Raising SaaS Capital? Your User Community Wants In

TL;DR: Building a user community around your SaaS company has enormous benefits for both growth and product development. Bold SaaS founders know this, and are starting to tie their companies to their most loyal users in an even more profound way: by letting them invest. We are in the early stages of a community-based disruption of traditional venture capital.

Great SaaS companies, like great musicians, foster communities of loyal fans. Performers leverage their dedicated fanbases in many ways beyond selling music: to sell out shows, to sell merchandise, to advance their political opinions. SaaS companies do some of that, but they also leverage their communities to learn about their customers.

SaaS companies go to their user communities to understand who their customers are, where they hang out, what problems they have, which product features they value, and how much they are willing to pay. Answers to those questions, and a company’s ability to leverage those answers effectively, is the difference between failure and success.

What’s clear is that if you build a product good enough to form a community around it, there are many ways to benefit from user loyalty. Investors know this too, and founders in this situation likely have multiple funding options when they want to take their company to the next level.

But when you take funding from professional investors and firms, you commit to a plan. They may tell you what to do with your product(s), how to do it, and when to do it. Their money can be a huge help to a company, but it can also destroy it.

And what about the interests of your community? They played an integral role in getting you to this point. They care about you and your product. They’ve been with you since the beginning.

That’s why I am proposing SaaS founders seriously consider a new form of capital raise: Closed Community Crowdfunding (CCC). A CCC is an invitation to your user community to invest in your company.

Product communities are one of your most important growth tools. To use a marketing metric I personally hate but is commonly known, users in your product community have NPS scores of 9 and 10 – they’re your most ardent promoters.   These are the people who show your product to others, who share your vision in idle conversation, who sign others up so that they can share in the experience.

One of the most important principles in product-led growth is customer expansion, which generally takes two forms:

  1. Users who steadily upgrade their plan or increasingly spend on in-app purchases (common in gaming and mobile)
  2. Users and organizations who organically spread the product to friends and colleagues (common with apps that are enhanced by collaboration, such as Slack, Airtable, and Calendly)

We’ll focus on the latter example. Communities are powerful drivers of customer expansion because the social dynamics of being part of a group of like-minded individuals tie them to the product beyond just the product experience. They promote your product because they love it and they love being part of a group who feels the same way. This creates multiple advantages beyond word-of-mouth growth:

  1. Community members will buy new products and features you launch (benefits: customer expansion)
  2. Community members churn less often (benefits: revenue stability, customer expansion)
  3. Community members are more willing to respond to your key product and business questions (benefits: product and GTM strategy)
  4. Community members can be mobilized as a group to make a lot of noise in the marketplace and elsewhere (benefits: guerilla marketing and competitive advantage)

The key takeaway is that these advantages, leveraged separately or in combination, cause a compounding effect on user growth. If every fan recruits 2 normal users and 1 fan, over time your core userbase will experience compound organic growth. To use the oft-quoted Einstein adage: “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it”. In this case, you are paid interest in the form of new users.  

But all of these advantages of user communities are driven by social incentives and the value of your product. What if you gave them the opportunity to become partners in the business? What if you gave them skin the game?

Inviting your power users to invest in your company via a CCC gives them a financial incentive to supercharge their efforts to grow your company. For the first time, they’re paying you interest in user growth, and you’re paying them interest in equity appreciation.

You may now be thinking: “sounds enticing, but has this been done before? The answer is yes, and the perfect example is Roam Research.

Roam is a differentiated notetaking tool that allows users to organize their thoughts in writing in the same way they do in their heads: as a network of connections rather than a linear semantic tree. It’s popular among professionals ranging from tech to academia and journalism. The Roam community loves the product so much that they unite under the same community hashtag: #RoamCult.

The #RoamCult quasi-religious following didn’t form by chance – the Roam team ensures that their followers play an integral role in their roadmap development and strategy. Don’t believe me? Have a close look at their pricing page and tell me whether it looks normal for SaaS:

Roam's Pricing Page

Yes, you read that right. They have a 5-year, $500 pricing plan for “Believers” (read: loyal fans), which notably provides access to calls with the creators themselves. When a plan like that is selling, the users are in for the long haul, and what better way to reward them by inviting them to become partners.

Roam doesn’t need funding – their $9M seed round closed in September 2020 and was led by VC heavyweights Lux Capital and True Ventures, in addition to two of the smartest guys in tech, John and Patrick Collison, founders of Stripe. And yet in April 2021, they decided open up an additional $500,000 round for strictly #RoamCult “Believers” to get in– it was oversubscribed within an hour, ultimately reaching $1.6M in total.

Roam’s CCC round is a proof of concept that loyal communities built around a product can be a viable funding source. They’ve done it on a larger scale where success of their CCC was not a matter of life and death, but there is no reason why this can’t be done with a smaller fanbase. It remains to be seen how the addition of the community members to the cap table will affect the community’s promotion of and participation in Roam’s growth and corporate evolution, but Roam’s CEO seemed to think they’re on the right track when he tweeted: “May have to do full 5M from community for next round”.

There is no question of the value of community building in SaaS. In a world of saturated growth channels, deafening noise, and endless options, user communities are centers of organic growth and invaluable product feedback. As the power of these communities is increasingly recognized by the market, their role in the future of the companies and products they support will grow.

The opportunity presented to SaaS companies by a CCC round is the opportunity to participate in this evolution. But doing so is not without risks. CCC’s will present new challenges in the organization of new funding and in investor relations. Other risks will undoubtedly materialize as well, and there will be failures to balance out the successes.

But here’s the thing: virtually no one is doing CCC rounds, and therein lies the opportunity. What’s the value of being known as the only pre-IPO SaaS company in your market that’s part-owned by their users? What’s the value of a loyal userbase with skin in the game? What’s the value of pioneering a new form of venture capital? The entrepreneurs who dare to cross the threshold of uncertainty will reap the rewards or pay the costs.

I believe that the potential upside far outweighs the potential downside. That’s why I encourage SaaS founders with loyal followings to seriously consider a CCC round as the best path to funding their company, and those who are more skeptical to keep an eye on this trend. New opportunities that capitalize on powerful trends don’t come around often.

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