Bootstrap VS VC-backed for SaaS

As a SaaS entrepreneur, making critical decisions on your business model can be difficult. At the core of it lies the choice between bootstrapping and securing venture capital (VC) backing.

Bootstrapped start-ups rely on self-funding and organic growth, while VC-backed start-ups seek external investment to fuel rapid expansion. Each model presents distinct advantages and challenges, shaping the trajectory and values of the company. It all depends on your circumstances and your goals.

This article is a compass, guiding you through the fundamental business choice of growing as a bootstrapped or seeking VC backing. By examining the pros and cons of each approach, we illuminate the essential considerations at every stage of your business journey based on start-up CEOs and founders’ accounts. 

Whether you’re charting your course from the inception of your SaaS venture or contemplating a strategic pivot, understanding the implications of these models is essential for informed decision-making and sustainable growth.

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VC-backed businesses and hyper-growth 

Funding and rapid growth

VC backing can propel your SaaS ventures into hyper-growth, fueling rapid expansion and market dominance.

The infusion of funds isn’t merely financial; it catalyzes accelerated development and aggressive scaling. As Benjamin Cahen, CEO of Wisepops, notes, ‘When you raise funds, you get a lot of money in your bank account. And with this comes a natural tendency to want everything done right away. Shareholders expect you to deliver results – fast.’

This financial support empowers founders to prioritize critical initiatives without the constraints of limited resources. For Intalayer, VC funding provided the necessary capital for its inception and ongoing operations, enabling founders Michael Wendland and Ian Glass to channel their focus into product development and strategic growth initiatives.

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Resources

In addition to financial backing, VC-funded start-ups benefit from an array of resources that can accelerate their trajectory towards success.

For instance, Michael and Ian from Intalayer highlight the invaluable access to a network of mentors, experts, and fellow start-ups within the program, providing a wealth of support and guidance. This network not only offers mentorship but also

serves as a link for connecting with potential customers and strategic partners, facilitating crucial relationships to drive business growth.

As Rob Walling, co-founder of MicroConf and investor in more than 150 companies, emphasizes, the involvement of VCs goes beyond mere financial investment; it entails personalized monitoring, strategic guidance, and invaluable advice, ensuring that start-ups remain on course for sustained growth and market leadership. And that is why VC funding serves as a stamp of validation for the business idea and its market potential, bolstering credibility and confidence in the eyes of stakeholders.

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Challenges related to VC funding

High expectations and pressure

VC funding pushes SaaS start-ups into a realm of very high expectations and pressure for rapid growth.

Jeff Rinvelt, Partner at Renaissance Venture Capital, underscores this reality, stating that VCs seek products with the potential for explosive scalability, often expecting double or even triple-digit growth rates. This continuous pursuit of growth is coupled with the imperative of providing exit points for investors, intensifying the pressure on founders to meet milestones and deliver substantial returns or face the abandonment of their investors.

Benjamin Cahen’s experience with his first venture before becoming CEO at Wisepops underscores the weight of these expectations as founders navigate the demands of meeting rigorous business metrics and exit strategies while grappling with the risk of under-delivering on promises made to investors. The dependency on external capital demands excessive time and resources dedicated to investor relations, diverting attention from core business operations and making startups vulnerable to market fluctuations.

Moreover, accepting VC funding comes with a trade-off, as founders may experience dilution of ownership and a sense of disconnection from their company’s vision and direction. This loss of autonomy can lead to lousy founder-investor relationships and compromise the start-up’s long-term viability, as noted by Benjamin Cahen and the co-founders of Intalayer, Michael and Ian.

For Rob Walling in his podcast, the VC model is ‘the idea with VC is that it is a high risk and high growth, and they want you to put the pedal to the metal and to go big or to go home’ inherently high-risk and high-pressure, demanding founders to go all-in on achieving exponential growth or risk being sidelined. VCs are notably often disinclined to invest in SaaS with modest lifestyle goals, as Rob puts it. 

Risk of failure

The allure of VC funding comes with a commensurate risk of failure as startups navigate high burn rates and aggressive spending to sustain rapid growth. 

