Source: Clement Vouillon, Point 9 Capital
Since I wrote “The Rise of Non “VC compatible” SaaS Companies” I’ve been in touch with many bootstrapped founders, brokers or SaaS acquirers and I’ve followed the development of the space by reading articles and listening to podcasts.
The following post is a summary of what I saw evolving the past 24 to 36 months and some implications for the near future. I’ve structured my observations around the four stages of a startup lifecycle:
- Starting a bootstrapped SaaS.
- Running a bootstrapped SaaS.
- Financing a bootstrapped SaaS.
- Selling a bootstrapped SaaS.
Why do you, as a VC, even care about this topic?
Because we are witnessing some significant changes in our industry (increasing number of saturated software categories, the rise of non-VC compatible SaaS, saturation of several traditional distribution channels) which impact the overall market and how we assess early-stage companies. It’s our job to understand these changes and to share our thoughts with the community.
1- Starting: an explosion of resources and a maturing community
What has changed in the past months?
The main aspects which have changed the past 24 to 36 months are definitely the maturation of the community and the explosion of resources and events around that topic. Whether it’s blog posts, Slack/email groups, forums, newsletters, events or podcasts, more and more people talk about how to start and run a bootstrap SaaS. The community is now quite structured and stronger.
The “VC backed” approach was more documented than its “doppelganger”, a.k.a the bootstrapped approach, and even if some people, like the folks at Basecamp, have been promoting it for years, it was still somehow perceived as a less prestigious path. But it’s changing as the SaaS industry is maturing and as an increasing number of “role models” are emerging.
I also meet an increasing number of ambitious early-stage SaaS founders who explain that they don’t want to raise money with VCs (not too early at least) and have a clear plan to go to profitability asap. It was not the case a couple of years ago.
What are some implications for the near future?
A positive implication is that this “inferiority complex” is fading away. Starting a business and going the bootstrapped way is not perceived as a lack of ambition anymore (it’s sometimes quite the opposite) and founders don’t hesitate to be vocal about it. Not only this explosion of resources makes it easier to start such an adventure, but it also becomes “sexier” to do so.
That said, a potential danger of this situation is that it’s attracting an increasing number of people who have “no clue” about SaaS and who think it’ll be a smooth ride. The majority of bootstrapped SaaS founders I was speaking to a year ago were either developers or former employees of SaaS companies. The majority knew that starting a SaaS business was not easy and they knew on what to focus (PM-Fit and relevant metrics).
Now that the community is growing I meet more people who want to start a SaaS because they read a blog post or heard a podcast about a founder who left his job, built a SaaS and is now traveling the world and drinking Pina Coladas while its product generates $10k per month.
The truth is, SaaS is hard. I expect an increasing number of people joining the trend, but as they underestimate the difficulty to succeed, we’ll see more disappointment and frustration.
2- Running: the rise of copycats
What has changed in the past months?
I’ve seen more awesome bootstrapped SaaS businesses emerging, and an increasing number of them share their story publicly, which will lead to the rise of copycats.
What are some implications for the near future?
Sharing founders’ knowledge and successes publicly is a good thing, overall, for the ecosystem. However, the downside risk is that it’ll also attract people who like to take shortcuts.
Hence the rise of the bootstrapped SaaS copycats. Getting to product market fit is still extremely hard, this is why some people prefer not to take this risk and simply copy a concept that was proven to work.
And discovering successful bootstrapped startups is easier since there are plenty forums, online groups, and podcast covering them. The problem is that many of these businesses are run by small teams and have only a nascent brand in their niche, they are not as defensible as bigger companies and are potentially more vulnerable to copycats.
My prediction is that we’ll see more and more of these copycats and it will make running a bootstrapped SaaS business much riskier. We’ve already seen it happening for “VC backed” companies and the bootstrapped SaaS community will need to figure out how to deal with that.
3- Financing: more debt financing
What has changed in the past months?
As the SaaS market is maturing, the number of saturated software categories, like Martech, is increasing. However, in such environments smaller and leaner bootstrapped companies can still strive.
These companies very often need some cash upfront to finance their cash flow or their growth. Hence the rise of alternatives “debt based“ financing players that we’ve witnessed the past years( ex: SaaS Capital).
To be honest, I saw a couple more players appearing in the space the past year, but I cannot say it was an explosion. What’s evolving is their model and their approach of the market.
What are some implications for the near future?
I think these alternatives debt financing players will gain in importance in the bootstrapped SaaS space:
- They’ll inject more capital.
- They’ll refine their model based on the results they get, so I expect new financing models to emerge.
- Their overall market will get bigger (more opportunities to invest).
- They’ll promote their services much more aggressively to founders (it’s already the case).
- More “non SaaS first” debt financing providers will add SaaS to their offer.
To which levels and at which pace? It’s hard to say, but I expect more a “linear growth” type of trend rather than something as crazy as the ICO explosion / madness.
Another interesting aspect is that we’ll probably see more companies skipping the early stage financing round with VCs, bootstrap to a couple hundreds of thousands or millions dollars of MRR and then decide to either raise big time with VCs or to keep bootstrapping.
4- Selling: An increasing number of acquirers
What has changed in the past months?
Out of the four elements I’ve listed in this post, the “exit” aspect is probably the one that I’ve seen evolving the most the past 12 to 18 months. After I wrote my post on non-VC compatible SaaS, quite a few people who are in the business of acquiring SaaS contacted me.
But who wants to acquire bootstrapped SaaS and for which reasons?
- Other SaaS (or non-SaaS) companies which buy startups to acquire talents, new features for their product or want to expand into new markets.
- Brokers: they don’t really buy SaaS themselves but are instead intermediaries between founders and the final acquirer. They source deals and help the different parties conclude the transaction.
- “Specialized funds” & Private Equity firms that buy profitable (or near profitable) SaaS companies to create a portfolio for which they can pool resources, e.g. technology infrastructure, marketing & sales, and make them grow.
Over the past months I’ve discussed with an increasing number of these “specialized” funds and what’s interesting is that each has its particular approach and model. Many are still in an exploring mode and are figuring out how to manage a portfolio of profitable SaaS companies.
What are some implications for the near future?
I think we’ll see an increasing number of exits in the bootstrapped SaaS space.
First because in many cases it makes sense for founders to sell their bootstrapped business. Tyler Tringas explains it well in “Selling My Bootstrapped SaaS Business”: from financial incentives to the desire of starting something new, many of these founders don’t want to spend ten years working on the same project.
Second because if a wave of copycats is coming it’ll make sense for many founders to sell before they struggle with too much competition (opportunistic sales).
Third because more and more bootstrapped SaaS manage to reach the $5M?—?$10M ARR threshold and it makes them good acquisition targets for Private Equity firms or bigger SaaS companies. This is especially true for saturated software categories where incumbents buy other companies to diversify their offer and expand to new markets. See for example BuzzSumo which got acquired by Brandwatch.
Fourth because the “profitable SaaS portfolio” approach seems to be hot at the moment, so I expect more “specialized funds” to emerge or existing startup studios trying this approach.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.
