The Alternative Funding Options For SaaS Start-ups Cheat Sheet

When we first started building Outseta we stated outright that we weren’t interested in raising venture capital—instead, we planned on bootstrapping the business and remaining independent. It wasn’t that we had any issue with venture capital per se, it was simply a reflection of never wanting to have our hand forced in pursuit of growth if we thought it wasn’t what was right for the business. There are a lot of advantages to organic growth that aren’t discussed enough.

Recently there’s been an explosion of new, alternative financing options and models made available to SaaS companies that feel like we do. And many of them are attractive to the extent that they’ve flipped our own internal dialogue.

This post is for other early stage SaaS companies who are similarly considering whether some of these new forms of capital make sense for their business. I’ve read the fine print to highlight the unique attributes of each fund and who they are best suited to—and I’ll share our own thinking in terms of each model’s appeal to our own business.

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TinySeed

• Website: https://tinyseed.com/
• Key Personnel: Rob Walling, Einar Vollset
• Revenue Requirement: No minimum requirement
• Equity Stake: Yes—standard terms are 10%-12%
• Board Seat: No
• Investment Docs: https://tinyseed.com/faq/
• Application Deadline: Applications are currently closed, but you can sign up to be notified when applications reopen via the link below.
• Apply Here: https://tinyseed.com/apply/

Like Indie.vc, TinySeed is not just an alternative funding model but a 12 month accelerator program. The fund focuses exclusively on subscription software companies that have the potential to grow into 7 or 8 figure businesses. TinySeed prefers investing in post revenue companies that operate in markets without a high degree of price sensitivity.

Investment Model

TinySeed invests $120,000 for your company’s first founder, then up to $60,000 per additional founder. The fund does take a permanent equity stake in your business of 10%-12%, although they do not take a board seat or hold any voting rights.

Of the money invested, a lump sum is delivered upfront to help out with start-up costs, with the remainder being paid out to the founders as salary on a monthly basis for the duration of the program. Founders agree to a salary cap (based off of the average salary of a software engineer in the nearest major city), and can increase their salary up to that cap as the business makes money. Any revenue beyond that salary cap is paid out as dividends, which are paid out to founders and the fund based on their percentage of ownership in the company.

The founders maintain complete optionality in terms of when to take dividends—if they prefer to invest revenue back into the business they have the option to do so. The idea here is that the fund gets paid when the founders choose to get paid. If the company sells, TinySeed receives the initial investment back (minus any dividends paid to date), and then the proceeds are divided based on percentage ownership in the business.

How They Help

TinySeed invests in cohorts of 10-15 companies at once so that portfolio companies benefit from exposure to one another—this includes weekly calls with other portfolio companies. They also have a network of mentors that’s about as strong as could be if you’re looking to build an early stage SaaS company. Mentors are available during scheduled office hours calls.  

Commentary

TinySeed is particularly attractive to me because of the the advisors and the ecosystem it would plug us into—the companies TinySeed is funding represent our exact target market at Outseta.

The advisors are a huge reason, in my eyes, to apply to this fund but they are also probably the biggest variable. How much interaction does a portfolio company actually get with each of the advisors? It’s not like Rand Fishkin has the time to work with 10-15 companies on SEO or Hiten Shah has the time do so the same with each on product strategy. I know the advisors are more than names slapped up on a marketing website, but the extent of their involvement is certainly an open question. The ecosystem, for us, is a no-brainer.

It’s worth noting that TinySeed takes and keeps the largest equity stake of any of the options on this list, but the stake seems reasonable given that they are typically making earlier stage (riskier) investments. If I was an investor, this model would be hugely attractive to me—spending $120,000 to buy a 10%-12% stake in a company could prove to be hugely lucrative if a company does reasonably well.

As an operator, I love the model of the fund gets paid when the founders get paid—I think TinySeed nailed this aspect of their investment model. While I’m not crazy about giving up 10%-12% equity in the business, paying dividends based on percentage of ownership in the company makes logical sense to me. I’m comfortable with the equity stake because it means that the mentors and other folks involved in this fund are going to be on your side for the long term, which is a pretty amazing benefit.

Tinyseed has become particularly competitive—you can see a list of their portfolio companies by cohort here: https://tinyseed.com/portfolio

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Calm Company Fund

• Website: https://calmfund.com/
• Key Personnel: Tyler Tringas, Sibi Murugesan, Kevin McArdle
• Revenue Requirement: No minimum requirement
• Equity Stake: Yes, but diminishing. In their default terms Earnest holds a small residual stake.
• Board Seat: No—upon request Earnest can become a board observer without voting rights.
• Investment Docs: https://calmfund.com/shared-earnings-agreement
• Application Deadline: Applications are always open, so apply anytime.
• Apply Here: https://apply.calmfund.com/

Calm Company Fund makes seed stage investments in “bootstrappers, indie hackers, makers, and real businesses.” Their investment model was designed to align with founders who want to build sustainable, profitable businesses.

