There’s been quite a bit of debate on Twitter recently about bootstrapping vs VC funding.
While it’s been an interesting (and often heated) debate, there’s one main problem with it: It presents bootstrapping vs VC funding as a choice that founders make based on their personal desires. As if it’s a 50/50 call.
However, I don’t believe that’s the case. Instead, I think there is a multitude of factors (ranging from product, company, founding team, market, etc.) that largely determine which path is right for you and your software business.
In this article, we’ll look at why the choice of bootstrapping vs VC funding could be the single most important choice you make in your business as well as some of the factors that can help you determine which path is the right one for you.
Why bootstrapping vs VC could be the single most important decision you make
In Moz Founder Rand Fishkin’s brilliantly open and honest book Lost and Founder, he uses an example VC fund called “Scorpio Ventures” to outline some of the fundamentals of how venture capital firms work.
Scorpio Ventures goes out to a series of limited partners (LPs) and pitches their ability to pick great startups. They raise a $400 million fund. Typically, LP’s would expect a 3-4x return on their investment over the course of a decade in order to make it worthwhile and effectively ‘beat the market’ (I.e. get a greater return than the 8-10% annual growth they’d get putting their money into public stocks, bonds, etc). This means that in 10 years’ time, Scorpio has to return about $1.2 billion to its investors in order to be considered successful.
With his new money in the bank, Scorpio comes along and invests in your company, Globex Corporation. They invest $15 million at a $45 million valuation, taking 33% of the company. You use this money and grow like rocketship over the next 5 years.
The next thing you know, industry giant Burns, Inc. offers you a whopping $450 million for the company. As the founder, you’re ecstatic. You stand to make almost $300 million. Enough to buy a waterfront house with a yacht and enjoy the rest of your life with your family & friends.
However, while you’re having the best day of your life, Scorpio Ventures is having its worst.
Although they stand to make about $150 million from the deal (10X their original investment), your company, Globex, was one of their most promising investments, and this amount won’t be anywhere near the $1.2 billion they need to get to in order to deliver the 3X they promised their LPs.
Now you’re in a sticky position: You want to take the money and spend more time with your family, but Scorpio Ventures is pushing you to reject the offer. And because the investment terms give them veto rights over any transaction, you’re now in a position where you’ve built an amazing business, have a huge offer on the table, and want to get out, but can’t.
All because years ago you took VC funding.
While this fable might seem a bit hyperbolic, it’s reflective of how the venture capital business works and shows that taking funding from them could literally be one of the most consequential decisions of your life and career.
4 Factors to consider when choosing to bootstrap or raise
Now that you fully understand the importance of the decision, let’s next look at a few factors you should consider when deciding which path to go down.
There are four key factors to evaluate when choosing to bootstrap or to seek funding, and each has a number of considerations.
1. Market: Size, competition, and maturity
The market you are entering (who you are targeting, existing competition, maturity, etc.) is a key factor in determining whether to bootstrap or not.
Total addressable market
How big is the market opportunity you are going after? Is it big enough that if you were to take a portion of it you could generate tens of millions in revenue? Or is it a small niche market that could likely only generate your business $1-2 million in revenue?
A good example of this is Shaperbase, an order management app for surfboard shapers. Most estimates put the number of surfboard shapers in the world at 1,000-2,000. With a price point that varies from $20-$100 per month, the reality for this business is that even if they were to somehow take 100% of the market, the maximum revenue they could really make is around $1 million ARR.
While this would make a wonderful bootstrapped business with two or three employees, it’s not going to be compatible with the business model of a VC.
So when considering whether to start pitching investors, think about what the total addressable market is for your business and whether or not it’s going to be big enough to be interesting to investors.
How much competition is there in the market? And have they taken funding? If so, how much and what stage?
If you have a number of competitors who have taken venture-backed funding, then they’re going to be using their considerable financial war chests to grow. They’ll be outbidding you on Google Ads, showing Facebook ads to all of your potential customers, and they’ll have bigger booths and presences at industry events. Over time, this generally means they’ll outgrow you. They’ll build a bigger brand, network effects and virality will snowball, and they’ll take the market.
A good example of this is Saasu, an online accounting application you’ve likely never heard of. They were very early to the online accounting game (a full six years before Xero, in fact.) For a long time, they had a comparable (or even better) product.
However, while SaaSu bootstrapped their business took, Xero went out and raised $680 million in funding over nine rounds and used this funding to accelerate their growth and product development. They did TV and out-of-home ads, they ran huge conferences across the world, and they built a huge network of accountants who love their product and refer their clients. Ultimately, Xero became a global SaaS behemoth with over $550 million in revenue, 2,500+ employees and a $12 billion valuation.
Saasu, on the other hand, is still a small business with around 20 employees.When thinking about taking VC funding, consider what your competitors are doing and whether you need the funding to match their spending on growth. Click To Tweet
How mature is the market for your product? Is it a well-known market category like email marketing software, or are you trying to create a new one, like Inbound Marketing?
Generally speaking, if you’re trying to build a new market it’s going to be difficult to do without VC funding, as it takes a lot of money and resources to educate people on why they need the category of product (let alone your product specifically.)
