May 27, 2018

SaaS Startups Can Survive Without VC Funding … It Just Takes 4 Extra Years

It is EASY to fund a SaaS start-up…it is just very, VERY difficult to finish. Is it possible to take a SaaS company all the way with out venture capital?

 

Answer by Jason M. Lemkin, Managing Director @ Founder-VC, Co-founder/CEO at EchoSign (acq’d by Adobe), Originally appeared on Quorathe knowledge sharing network where compelling questions are answered by people with unique insights.

This photo taken on December 8, 2015 shows flags adorning the head office of Australian tech start-up Atlassian. (Photo credit WILLIAM WEST/AFP/Getty Images)

The reality is in SaaS it isn’t that hard.

Companies like Atlassian and Qualtrics have gotten to nine-figures in ARR (and IPO’d in the case of Atlassian) without needing any venture capital.

There are generally a handful of common characteristics:

  • First, it takes much longer, usually, to get to to Initial Scale ($10m ARR). Usually four years longer when you are bootstrapping. Then, they seem to basically scale at the same rate as venture-backed peers. This makes sense. At $10m ARR, you can begin to aggressively fund hiring from incoming cash flow. Much earlier, you will be capital constrained on aggressive hiring.
  • Second, usually, bootstrapped SaaS companies start at the bottom of the market (SMBs and silos-in-the-enterprise). It’s not that six figure deals are more expensive to close … they aren’t. But the sales cycles are longer, and generally, you need more experienced sales and marketing talent to acquire and close these deals. So usually you have to start at “the bottom” of the market and slowly go upmarket.
  • Third, it’s important to be in a segment where competition can’t kill you. Because it will take you four years longer to get to $10m ARR, it’s important to be in a market segment where direct competition is weak. This doesn’t mean it isn’t there. Just that in your sweet spot of deals … you usually win. If you are competing head on with three other super-talented start-ups with $10m in venture capital doing the same thing, and you aren’t at $1m in ARR yet … odds are, you lose. You have to do something not just different, but sufficiently different that you can withstand competition until you are big enough to stand on your own two feet.
  • Fourth, you need a capital-efficient way to hire your dev team. Engineers in the Bay Area are incredible expensive. Two times more than London or Paris. If you need five Bay Area ex-Google engineers to get your start-up going, it will be impossible without capital. Atlassian was started in Australia. Qualtrics in Utah. Etc. etc. Perhaps not a coincidence.

Again, the number one most important thing to understand in SaaS is you can totally do it without external funding. It will be HARD. But so is everything. But you need to budget an extra two years to get to Initial Traction ($1.5m or so in ARR), and then, an extra two years to get to Initial Scale ($10m in ARR or so). Both stages will likely take longer.

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