Investment Model

Earnest invests upfront capital in businesses typically after a product has launched, but before the founders begin working on the company full time. The investment model has two main components:

1. Businesses pay back a “Return Cap” which is 3x-5x the amount invested in their company.
2. In their default terms, Calm will maintain a small residual equity stake in the business even after their Return Cap is paid back—this amount scales down as the fund is repaid, but never reaches 0. This means that Calm and their advisors are still incentivized to keep helping you grow the business after the Return Cap is fully paid because they would participate in a sale if it ever happened. “We will likely still offer and do deals that have no residual stake after the Return Cap is repaid, but that will likely entail a higher total Return Cap to compensate for the lack of residual stake,” says Principal Tyler Tringas.

Calm calculates “Founder Earnings” which is net income + any amount of founders’ salaries over a predetermined threshold. Similarly to Tinyseed, this model is designed to give founders the option to continue investing profits in their business if they see fit and the fund is only paid when the founders are paid.

How They Help

Calm also has a strong network of mentors, all of whom have skin in the game having invested in Calm companies. There is no curriculum or prescriptive structure to mentorship; Calm companies are expected to tell the fund what they need and ask for help. All mentorship is handled remotely.

Commentary

I’ve really enjoyed following Calm's story and the research that went into them coming up with their investment model. I also like that all of their advisors have skin in the game—it definitely makes me feel like they’ll be accessible and helpful. Like Tinyseed, I love the alignment of the fund gets paid when the founders get paid, but Calm is much more appealing to me if returning 3x the amount invested to the fund rather than 5x.

As with Tinyseed, I understand the reasons for this as they are making early stage bets, so it’s sort of pick your poison—a bigger return multiple or a larger equity stake. But I’d be hesitant to take too much money; the idea of taking on $200,000 and needing to repay $1,000,000 is a little daunting.

*Outseta Co-founder Dimitris Georgakopoulos is a mentor and investor in Calm Company Fund.

Lighter Capital

• Website: https://www.lightercapital.com/
• Key Personnel: BJ Lackland
• Revenue Requirement: $15,000 monthly recurring revenue and gross margins of 50%+
• Equity Stake: No
• Board Seat: No
• Apply Here: https://www.lightercapital.com/apply/

Lighter Capital provides an alternative funding methodology they call “revenue based financing” to SaaS, tech services, or digital media companies based in the United States. They have provided funding to over 350 start-ups to date.

Investment Model

Lighter Capital makes investments of $50,000 to $3 million—up to ⅓ of a company’s annualized revenue run rate. The money borrowed is typically repaid over 3-5 years, with payments ranging between 2%-8% of your monthly revenue. Typically the money returned is between 1.35x-2x the amount borrowed.

Companies do not need to be profitable to secure financing, but there should be a clear path to profitability in the company’s future. Funding is typically received within 4 weeks of application, and follow-on rounds can be distributed in 3-4 business days. Lighter Capital only funds companies based in the United States.

How They Help

Lighter is not an accelerator and does not offer a network of mentors—instead it’s more of a true financing option. “Aside from the reporting, where we are most helpful is planning out a company’s financing, frankly” says CEO BJ Lackland. “As opposed to a VC we don’t necessarily need to know the best VP of Sales candidate in healthcare tech in South Carolina. What we know is if you’re doing X million in revenue and have this kind of burn rate and this kind of growth rate, what kind of capital is available to you from which different sources? Whether it’s angels, VCs, or banks, we probably know how to introduce you to any of those sources. So we can help with strategy, mostly on the capital side.”

Commentary

Lighter Capital is without question the most attractive of these models is you’re simply looking for financing given the speed at which they make funding decisions and that you’re only on the hook for returning 1.35x-2x the amount borrowed. That said, there’s a reason for that—they’re taking on far less risk by only funding companies with $15,000+ in MRR and otherwise healthy financial metrics.

Outseta isn’t there yet, so at the moment this option is out of reach for us.

AppSumo

• Website:
• https://appsumo.com/
• Key Personnel: Noah Kagan, Ayman I Al-Abdullah
• Revenue Requirement: No
• Equity Stake: No
• Board Seat: No
• Investment Docs: Terms will vary for each company, but more details are outlined below.
• Application Deadline: Applications are always open, so apply anytime.
• Apply Here:
• https://appsumo.com/partners/apply/

Investment Model

Some people will likely read this and say that AppSumo doesn’t belong on this list—the argument being it’s a software “Deals” site more than an alternative funding model. While I understand that sentiment, I’ve chosen the add them to this list because I’ve seen a growing number of companies use AppSumo successfully as a means of raising seed funding for their start-up. And perhaps most importantly, it’s the only option on this list that doesn’t have any revenue requirement or take any equity in your business.