Hubspot is a good example of this. They famously created the category of Inbound Marketing, but it wasn’t cheap to do. They raised over $100 million from venture capitalists and used that considerable war chest to promote inbound marketing as a ‘new’ way of doing marketing.
They created a conference, an academy, free tools, tens of thousands of blog posts and hundreds of eBooks. At one point, their content team included 50 people with multiple blog post writers and editors, a podcast team, a video team, a co-marketing team, and more.
As such, it’s worth considering the market maturity when making your decision about VC funding vs bootstrap.If you need to build the market in order to grow your business (rather than just capturing existing demand), then you’re likely going to need some outside funding to do it. Click To Tweet
2. Resources: Current capacity, resellers, and partners
The resources you have at your disposal should be another key factor in determining whether venture capital or bootstrapping is the right path for you. Here’s what you need to think about when it comes to your resources.
Current team resources
What does your current team look like? Do you have skills and experience in both product and go-to-market?
Salesforce Co-Founder Marc Benioff once said:Great companies are at the intersection of a great product and a great go-to-market strategy. Click To Tweet
That’s the truth: It’s hard to build a great SaaS company if you only have product/development capacity and no experience in go-to-market functions like marketing, sales, and customer success.
Simul Docs, a version control and collaboration tool for Microsoft Word documents, is fortunate to have both sides on their founding team. My co-founder Ben has extensive development experience (having most recently been a Senior Engineer at Canva), while I have extensive go-to-market experience having led sales and marketing teams at multiple SaaS unicorns (including InVision and Campaign Monitor.)
Because of this, it’s much more possible for us to go down the bootstrap route because even with our small founding team, we have the experience needed to develop, market, sell and support the product.
So when you’re considering bootstrapping vs VC, look around and see what skills you already have within your team (and whether that’s enough to achieve what you’re hoping to achieve.) If not, you’ll either need enough revenue to hire out that expertise, or it might make more sense to take venture capital so you can access the expertise you need to reach your objectives.
Availability of resellers/partners
If you don’t have the required skills in-house, are there partners or resellers that you could lean on to bring them to the table?
Mandoe, an Australian digital signage software company, didn’t have all of the necessary resources in-house when it first started, so it sold its product exclusively through Telstra, Australia’s largest telecommunications company. Mandoe focused on creating a great product while Telstra’s army of thousands of salespeople across the country sold its product to the beauty salons, retail stores, and cafes to whom they already provided telephone and internet services.
It was a successful strategy for Mandoe: It fueled growth to a rumored $50 million acquisition.
The lesson here: If you don’t have the resources and expertise in-house to handle certain parts of development or go-to-market functions before you start looking at venture capital, it’s worth considering whether or not there are strategic partners or resellers you could leverage.
3. Go-to-market model: Channels & conversions
The go-to-market model you use also has a significant impact on your bootstrap vs VC decision. As you weigh the factors in this arena, be sure to consider your channels and conversion model.
What channels are available to you to attract potential customers to your product? Are there low-cost channels like SEO and virality, or is it going to be more events, paid marketing, sponsorships, etc.?
Qwilr, a SaaS product for making proposals and quotes as beautiful web pages (rather than boring PDFs), is a product that has a huge potential SEO channel. The product has a number of templates like a Business Proposal Template or a Sales Proposal Template within the product, and they’ve created landing pages for each of those templates which rank within Google results.
Some basic keyword research suggests there are over 250,000 searches per month for these template terms (i.e. business proposal template), which is a huge amount of people searching for something similar to what Qwilr offers. As a result, they can tap into this audience to drive new signups and customers at a low cost.
However, if low-cost channels aren’t available to you (i.e. because there’s not a lot of search volume), then you may need to look at higher-cost channels like events, which require capital to do well.
When you’re deciding to go the VC or bootstrapped route, consider what channels you might use to get your product in the hands of potential customers. If it seems like there are low-cost options that could have enough volume to help reach your goals, you may be able to do it without a huge amount of capital. However, if your channels are all paid (i.e. advertising, events, sponsorships, etc.) then it’s likely you’re going to need some capital to pay for those more expensive acquisition channels.
How do you convert people interested in your product into paying customers? Do you have a self-service product where people sign up and pay using their credit cards within the product, or do you primarily convert people through a sales team?
Generally speaking, self-service businesses are cheaper to scale in the early days and likely more fitting to a bootstrapped path. Many successful bootstrapped companies (including Zoho, Basecamp, MailChimp, and Aweber) are primarily self-service.
Launchpad6, a company I previously founded, made a video CMS product that companies used to create their own video sites. We used an inside sales model to sell the product and then had a Customer Success team that helped with the implementation of the site.
The problem was: With just two people in the founding team, I was in charge of marketing, sales, and customer success. After we signed a contract with a new customer, I’d spend weeks bogged down in overseeing the implementation and would dedicate zero time to bringing in new customers through sales and marketing activities. If we’d taken VC funding, we would have been able to hire a few more people and dedicate them to each function — and as result, we would have been able to grow and scale the company more.
