Bootstrapping in SaaS? It Works. But Add ~4 Years to the IPO Timeline.

Bootstrapping in SaaS it isn’t that hard, per se.  It happens all the time.

Companies like Atlassian and Qualtrics have cruised past nine-figures in ARR (and IPO’d in the case of Atlassian) without needing any venture capital.

Take a look at our great deep-dive discussion with Ryan Smith, CEO of Qualtrics here:

There are generally a handful of common characteristics though that make Bootstrapping to Scale work in SaaS:

  • First, it takes much longer, usually, to get to to Initial Scale ($10m ARR). Usually 4 years longer when you are bootstrapping. THEN, after $10m, bootstrapped SaaS companies seem to basically scale at the same rate as their venture-backed peers. This makes sense. At $10m ARR, you can begin to aggressively fund hiring just out of your incoming cash flow. Much earlier than that though, and you’ll be capital constrained on aggressive hiring.  You’ll hire much, much, much more slowly than your venture-backed peers until $10m-$20m ARR or so.  Especially in the earliest days.

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  • Second, usually, bootstrapped SaaS companies start at the bottom of the market (SMBs and silos-in-the-enterprise). It’s not that six figure deals are more expensive to close … they aren’t. But the sales cycles are longer, and generally, you need more experienced sales and marketing talent to acquire and close these deals. So usually you have to start at “the bottom” of the market and slowly go upmarket.
  • Third, it’s important to be in a segment where competition can’t kill you. Because it will take you 4 years >longer< to get to $10m ARR, it’s important to be in a market segment where direct competition is weak. This doesn’t mean it isn’t there.  It just means that in your sweet spot of deals … you usually win. If you are competing head on with 3 other super-talented start-ups with $10m in venture capital doing the same thing, and your win rate is low, and you aren’t at $1m in ARR yet … odds are, you lose. You have to do something not just different, but sufficiently different that you can withstand competition until you are big enough to stand on your own two feet.
  • Fourth, you need a capital-efficient way to hire your dev team. Engineers in the Bay Area are incredibly expensive. 2x more than London or Paris. If you need 5 Bay Area ex-Google engineers to get your start-up going, it will be close to impossible without capital. Atlassian was started in Australia. Qualtrics in Utah. Etc. etc. Perhaps not a coincidence.

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Again, the #1 more important thing to understand in SaaS is you can totally do it without external funding. It will be HARD. But so is everything. But you need to budget an extra 2 years to get to Initial Traction ($1.5m or so in ARR), and then, an extra 2 years to get to Initial Scale ($10m in ARR or so).  Both stages will likely take longer.  Because you’ll grow more slowly.  It will take longer until you can afford the first few sales reps.  Longer to afford your first VP of Sales.  Longer until you have enough money to hire a VP of Marketing and afford a few marketing experiments.  Longer until you can hire enough engineers to close key feature gaps.

And also — the choice isn’t always so binary.  Many successful SaaS start-ups bootstrap to $1m in ARR or so, and then raise their first external capital to grow faster.  That still adds time to the journey.  But it lets you skip the dilution associated with a seed round.  Not the worst strategy in the world.

Published on July 19, 2016

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