As highlighted by Rob Walling, the VC investment world is fundamentally competitive and linked to entrepreneurs’ fear of failure. Only 1 out of 10 companies is expected to achieve astronomical success – the ‘billion-dollar unicorns’ – while the majority are expected to fail. 

This stark reality underscores the fragile nature of VC-backed ventures, as they can be very strongly impacted by market fluctuations, changes in customer behavior or internal disputes amidst the relentless pressure to scale at breakneck speed. In this environment, even VC-backed start-ups are not immune to failure, which underlines the risks of pursuing hyper-growth.

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Bootstrapped businesses and healthy growth 

Long-term stability

Bootstrapped ventures prioritize wise growth investment and meticulous expense monitoring to foster long-term stability and savings.

Benjamin Cahen’s journey exemplifies these values. He achieved $1 million in annual revenue within five years without initially resorting to external funding or hiring employees, notably because of its good product-market fit and large network to gain clients.

As Benjamin highlights, not having external funds means we pay attention to what we spend money on and use it wisely for long-term growth: ‘When you have no funds, you only pay for what’s critical. Period.’ This careful management helps his business stay solid and stable, protecting it from the ups and downs of relying on outside money.

Avoiding high burn rates is a factor that could help you build your company on stable and long-lasting grounds.

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Freedom over your business

Bootstrapping allows entrepreneurs complete independence and control over their ventures. Benjamin Cahen’s decision to avoid seeking external investors demonstrates his commitment to independence, allowing him to steer his course without investor reporting or predetermined business plans: ‘Zero investors. No reporting, no business plan. I needed a vision and a roadmap; that was enough.’

Similarly, Rob Walling praises the virtues of complete control, emphasizing the freedom to determine the company’s fate, whether it entails perpetual ownership or strategic divestment.

Financial independence is a cornerstone of bootstrapping, as highlighted by Anna Stafford, Director and founder at AI Accounts. It enables entrepreneurs to keep complete ownership and control over their businesses by leveraging personal savings or operational revenues for growth. This autonomy extends to product development and strategic flexibility, empowering founders like Michał Sadowski, Founder and CEO of Brand24, to innovate and adapt to market dynamics without the pressure and constraints of meeting investor expectations. 

In essence, bootstrapped start-ups thrive on autonomy, self-reliance, and strategic agility, laying the groundwork for sustainable growth and enduring success.

Challenges of being bootstrapped

Limited resources

Being bootstrapped usually means facing limited resources. Benjamin Cahen’s experience reflects this struggle as he dealt with the demands of his startup alongside having a full-time job to ensure financial stability. Balancing multiple responsibilities is an inherent challenge of launching and sustaining a business without external funding.

Additionally, the absence of financial backing or networks can hinder client acquisition efforts, as highlighted by Michał Sadowski, who initially relied on cold outreach to secure his first 300 clients, a process further complicated by geographical limitations.

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Slower growth

Additionally, bootstrapped businesses are stigmatized by limited recognition and slower growth trajectories. Benjamin Cahen overcame this stigma by very quickly gaining traction and credibility in competitive markets with Wisepops.

Similarly, the startup’s lack of financial backing translates to reduced visibility and prestige, which impacts its ability to inspire confidence in prospective users. As Michael Wendland and Ian Glass noted, being perceived as an unknown entity diminishes trust and confidence among target customers: ‘As an unknown entity, your target customers will have low confidence in your ability to change their lives.’

What’s essential as a bootstrapped vs. VC-backed business?

Bootstrapped businesses’ focus

Bootstrapped ventures should prioritize revenue generation and customer-centricity.

Anna Stafford underscores the significance of prioritizing customer experience over marketing expenses, as exemplified by Calendly’s success in building a product that garners user loyalty through their exceptional user experiences. Similarly, for Michał Sadowski, Brand24’s emphasis on providing excellent customer service with limited resources has resulted in heightened customer retention rates, showcasing the pivotal role of customer-centricity in bootstrapped ventures.

Toinon Georget, CEO at Waalaxy, believes that you should try to maximize your margin, i.e., the percentage of profit you make on each sale. Maximizing margins as a bootstrapped SaaS ensures financial sustainability and reinvestment in growth areas like product development and marketing. It also enhances competitiveness, attracts potential investors, and maintains operational independence.