When thinking about your bootstrapped vs VC path, consider the resources you need to build the sales and marketing machine that will drive your revenue growth.
If you have a self-serve model, it’s likely you can achieve some scale with fewer resources, but if your product requires people to market, sell, and then implement the tool, it’s likely you’ll need to hire dedicated team members who can get the machine humming. That costs money.
4. Product: Adoption cycle & roadmap
Aspects of the product you sell also have a significant impact on your bootstrapped vs VC decision, so before you make the call, be sure you’ve thought through the product-related aspects of the equation.
What does it take to get started using your product? Is it as simple as uploading a document (like Dropbox, for instance)? Or do customers need to do a full company-wide implementation of your product (i.e. HR software like Gusto or Bamboo HR)?
Earlier we talked about the effect your go-to-market model has on your decision and how self-serve business can often scale with fewer people. However, even self-serve businesses have different adoption cycles.
For instance, if you look at the standard self-service funnel, it typically looks something like:
- Signup: The moment when a person signs up for an account
- Activation: The moment a person completes an action where they see the value your product provides
- Subscribe: The moment a person upgrades their account to become a paying customer
Depending on the nature of your product, the signup to activation rates can vary dramatically.
In the case of Simul Docs (the aforementioned version control tool for Microsoft Word), all a user needed to do was to upload a Word document, open it, and make a change. The software then automatically creates a new version — which is when the user realizes the value of the product. Because it’s only three quick steps, the activation rate is around 30%.
However, for more complex products (like Shopify, for instance) the process of getting started is much more complex. In order to launch a store, you’d have to create your account, upload products, set prices, set up shipping options, connect payment providers, etc. With so many required actions, the activation rate is likely much lower.
This then gives you two options: You either need to have huge volumes at the top of your funnel in order to overcome low activation rates, OR you need Customer Success and Support employees to help users reach the activation point. Both cost money.
When thinking about bootstrapping vs taking VC, consider how easy it is to adopt your product and what that would mean for your funnel metrics and unit economics.
No product is ever complete, but some are likely a lot closer to their vision than others. How far along are you in your product roadmap? Are there still outstanding features that your product still needs to have to be considered viable, or is it quite mature already?
Qwilr, the previously mentioned tool for creating proposals as beautiful webpages, is an interesting example of how the maturity of the roadmap can change as the target market changes.
Originally built for smaller businesses and freelancers to help them win more work by sending better-looking proposals, the early product was at a mature stage with a solid editor for building proposals — complete with hundreds of templates, digital signatures, payments, and more. It had everything a freelancer or small business would need to send great proposals and win more work.
However, as larger organizations started to use the product, the roadmap extended. Larger organizations needed features small businesses and freelancers didn’t (like collaborative editing of proposals so multiple people can work on them at the same time, or integrations with enterprise-level CRMs such as Salesforce.)
As a result, the company built out a team of product managers, designers, and engineers dedicated to designing and building these features in order to better serve the needs of larger customers.
The lesson: When thinking about whether or not to go down the VC path, consider not just what your roadmap might look like now and where you need to get the product to for your current market, but where you might need to get it for future markets as well.When thinking about whether or not to go down the VC path, consider not just what your roadmap might look like now, but where you might need to get it for future markets as well. Click To Tweet
The forgotten 5th factor: Desire
If you’re running a software company, it’s likely that you read a lot of content and opinions from VC’s. This is a good thing, as the likes of Jason Lemkin, Tomas Tunguz, Christoph Janz, David Skok and the rest of them have produced some amazing content over the years that has genuinely progressed the knowledge and understanding that we all have of the SaaS business model.
However, if you’ve spent enough time reading these posts, you’ve likely been led to believe that the only definition of success is creating a billion-dollar company (or a Unicorn as they’ve named it).
This just simply isn’t true.
As Basecamp Co-Founder David Heinemeier Hansson points out in this Twitter thread, building a billion-dollar company isn’t the only definition of success.
Despite what VC’s will have you believe, it’s actually perfectly fine to want to build a smaller, profitable business that allows you to enjoy a good but modest lifestyle, appropriate work/life balance, more time with family, etc.
So when thinking about whether you want to take on VC funding, think about what you want your life and your company to look like. Do you want to build a large company with hundreds of employees, working long hours in an attempt to turn it into a Unicorn in 10 years’ time? Or would you rather build a smaller company with fewer employees, maintain a healthy work/life balance and enjoy the freedom of not answering to anyone?
Both are perfectly acceptable paths, but it’s important you consider which one is right for you and the other stakeholders.
Bootstrapping vs VC: It’s not (just) a personal preference
Your decision around whether you should go down the VC or bootstrapped path is one of the most important decisions in any company’s existence. It can have a significant impact on the kind of company you create and its outcomes.
However, contrary to what Twitter may have you believe, it isn’t simply a decision you make based on personal preference. There are a number of factors about your market, product, and company that can help determine which is the right path for you.
Don’t rush the decision, and make sure you think every aspect through. It’s not a 50/50 call.
Aaron Beashel is a B2B SaaS marketer who helps companies grow customer acquisition. He can be found riding waves or sliding down snowy mountains at all other times.