Types of Investments in SaaS
What is an investment?
As Wikipedia defines it, an investment is as simple as allocating money in the expectation of some benefit in the future.
Can it really be this simple? The answer is Yes and No. Yes, because the concept itself is straight forward and No, because investments could make or break a company and it is important to know at what type of investment to go for at different stages of company’s growth.
Did you know that there are 21 different types of investments 😱 Let’s look at each type:
Angel round is when you raise money from individuals, also known as ‘Angels’. The sum of money in most cases is very small, usually at Pre Seed or Seed stages. Multiple ‘Angels’ can also come together to invest in the same funding round.
Being more of a way of supporting than investment, Pre-Seed stage investments are used to convert a concept in ideation phase into prototype. A typical Pre-Seed investment will be less than a million dollars. Though there is no need for the company to have the product on hand in most cases and make do with just the proof of concept, a strong founding team and data backing is absolutely necessary.
Companies usually go for Seed round of investment right after product development to get a good boost when they get into the market and start making money. Seed round of investment helps a lot in development iterations to streamline the product (to achieve market fit and keep up with the continuously changing requirement) and expand the team.
Series funding is a series of startup funding stages that follow one after the other and includes Series A, B, C, D, and sometimes E. In each stage, the startup raises more money and increases their valuation. The one exception is a down round, which we talk about in Series D.
4. Series A
Series A investment is when the company has started making money and identified the KPIs required to be on the growth trajectory. The company at this point would be concentrating on optimizing processes that can showcase a strong business model which will result in good cash flow.
5. Series B
Say, the monetization strategy from series A has proved to be really good for the company and the essential metrics tracked are getting stronger and stronger by day, the company will start looking to penetrate new market segments and that is where Series B funding comes into picture.
6. Series C
A Series C funding is generally obtained when the company is doing pretty well, has started venturing into newer market segments, expanding rapidly. Series C funding assists in launching into new markets or acquiring companies.
7. Series D – Series J
Companies go for Series D or further rounds for two major reasons: either they are looking for a final push before going IPO or accomplish things that they weren’t able to complete during Series C.
IPO- INITIAL PUBLIC OFFERING
An initial public offering (IPO) is often the last stage of startup funding that companies go through. With an IPO, investment bankers commit to selling a certain amount of shares for a certain amount of money, thereby raising money for the company. The shares are traded on the stock exchange.
IPOs are seen as risky investments, as there’s no data yet on how the shares will trade. But when the IPO goes well, investors stand to gain a lot of money and companies get a boost in reputation and pride. When it goes poorly, however, the opposite happens — investors lose money and the company may see their prospects decline in other areas as well.
8. Post-IPO Equity
Investment in a company after it has gone public is called Post IPO Equity.
9. Post-IPO Debt
Similar to Debt financing, Post IPO Debt is when the company obtain a certain amount as loan after going public in promises of returning it with interest.
10. Post-IPO Secondary
Post IPO Secondary is the same as Secondary Market happening after the company has gone public.
OTHER TYPES OF INVESTMENTS
Apart from early stage, Series and IPOs, there are many different sources of investments as listed below
11. Private Equity
Private equity is when investors directly invest in private companies, or buyouts of public companies that end up in delisting of public equity. It is led by a private equity firm or hedge fund and happens in the later funding rounds.
Quite literally, debt financing is when the company borrows money to be repaid with interest at a later date.
13. Convertible Note
Convertible equity is a form of short term ‘debt’ that can be tallied with the next round of funding. For example, if a company raises Series B but doesn’t want to raise Series C immediately, they could go for Convertible Note for the time being.
Investment without obtaining an equity stake in the company is called grant. The investment could be by a company, investor or a government agency.
15. Corporate Round
Often done to forge strategic partnerships, getting access to company’s financials or laying down the groundwork for acquiring, corporate round is when a company (not VCs) invest in other companies.
16. Equity Crowdfunding
This type of funding lets individuals invest small amounts of money in exchange of shares, convertible note, debt and revenue share.
17. Product Crowdfunding
Similar to Equity Crowdfunding, Product Crowdfunding is when the product itself is offered to individuals in exchange for capital.
18. Secondary Market
At times, investors do get the chance to purchase shares from existing shareholders and not directly from the company. Such scenario is called secondary market and is very rarely made public.
19. Non-equity Assistance
Non equity assistance is when a company gets offered infrastructure or other resources without expecting equity in return.
20. Initial Coin Offering
Also known as ICO, it is a modern way of investing in companies. Instead of getting equity in return of investment, buyers will purchase a part of new cryptocurrency with a different type of cryptocurrency like bitcoin.