Point Nine Land
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Point Nine Land

The Rise of Non “VC compatible” SaaS Companies

Four different types of SaaS companies

  1. Funded SaaS: companies which finance their business with VCs a.k.a equity against money. From early stage startups with no revenue to companies going public with hundreds millions dollars of ARR, the range is extremely wide.
  2. Bootstrapped “scaling” SaaS companies: SaaS companies which manage to pass the $10M ARR threshold without VC money. Ex: Mailchimp or Atlassian (which raise VC money but at a very late stage) have reached the hundreds of millions dollars of ARR without VC money. These “unicorns among unicorns” are very rare.
  3. Bootstrapped SaaS companies: bootstrapped companies which manage to reach the $300k — $10M ARR range without VC money.
  4. Bootstrapped Micro SaaS: “1 to 3” people companies which operate in the $1k — $300k ARR range, without VC money.

Why bootstrapping a SaaS to several million dollars of ARR is an increasingly viable path

The rise of the non “VC compatible” SaaS companies

  • The founders want to bootstrap their business — very often because they have previously worked in VC backed companies and don’t want this model anymore (and being experienced helps tremendously when bootstrapping).
  • The company operates in a crowded category where it’s almost impossible to scale but where it’s possible to run a lean and profitable SaaS business.
  • The company is more a “feature” than a “product” that can be monetized on SaaS platforms (Salesforce, Zapier etc…).
  • The company addresses a “niche” or a very specific need that is not replicable / scalable.
  • The TAM (Total Addressable Market) is not big enough for a VC return but big enough for a very profitable bootstrapped company (read Prasanna K comment for more details).
  • The company has a strong “local” component which is hard to expand.
  • These bootstrapped companies can be equally, or even more, life changing for their founders and employees.
  • Like bootstrapped businesses the vast majority of VC backed companies won’t scale to tens of millions dollars ARR.
  • Growing a bootstrapped or a VC backed company is equally hard. But for different reasons.

Some words on “VC Compatible”

Consequences

  • VCs must be aware that they’ll see an increasing number of non “VC compatible” companies in their deal flow.
  • Founders must increasingly be aware that going the VC way might not be the best solution for them and that bootstrapping 100% or finding alternative ways of financing their company can be healthier.
  • The line between VC compatible and non VC compatible companies can be blurry and even change over time.
  • There’s currently a clear gap in early stage financing for these “non VC compatible” SaaS and this is why we’re witnessing the multiplication of debt / cash flow / crowdsourcing based financing vehicles and also of startup studios / specialized funds that build portfolio of lean SaaS companies.

A “VC Compatible” checklist

About your aspirations:

  • Is your aim to build and scale a very fast growing company at the cost of giving up some control along the way? (a.k.a speed versus control)
  • Or do you value more building a company which might not be as fast growing but which destiny is controlled 100% by you and your other co-founders?
  • Are you sufficiently aware of what it means to work with VCs?
  • If yes, are you ready for the constraints and benefits it implies?
  • If no, do reference calls with VC backed founders first.

About your business:

  • Is your SaaS a feature or a product?
  • Can you monetize quickly your first users with an early version of your product?
  • Do you need a lot of capital up front to build the first version of your product? (ex: heavy tech)
  • Do you need a lot of capital up front to acquire your first customers? E.g: you target the enterprise segment from day one or you need first to educate your market.
  • Is your product in a crowded category and if yes, do you have an unfair advantage to break out at scale? (The unfair advantage can be on the tech or distribution side).
  • If you’re a niche product can you expand to other problems / bigger markets?

Conclusion

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