AppSumo is a software “Deals” site that works with start-ups to promote their products, the hook being you must offer Appsumo’s audience a lifetime deal on your product. So rather than offering your SaaS product for say $29 per month, you sell a promo code on AppSumo that gives purchasers lifetime access to your product for say a one-time fee of $99.

This of course means you won’t make recurring income from users that sign-up for your product via AppSumo, but the company has an enormous amount of website traffic to their digital storefront and an email list of millions of tech early adopters—both of which they’ll use to promote your product. This audience often buys access to new products on AppSumo as an investment in the future potential of a company, realizing it will give them lifetime access to the product as it matures.

The catch? Your start-up keeps somewhere between 30%-40% of the total dollar value of the promo codes sold on AppSumo’s site—they rest is either AppSumo’s cut or invested into the promotion of your product.

How They Help

In short, the AppSumo team helps by getting your product in front of a massive audience that would take a start-up years to build on their own. They’ll build a page for your product in their digital storefront, will run email campaigns promoting your product to their audience, and will create a professionally produced demo video for your product.

If your start-up is looking for a one-time injection of cash to use as seed funding, this is an option worth considering. For example, Lemlist successfully raised $160,000 in two weeks after launching their product on AppSumo.

Commentary

There are a lot of polarizing opinions about AppSumo in the start-up world—there are plenty of stories out there of AppSumo launches gone wrong. I’ve spoken to a number of founders who have had both good and bad experience with the site, and the bad ones all have a common theme—they went into their launch without a clearly defined goal or objective.

AppSumo can serve a number of different purposes—it can help companies get early product feedback, it can help companies land their early customers, or it can truly act as an alternative financing option for your start-up. Be clear on which is the most important to you, as you’ll want to structure your deal to best support your end goal.

The general downside of AppSumo is that you can suddenly find yourself with thousands of new users that you need to support, which can be really tough for an early stage start-up to absorb—and of course these users won’t be paying you on a recurring basis. It’s also worth noting that you can (and probably should) design your offer so that you can upsell your AppSumo customer base on other products or services that do generate a recurring revenue stream for your business after the initial promotion. Companies like HeySummit have done this successfully, raising not just a one time injection of cash but also leveraging that user base to subsequently build a recurring revenue stream that helped sustain the business in perpetuity.

Be clear with your objectives before launching on AppSumo, but it’s certainly a means of getting your company in front of a massive audience that has the potential to drive significant cash flow in the early days on your start-up.

Corl

• Website: https://www.corl.io
• Key Personnel: Derek Manuge
• Revenue Requirement: No
• Equity Stake: No
• Board Seat: No
• Application Deadline: Anytime
• Apply Here: app.corl.io

Investment Model

Corl invests in businesses through Revenue-Based Financing. They provide upfront capital (up to $5M) in exchange for a percentage of revenue through a monthly royalty (usually 1-5%). After two years of royalty only payments, there is a balloon payment at the end. And businesses have the option of an early buyout.

The major advantages to Corl's revenue based financing model include:

• No dilution to the company
• No warrants, personal guarantees required
• Cheaper than equity
• Payments grow and shrink as your business does (ie. great for seasonal or businesses that are scaling)
• Buyout option if the company outperforms their expected trajectory

Corl's platform plugs into your businesses' systems like online banking and Quickbooks to asses the business in as little as 10 minutes. Funding can take place in as little as two weeks. Fixed rate options also exist for those that prefer that route over revenue based financing.

How They Help

Corl's two year term with interest/royalty only payments is very friendly for founders. Unlike other options which have quicker payback periods, the two year term allows businesses enough time to see the return generated by the funding (eg. Hiring engineers, expanding product lines, increasing inventory, increasing marketing, etc.).

Commentary

I particularly like that Corl's platform removes the bias from funding decisions as whether you're funded or not is based solely on your on data. This has led their portfolio to include a higher percentage of women and minority owned businesses than most venture capital firms. With no personal guarantees or warrants, Corl is an attractive option to either do in conjunction with equity rounds, on its own, or as a bridge round.

A new generation of financing options is here

All of the alternatives on this list are new and interesting options that allow founders to raise capital while maintaining control of their businesses—and more alternatives seem to be hitting the market every day. Rather than being shackled by cookie-cutter financing models, a new generation of entrepreneurs is learning that if you can dream up a new financing structure you can probably make it happen. But more importantly, there seems to be a new emphasis on building real, profitable businesses. I for one believe that’s a good thing that will ultimately result in stronger, more durable businesses.