Every B2B SaaS founder is faced with a difficult challenge: how to fund their idea.
Bootstrapping can be used as an alternative approach, and understanding when the right time is to take on investment can be critical to your ultimate success and wealth outcome.
Boot strapping your B2B SaaS company is hard.
High costs for technical, sales and marketing talent typically make the operating expenses much higher than subscription income in those initial stages of growth.
The challenge is therefore to close the gap between operating costs and revenue as fast as possible!
That’s why many B2B SaaS founders turn to venture capitalists for funding assistance as fast as possible.
But often, in my opinion, way too soon.
25% of VC-backed investments go to the moon and succeed...while 75%, unfortunately, fail within 3 years or less. This is a sad but true statistic for startups. There are some correlations between venture-backed startups and the crazy-high failure rate, which is why it’s important for founders to understand both sides of this decision-making process before they move forward in order increase chances of creating long term success.
When I sold my SaaS company, I was the sole shareholder at the time of exit (after 15 years) because I’d boot-strapped the entire way and never took outside money.
I grew slower than some of my competitors, however I was profitable within 3 months of inception and was able to control 100% of the cap table through to exit.
And whilst I was extremely happy with my net outcome, being fortunate to never having to worry about money for the rest of my life; plus become an active investor myself; I honestly don’t know what the outcome would have looked like, if I had of taken on funding.
There are of obviously many ‘uber-successful’ founders that take on funding; and exit extremely successfully, so there’s no perfect answer on when to raise money.
But In my opinion, too many founders raise too early, and give up too much equity too quickly.
Often they don’t learn how to be super-efficient with capital, and don’t put the right disciplines in place to survive one of the toughest sports in the world.
Due to the VC investment cycles, where Limited Partners need to see a return on their investment inside a defined period; well-funded companies often:
These scenarios can correlate to that 75% failure rate of venture-backed start-ups.
Think about this scenario.
Lets say you can bootstrap your way to $2M annual recurring revenue.
If you grow at 45% each year for two years, then grow at 35% for another 6-7 years; you should end up at about $30M ARR.
You’re now a perfect target for Private Equity buy out or acquisition by another global leader.
At a conservative 6X multiple, you’ll be valued at $180M +
If you haven’t given away too much equity, you’re exit can make you extremely wealthy.
However, if you’d raised $150M along the way, your exit doesn’t look so exciting anymore!
There are many successful B2B SaaS companies that have managed to build their businesses without relying on external investment to fuel their early growth.
Basecamp, a project management software has a loyal following of users and the company never took any outside funding during their startup phase. Despite this, Basecamp has been profitable for years and has continued to grow steadily.
Atlassian is a massively successful B2B SaaS company that bootstrapped for years. Atlassian has grown into a multi-billion-dollar company. Atlassian's products, including Jira and Confluence, are used by thousands of companies worldwide.
FreshBooks is another example of a successful B2B SaaS company that didn’t originally raise funding. FreshBooks provides cloud-based accounting software for small businesses. The company has grown rapidly in recent years, and today has over 24 million users worldwide.
Mailchimp, a marketing automation platform, has grown to serve over 15 million customers and also bootstrapped for many years. They’re approaching $1,000,000,000 in ARR, with over 1000 employees.
Others include, BambooHR, a long time bootstrapped HR success story with 500 employees; Cloudinary, approaching $100M ARR; Zoho – a strong leader in CRM with over $300M in ARR and 7000 employees; and Sitecore – a global leader in digital experience management
Each of these companies provides a compelling case for the benefits of building a business without raising external investment too quickly.
By focusing on delivering value to customers rather than on attracting outside capital, these companies have been able to build sustainable, profitable businesses that are well-positioned for long-term success.
They serve as inspirations for other B2B SaaS founders seeking to grow their businesses without the added pressure and constraints of external investment.
Growing a SaaS company profitably without taking investment too early is challenging but achievable.
There are many strategies and disciplines you can follow in the early days that will allow you to scale to successful levels without initially raising venture capital.
I’ve done it myself, as have many other B2B SaaS founders. It’s challenging, but possible.
Focusing on product market fit, customer acquisition, retention, effective monetization strategies, cost control, talent, GTM, sales and marketing and process automation can help SaaS companies to grow and thrive while remaining profitable.
I highly encourage founders to learn how to do more with less, for as long as you can, before raising.
If and when you do take funding, I also recommend carefully choosing a strategic partner, that can add tangible value beyond the cash itself!
Most VC’s just write you a cheque, and then turn the screws. Whereas a strategic partner can provide guidance, mentoring and advisory to help navigate the challenges along your journey.
This can help you beat those odds of failure, by an order of magnitude!