Also, bootstrapped CEOs like Benjamin Cahen advocate for a minimalist approach, prioritizing critical tasks and making efficient saving decisions. Toinon from Waalaxy echoes this and emphasizes the importance of maximizing profit margins in bootstrap. This focus on profitability and efficiency enables bootstrapped businesses to succeed quickly despite resource constraints, fostering sustainable growth and resilience.

VC-backed businesses’ focus

In contrast, VC-backed start-ups pivot towards maximizing revenue growth and market expansion.

Toinon emphasizes scaling revenue rather than optimizing profit margins in VC-backed ventures. This strategic shift is underscored by MailChimp’s success, where founders Ben Chestnut and Dan Kurzius capitalized on an attractive product proposition and innovation to attract substantial investment.

For VC-backed CEOs, fundraising and investor relations become very important. Transparent communication and delivery on financial and operational milestones are imperative for investor’s confidence and support. Emeric emphasizes the importance of providing investors with clear insights into your business’s growth trajectory and direction to demonstrate your commitment to scalable growth and revenue optimization.

To do so, focusing on key metrics like revenue growth, profitability, and retention will enhance your company’s valuation. Moreover, comparing your growth rate with similar companies can reveal if you’ll get a higher or lower valuation than the average in your peer group.

Finally, funded companies prioritize fast-paced growth by streamlining processes, optimizing workflows, and expanding into new markets. This relentless pursuit of growth necessitates a strong focus on maximizing productivity, minimizing costs, and capitalizing on market opportunities to accelerate revenue generation and expansion.
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Growth rates and valuations

Growth comparisons in SaaS are only meaningful among similarly sized businesses. A 30% growth rate for a $5 million ARR company is below the median, while the same rate for a $20 million ARR company is above the median, leading to different valuations.

In 2023, the overall median growth rate for private SaaS companies was 35%, down from 40% in 2021. Despite the slowdown, most companies posted positive growth in 2022.

Equity-backed SaaS companies generally report higher growth rates than bootstrapped ones, though the gap has narrowed. VC aims to accelerate growth, but the difference in growth rates is often due to the companies’ pre-existing performance. 

While VC funding can boost product development and acquisitions, it doesn’t always guarantee a significant change in growth trajectory.

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VCs’ perspective is evolving

As noted by Emeric Ernoult, CEO at Agorapulse, VCs’ perspectives have evolved.

Emeric highlights a notable shift in VC priorities between 2021 and 2024 regarding what’s important for both VC-backed and bootstrapped businesses. In the past, VCs primarily focused on growth, often overlooking profitability and prioritizing expansion regardless of healthiness. However, by 2024, this approach has changed. VCs no longer advocate for growth at all costs; instead, they recognise the importance of healthy and sustainable growth trajectories.

According to him, this shift signifies a broader trend within the VC landscape, with a potential return to growth-oriented strategies around 2025–2026, depending on economic conditions. While VCs inherently prioritize growth, they are becoming more discerning, balancing growth objectives with financial health and sustainability considerations.

On the other hand, bootstrapped businesses have always prioritized health and profitability, as they lack the safety net of external funding. Today, bootstrapped and VC-backed align their strategies towards healthy and careful growth, regularly monitoring cash positions to ensure prudent cash flow management. For self-funded companies, profitability is not just a goal but a lifeline, essential for their survival and long-term success. As such, they remain vigilant and obsessed with maintaining profitability amidst growth endeavors.

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The choice of seeking funding or pushing your self-funded company to success resides in your goals and characteristics.

VC-backed startups benefit from external capital, fueling rapid expansion, but they face high expectations and the risk of ownership dilution. Conversely, bootstrapped ventures prioritize autonomy, revenue generation, and profitability, forging long-term stability and resilience despite resource constraints and slower growth.

As the SaaS landscape evolves, the VC perspective is changing, recognising the importance of healthy and sustainable growth. Whether bootstrapped or VC-backed, prudent cash flow management and profitability emphasize a shared commitment to building long-lasting businesses.

Ultimately, by understanding each approach’s implications and comparing them with your aspirations, you can chart a course towards informed decision-making and sustainable growth.