As a startup founder, I frequently receive questions from friends, family, acquaintances, about how this mysterious fundraising process works. In short, raising venture capital funds is a business deal in which you exchange equity, or a percentage of company ownership, for the capital your business needs to grow, in the form of investment funds.
Rapidly just raised our Seed round in February and now I am currently in the process of raising our Series A in the midst of COVID-19. Rapidly has a distinct business model in which we have two streams of revenue: our SaaS subscription and our marketplace. The distinction between these is highly important when communicating with investors and customers.
SaaS Business Models
A SaaS (software-as-a-service) business model is generally selling a software solution to businesses. Users pay on a monthly basis for the usage of the software, which has a predictable revenue month over month for the length of their contract. This type of business model has high margins of up to 70-90% because it costs very little to replicate the offering. The main overhead cost of the product is paying for the production of software and server time.
Your churn rate helps you understand how many customers are no longer using your product month over month or year over year. If you have low churn numbers, your SaaS contract amounts should be quite steady or could increase over time as your clients grow. For a product with a higher churn rate, you might want to offer more upsells into higher tiers to compensate.
Your payback period helps you understand how quickly your SaaS contract fees pays back your customer acquisition cost (CAC). In an ideal SaaS model, you’re looking for both a low churn rate and a low payback rate, but that can be hard to achieve. A lower CAC and quick payback rate might have a higher churn rate. Some SaaS companies with higher CAC and a longer payback rate might have a very low churn rate.
Marketplace Business Models
In a Marketplace business model, you make money from the revenue take-rate through either buyers or sellers on the platform. This is a percent of the revenue generated in the marketplace, that will come back to your business and contribute to what is known as your gross services revenue.
It’s very important to optimize your take rate so that you always have both buyers and sellers in your marketplace. If your take rate is too high, sellers are gonna try to go around you to get those customers offline, because they don’t want to pay whatever you’re charging them for the acquisition of their customer. If your take rate is too low, you might easily acquire new customers but you’ll never be able to generate enough revenue to sustain the marketplace long-term.
As your company is spending money to acquire both buyers and sellers in the Marketplace, you must balance the budget to acquire both sides and make sure there are enough sellers for the buyers and vice versa. Which side do you see the most value? That’s where you will want to focus your marketing and advertising efforts. Or you may want to add additional products and services to continue to grow revenue without further customer acquisition costs.
Ideally, you want to know how high can you get your take rate and still continue to grow marketplace users? You have to have this magic number and be able to explain how those economics work to any investors.
A Hybrid Business Model
I myself use both SaaS tools and Marketplace offerings in my professional and personal life. As far as pure SaaS solutions go, Team Rapidly subscribes to Mailchimp and LogRocket. As a consumer, I use services with marketplace models every day, such as Doordash, Uber, Amazon, or the App Store.
Rapidly’s own business model comprises a hybrid model with SaaS solution that serves a point solution for tax and accounting firms to connect their other tools in one central dashboard. To get tax and accounting firms using our SaaS platform we have built a marketplace for tax and professionals to grow their practices and get verified and credentialed to best promote themselves online. A well-known example of a hybrid model is Salesforce, in which you sign up for their SaaS software for a flat monthly recurring fee, and they also have a take rate for any add-on purchases in their app integration marketplace.
If you have a SaaS component and marketplace component in your business model, this can be confusing to investors. I’m overcoming the confusion that comes with a hybrid business model by highlighting that we are building a vertical SaaS company, and looking for depth over breadth in the customers and industries we reach. We are looking to embed ourselves within the tax and accounting industry and to reach tax and accounting firms who need our solution. We are not trying to create a Salesforce-type product that has a use case for most industries that rely on their sales function.
Our marketplace function is just a single feature of our various offerings within our chosen vertical, and I make sure to communicate that to investors. Team Rapidly is building out these adjacent services that complement our SaaS functionality and allow us to better serve tax and accounting firms.