2022 continues to be a wild ride. We’ve seen a slowdown in the venture market due to the drop in the stock market, inflation, an increase in interest rates, and a number of other issues. Valuations are declining, funding rounds are slowing, and some tech companies are freezing hiring or laying off employees to boost profits. So far this year, only 42 companies have priced IPO offerings. That is on pace to total less than half of last year’s 399 IPOs.
With that said, it doesn’t mean a new round of funding for companies, especially SaaS-based companies, is impossible. The global SaaS market size was $282 billion in 2021 and is expected to reach $307 billion by 2026. U.S. SaaS companies received VC investments worth more than $300 billion last year.
So how do you know when it’s the right time to start a new round of funding? The short answer is: When you are ready. Here are some items to consider before making the final decision, especially when your existing investors approach you.
Questions to ask yourself
1) Do we have a clear strategy?
As you consider raising a new round of funding, strategy is vital. You, your co-founders and other executives must agree on a vision and a plan to attain your goals.
No amount of funding will overcome a lack of demand from consumers, so ensure there is a market for your product before moving forward. Research your target market so you can advance the product to satisfy growing needs. Map out the future and anticipate market changes to set your company up for future success and position it to be a leader in the field.
If you don’t have a defined growth plan or target market, you may find yourself overwhelmed with options. Company leaders could sit for too long analyzing every possible opportunity rather than taking decisive action. Some call this phenomenon “analysis paralysis.”
2) How will we use this money to advance company growth?
Once you and other company leaders have identified the market and demand, consider specific items or tasks for which you should use the money. Market research is crucial to ensure product advancements fulfill needs. From there, you can pinpoint areas within the company that need funding to accelerate and sustain growth.
Maybe it’s time to scale the product. This requires resources, including hiring talent with the necessary skill sets to accomplish your goals. The decision to scale must be considered carefully because expanding too early can hinder your agility in the market. However, waiting until too late can slow down the process and hurt the product. Be thoughtful on who you hire and how they will grow with the company.
You may also opt to use the money to build out a leadership team. This is often a worthwhile expense, as executives play a significant role in driving the company forward and identifying internal and external influences. Having the right people guiding the company defines its culture and path to success. Keep in mind that the decision to hire leaders must not be taken lightly. Organizations shouldn’t be too top-heavy, especially as the product is scaling up and undergoing improvements.
Another area to allot funds is research and development. Pushing the envelope on new features and capabilities keeps you ahead of competitors. You should never stop innovating, and funding helps you to do that. If you believe it is time to take your product to a new level, it may be an excellent time to raise money.
And, possibly most important in the current financial climate, funding provides assistance in turning good revenue and maintaining growth. Investors right now want to see consistent growth and a high customer retention rate. With falling valuations, inflation, a weak stock market and other factors, investors are more careful in their financing. New funding can put gas in the tank.
3) Do we have the right investor mix?
When entering into a partnership with investors, you and the investors must align on the company’s vision. This relationship works best when the investor understands the market, your product and the value that you bring.
Current investors approaching you with an offer to help raise money is a sign that you should seriously consider opening another round. They know your product, and they know where you started and how far you’ve come. They also see the potential for the future, and you know your priorities align due to your past relationship.
That’s precisely what happened for HYCU’s Series B. The investors from our Series A approached me about wanting to reinvest, even though HYCU completed the first round just over a year ago. They expressed their trust in the company and its mission and helped us see it was a good time to move forward. That was a key factor in my decision, even though the move did not correspond with our original timeline.
As other investors consider participating, you should evaluate their compatibility and value add to your end goals. Are they pioneers in their industry? Do they have domain expertise, name recognition and reliability that would help with your brand? Their expectations for the invested money should align with yours, and your relationship needs to be able to withstand the ups and downs of business development.
It is OK to say no. Not all investment opportunities or partners will be right for your company’s current needs. You need the right mix that complements your existing needs and supports your long-term plans.
4) Is the timing right?
It is possible to raise money too soon. As I mentioned earlier, having a clear strategy is imperative. If you still don’t have a plan, you may face a lack of demand or product advancements unneeded in the market. In addition, acting too soon can lead to inflated investor expectations that you are unable to fulfill.
On the other hand, waiting too long can lead to slow growth. You will deplete your current resources and your competitor(s) may overtake you in the market.
Deciding when to move forward with raising funds is a challenge, even more so in the current economic climate. If your current investors believe in your product and want to invest more, you should seriously consider the state of your strategy and if you are ready to make good use of the money. The right mix of investors standing behind your product can go a long way in building up a SaaS company.
Simon Taylor is the CEO and founder of HYCU, one of the world’s fastest-growing multicloud backup and recovery as a service companies. Taylor has more than 20 years of experience in go-to-market strategy development, product marketing and channel sales management for the tech industry.
This article is part of the Crunchbase Community Contributor Series. The author is an expert in their field and we are honored to feature and promote their contribution on the Crunchbase blog.
Please note that the author is not employed by Crunchbase and the opinions expressed in this article do not necessarily reflect official views or opinions of Crunchbase, Inc.
