While getting VC funding has long been touted as the ultimate goal — and a mark of pride — for tech startups, founders are increasingly skeptical that this is the best (or at least only) way to grow a company. VC firms are notoriously grabby — entrepreneurs trade a substantial ownership stake of their companies for access to VC largesse.
A Shift Toward Bootstrapping
More and more SaaS founders are recognizing that bootstrapping their company to a certain degree is not only possible but may even be the best way to get a head start. And some companies are simply a hard sell for venture capital, so a bootstrapping strategy may be their most realistic option.
What is bootstrapping in finance?
In short, bootstrapping is a financing strategy for startups in which the company is funded with little to no venture capital or outside investment. Instead, personal finances or operating revenues of the company are used to generate growth. Bootstrapping involves starting a company with little to no assets, which obviously can be extremely difficult, and is exactly why, traditionally speaking, most startups seek to raise seed money or a Series A round first.
Why are so many SaaS startups bootstrapping?
This shift is taking place in part because bootstrapping, especially in SaaS, has become easier for a number of reasons, and VC funding is too difficult for various types of companies to acquire. One of the most significant influencing factors is the relevant ease and cost of developing a new SaaS product compared to that of acquiring VC funding.
With the whole world becoming increasingly more digital, it’s become easier and more affordable to develop new software-based tools and apps than ever before. Not to mention, everyone currently in their 20’s and 30’s were all raised in the digital age of computers, and finding competent, if not highly experienced developers is not only easier than ever before but more affordable as well.
Finally, the market for SaaS products is larger than ever and consumers are more tech savvy than ever, which means your product is a more viable solution for more people than it would have been in the past.
Clement Vouillon of Berlin’s Point Nine Capital argues that it is increasingly possible to bootstrap a SaaS company to between $300K and $10M ARR due to:
A growing receptive market for SaaS products,
The increasing ease and low cost of building and distributing SaaS products; and
Widely available advice from people who have gone this route before.
Many founders are starting their second or third (or fourth) company; they are more likely to be experienced, both with venture capital and with founding startups, which can help them to see the drawbacks of VC as well as the benefits to bootstrapping.
What makes a startup ‘non-VC-compatible’?
A determination to bootstrap is one of the key elements that makes a SaaS company what Vouillon refers to as “non-VC-compatible.” He calls the increase in companies that fall into this category a “growing trend” and discusses various other reasons companies may not be a good match for VC:
The company is in a crowded category where scaling isn’t really an option, but where one can run a profitable SaaS business of a certain size indefinitely.
The company makes a tool that functions more as a feature that can be monetized on SaaS platforms like Salesforce or Zapier instead of as a product in its own right.
The company’s product or service is targeted to a narrow niche and isn’t able to scale or broaden into a wide market.
The company’s total addressable market is too small to allow for scale that will create the returns VCs are looking for but can sustain a bootstrapped company.
The company is strongly targeted to a local market in a way that makes it hard to scale.
The companies that fall into the “non-VC-compatible” category will find it very difficult to scale past tens or hundreds of thousands of dollars of MRR. Most will grow more slowly as they get larger and will be hard pressed to scale to $1 million MRR. Some will be able to gradually reach $10 million ARR, but getting beyond that may be a huge challenge without VC funding.
The good news is that smaller and slower growth isn’t necessarily something to be mourned. When you haven’t traded away a large ownership stake to VC firms, you don’t necessarily need VC-level returns. As Lighter Capital customer Chargebee puts it:
“Breaking out of the micro SaaS stage or getting the capital you need to scale past $10M ARR can be a real challenge when VC money isn’t an option. Many companies will never do it (but when they don’t have investors looking for a big exit, that’s fine).”
Is Your SaaS Startup ‘Non-VC-Compatible’?
Are you one of those companies that may do better bootstrapping instead of seeking out VC funding?
Run down this checklist to see if you might be this new breed of self-reliant startup and ask yourself if any of theses describe you:
I prefer bootstrapping my startup and growing slower to acquiring VC funding and pursuing rapid mega growth.
My startup’s offering functions more as a feature than as a product.
My startup is in a category that is too crowded to allow for VC-scale growth.
My startup is too niche to allow for VC-scale growth.
My startup’s total addressable market is too small to allow for VC-scale growth.
My startup is focused too locally to allow for VC-scale growth.
Yes? Then you are likely a “non-VC-compatible” company. Bootstrapping may take you pretty far, but if you need to fund your runway to reach the next level, consider non-dilutive financing, which is often ideal for slower-growing, smaller-scaling startups.