Getting to Initial Scale

Don’t Accidentally Bootstrap Yourself to Death'

Jason Lemkin

Screen shot 2012-12-08 at 4.48.52 PMThere’s a phenomenon, a type of SaaS company, that I think if you are scrappy, if you can make things happen as a founder — that you need to be careful not to become.  

It’s the Bootstrapped-to-Death Start-up.

I’ve known quite a few over the past 7 years, and each and every one is a bit of a slow-motion train wreck disguised as a modest success.

The basic scenario is this:  By Hook or By Crook, after 2-3 years, they get themselves to $1m-$2m, in ARR, with no capital at all, no investors except themselves.

Now if you can get there in 12-18 months, that’s great.  24 months is probably OK, but at the edge for most people.  Or if it’s a semi-mythical lifestyle business, maybe it’s OK.  Or if you are in consumer internet, it might be OK because you don’t have customers or need so many people.

The problem is going too long without capital when you really need it.  You get exhausted:

  • Too many customers to follow up with, without the money to hire a real client success team.
  • You’re doing all the core sales yourself.  Great when you start.  Terrible after 24 mos.
  • You can’t really keep up with the customer-driven side of the roadmap.  It’s great you have customers, but they have needs.  Of course you can’t do it all.  But if you are too scrappy, you may not be able to do enough.  The competition will then kill you.
  • Worst of all: you start to Think Small.  Because you can’t afford to spend an extra nickel, as the years roll on … you abandon the Big Vision, if not nominally, then at least deep inside your psyche.  You’ve thought scrappy for so long, you forget how to do anything else.

Exhaustion sets in.  And this is where the competition kills you.  Because they aren’t so tired, and even if you are ahead of them, they have a fresh perspective, fresh troops, fresh capital.  You will ultimately lose.

I’m all in favor of bootstrapping in SaaS.  In our IPO/Billion Dollar Valuation/Bootstrap Case Study of Eloqua/Marketo/Pardot, the bootstrapped founders at Pardot did the best financially.  But they got to scale relatively quickly – in 24 months.  This is hard in SaaS.

So bootstrapping is great.  But if after 18-24 months of bootstrapping, you can raise venture capital — I would take it, in SaaS at least.  So you don’t exhaust yourself, your team … and your vision … to death.

Bootstrapped cartoon from here.

Published on December 10, 2012
  • Would depend on how much they want venture capital isn’t free. Look at other options if you really believe in your idea. Especially with the global infrastructure available now.

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  • jquave

    Great post, I had an experience with my prior company like this that eventually led to me leaving.

    • Yeah. Unfortunately, I think if you are at one of these companies … you have to leave, no matter how “nice” the working environment might be (and often is).

  • Mark Organ

    Nice post, insightful. Pardot was not the only bootstrapped startup in that space. Eloqua was also. Raised a bit of friends & family money and got profitable on that, for 3.5 years before raising series A.

    The way we got and stayed profitable was to focus on a tight vertical niche, charge high prices and provide a high level of service to justify those prices. We never abandoned the dream of a large, scaling company – so we turned down deals that were out of the zone. We were frugal but spent money where it counted especially in hiring the best possible people. Eventually the financing market returned and we took advantage of it to build scale before new competitors could do it faster.

    So I agree with the authors that a SaaS company, especially an innovator, should take money when it can. Bootstrapped is OK too but a lot more effort needs to be made so that the company can scale, and that means niche-ifying to get as repeatable as possible. Without very repeatable processes the bootstrapped company is screwed. And the lower the prices, the more free stuff provided, the more repeatable the processes need to be.

    – Mark

    • Good to hear from the man that knows! I assumed I got things a lot of things wrong in this case study, but I assumed it was at least directionally correct.

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