Ask HN: How to raise 10M for a SaaS product?

[qaq]

The market structure an obsolete leader (lead time for highly requested features literally 6-10 years)owns close to 50% of the market. There is a large number of competitors literally none offer capabilities that would allow F500 company to switch from market leader to their offering. Building up a competitive offering would take a few years and a 10M round. This does not fit normal VC deal structure. How could one look for capital? (market size is about 6 billion)

[trcollinson]

So you already hit the nail on the head. You say "This does not fit normal VC deal structure." That generally means you are going to have to create a whole new funding market to get that 10MM you are looking for. The important part is why.

The reason this doesn't work for VCs is because their model works and works well. They want enough risk to allow for a substantial level of potential upside, with a reduced amount of time (and therefore risk) to see results. So basically they are fine with relatively small amounts of money going into relatively small SaaS products as long as those products have some users, some revenue, and a path to higher profitability.

You are asking for a relatively large sum of money, for a very high risk project. Your project is high risk because it has absolutely zero customers, a long lead time for any sort of results, and has an absolutely giant competitor that owns a massive market segment. With zero customers, we have no idea how long it will take you to get to any sort of profitability. With no product built and with a long lead time to build any sort of product we don't know if you'll really build the right thing to get to profitability (and, neither do you, even if you think you do). Finally, you admit you have a giant competitor that owns the market. You can get past that but it will be potentially really costly and risky.

At the VC I work with, there wouldn't be a lot of interest in any of that. It's not because you don't have a good idea. It's also not because you aren't right that there is a market there and that you might be able to take it over. Those are all true and I believe you. The problem is $10MM is a lot of money and can be used in numerous other potential investments which have less risk and could do quite well.

So what should you do? If you really want to do it, I would look at how Elon Musk built SpaceX and Tesla. First, come up with another idea, make that successful, make quite a bit of money, then fund this project with your own money and the money of the people you gain new relationships with. This might sound silly but it's really not. If you can build this company, first build one that is less lucrative but still successful, then build this one. It happens more often than you think.

[gt2]

Make an MVP that has some of the capabilities you mention, and build a small loyal audience that pays, either with eyeballs/time spent on the app or actual dollars. If you have a smidgen of that, and a team of 1 or more capable people, you can then approach people for funding which would be needed to scale your product out to more users and more capabilities (iterating). How you do it is simple, you show your product, user base, yourself, and your vision to anyone who will listen. And then take the amount needed to make it happen (could be less than the 10M figure you mentioned, actually wondering where you go that number from). Good luck!

[qaq → gt2]

I would 100% agree with you there are literally like 100 offerings that lack features that you absolutely will not be able to do as MVP as in enterprise grade workflow engine with visual editor etc. There no lack of competitors on the low end of things and there is literally 0 competitors on the high end of things. So there is no business case in trying to compete on the low end there is very good case for the high end offering but it literally does not fit the regular VC deal structure.

[gt2 → qaq]

I really don't agree, and think you are misguided by the high end/low end characterizations, although I can see where you are coming from. You think that if something was enterprise grade, etc. and had all the features people would switch. You could be right, but

a) you really need to check out some case studies about things like this because people absolutely do not shift to a "better" or even "more complete" product. There is a thing such as lock-in and it's caused by many factors, some of which the user don't even have control over and

b) Consider that people using the other offerings could use your simple less complete offering but which has that 1 killer item (and a couple more as time goes on and you add them slowly). I have seen it many times and I'm sure you have too -- users keep using Photoshop but use that other editor for something special. Or use Office but use some other tool for their specialized offering.

I really think this is the way to go to a) have success and b) even get funding. It's incredibly difficult/rare, even for a team of multiple highly proven individuals, to get that kind of funding and green light to go do a waterfall project based on your hunch that everyone will switch if something just existed.

[qaq → gt2]

I know not going into specifics is making this sound a bit stupid but again "high end" is not a marketing term in this case there is a minimal set of features that would enable a F500 company to switch there is litterly close to a 100 low end offerings that are useless for the f500 use case and no matter how cute they are they not going to make a dent. The cool thing this is targeted at super technical people who absolutely hate the status quo and truly would love an alternative, but that alternative has to support their use case.

[hluska → qaq]

A reasonable founder would have to ask why nobody will compete on 'high end' features. Maybe they're much more difficult to build, perhaps there is an incredible amount of vendor lock in, or perhaps nobody really cares about these 'high end' features...

[qaq → hluska]

I agree all very reasonable questions but going back to original ASK HN. It's obvious there are instances where developing MVP takes a significant amount of resources what are the avenues for financing such a project.

[hluska → qaq]

I've noticed that you really like this idea. That's good - you'll need passion. But, I'm concerned that you have so much passion that you've convinced yourself that if you build a high end product, you'll get customers.

There are a lot of very smart people out there and $10m isn't too much for an experienced founder to raise. If this market is so big and frothy that you can name hundreds of low end competitors, someone would be competing at the high end. Why isn't anyone??

Once you can answer that, you'll know what kinds of avenues are available to finance it.

Sometimes, high end variants look seductive because there's no competition. But, there's no competition because margins are too low to support the high end product. Other times, there is no competition because sales cycles are measured in years and nobody can stay alive long enough to get to yes. Other times, there is no competition because you have genuine insight that gives you a severe competitive advantage.

Those 'choices' point towards three financing options. The first one, if margins aren't high enough to pay for the damned thing, you're starting a non profit, so it's time to look for grants, patreon, etc. The second one, where sales cycles are too long, is a great use case for crowdfunding. And the third one sounds like a deal that VCs would get in on (if you have the background/communications skills).

On the other hand, if you can't figure that out, or if you keep coming back to no financing, you might be looking at a bad idea...

[qaq → hluska]

1) I like the idea because I am on the receiving end of the pain as a user

2) There are fundamental reasons why you can make a better product and the leader can not respond (would be too long trying to outline why here)

3) This product is used by eng. daily most startups in this space are by software eng. and try to address the pain points for eng. and not for managers.

4) The leader product can not be used by F500 customer (managers) without a number of 3d party addons (which can and should be part of core functionality)

5) without going into specifics imaging SAP ERP system that was built from quickbooks e.g. fundamental mismatch between original arch. and what was bolted on over the years.

[noahc → qaq]

You've already answered your question. Be someone that does non-f500 for a decade, then slowly introduce the f500 features and in a decade you'll be where you want to be.

[wumpus]

I've been a founder twice at startups that raised a lot of VC and the MVP was big. The only reason we did it is because we had experience as founders, and the MVP really was big (a chip once, a web-scale search engine the second time).

[danieltillett]

You can’t really unless you have done it before in which case you would not be asking here as you would already have the network that would give you the money.

There are a few ways you could manage this.

1. Find a single rich individual who will back you. This is not going to be easy, but it is possible.

2. Raise less and move the development team to a low cost country. A tight team of a half a dozen smart people can get a lot done if they have time on their side.

3. Work on something else first, sell, and try when you have money and credibility.

[marktangotango]

There tons of examples that fit this description. Financial record keeping (401k, mutual funds, etc), medical insurance claims processing are some. The market is large, legacy providers and their legacy systems are complex, featureful, and entrenched. These can be very very difficult markets to break into. The sales cycles are years long and conversion cost high. I’ve heard numbers like 20k to 40k hours to convert on to new providers.

Does you pitch take all this into account as well, not just the tech?