and more. It will have a focus, the companies there will be of a certain stage or a certain section of tech. Normally they will provide other benefits such as introductions to potential lawyers, accountants that they have already reached agreements with and vetted.
You can go to the manager of your incubator for example and tell them that you need an introduction to a law firm for patents for IT protection for the tech we have built, they will then inform you of the partnerships they have with the law firms so they might give you some free consultation.
An incubator might have an event space where some nights in a week they will have different events. They can also offer other benefits such as access to mentors that they have a relationship with, these mentors might help you with your design or sales funnel or marketing plan or people that they have networked with that want to give value back to the community.
An accelerator program on the other hand has a start and an end date, within that time frame they expect certain milestones to be hit.
Through the process you might have classes six or eight hours a week.
It could also be a two week accelerator where it is five hours a day with different service providers who will walk you through how to use a CRM system, your sales funnel and how to do your marketing plan.
It is almost like a semester at a university but the focus is only on your startup.
With an accelerator there is usually some type of investment from the accelerator program for equity in your company. It could be at the beginning of the accelerator where they might say everyone that goes through it will get $25k for 5% of their company.
It could also be at the end where they pick only three companies out of the 10 companies that have gone through the accelerator and they write out a check for only those three companies.
At the end of the accelerator there is normally a pitch event or a demo day where you are presenting your company to a roomful of potential investors, service providers or an economic development manager that wants to entice you to come to their city.
How do I pick the right incubator and accelerator program for my SaaS as there are so many of them at the moment?
There are a lot of bad accelerator programs where people eventually give up equity in their company only to find out they received nothing in return for the equity they gave. Some programs have mentors that are akin to a multi-level marketing scam where everyone is just trying to get you to hire them or a friend of theirs to redesign your products,
There are also horror stories from mentors who thought they were given their time for free to help companies, only for them to find out that the companies were paying the institution or the organization that runs the accelerator and they were not getting anything out of it.
There is no real accredited accelerator so they can come and go, almost anyone could start an accelerator tomorrow if they want to.
You need to do your research, a lot of startups put the little badge of the accelerator that they graduated from on their website or on their LinkedIn. You can reach out to people in your space that are in the same sector or same stage with you and ask them for their recommendations. Find out the accelerators that are not in their first batch or cohort or group, if they have been there for a while it is actually a good sign.
A huge benefit of accelerator programs is the alumni network and it is said that some of these groups are the equivalent of Harvard MBA.
You should also look for accelerators in your sector, if you are an AR/VR company then you probably don’t want to apply for a med tech accelerator.
A lot of mentors will put the program that they are mentors at on their LinkedIn profile. You can look them up and talk to them, you can ask them how many hours they spend with the startups during the accelerator? What milestones do you see them actually hit?
Do you have companies that you advise in these accelerator programs that you can introduce me to? Do you know any angels that have invested in the graduates of these programs? Could I talk to them?
Would more advanced SaaS companies benefit more from angel or VC?
For later stage or more advanced companies, it depends more on the amount of money they are raising.
A company at a very early stage that has only been around for three months might raise $10 million, that will limit most individual investors so you won’t get an angel to write that check. There are people that raise $10 million from angel groups and angel syndicates but then you might have 60 people write $50,000 whereas for some VCs that is their standard check as they might write checks between the size of $3 million to $20 million.
The type of founding you are seeking can actually narrow who you can actually approach. If you are raising $1.5 million you can go to angels that will write a check of $100,000 or $250,000 or maybe there is a syndicate that will write half a million.
If you are raising like $5 million you will probably need to talk to micro-VCs or VCs that write $1 million or $3 million checks.
One drawback that people don’t know about is that VCs have an investment date and they also have an harvest date, the fund has to collect the money back to the limited partners in for example year 7 or year 10 so they have to urge you to move fast and get the money out there at some date.
Whereas for an angel investor it is their personal money, they don’t have this contract or guidelines that say this is the end date, obviously they might want to see the money before they get too old but there is no hard date.
Resources
The Silicon Valley Podcast with Shawn Flynn
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AngelList — Find Startup Jobs and invest in Startups
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