VC or Bootstrap: What Other Options Are There

VC or Bootstrap: What Other Options Are There?

As a B2B SaaS entrepreneur, your primary options are to raise venture capital or to bootstrap the growth of your company.

Venture Capital is a Law of Small Numbers

Raising a successful Series A feels like a big win which will set your company up for subsequent larger raises and to make a big impact. The belief is venture capital is reserved for only the "very best" companies so it feels like a no-brainer to accept. However, the follow-on implications are significant.The reality is you are expected to triple, triple, double, double, double ("T2D3") your revenue from that point forward. Unicorns are the goal, and this is the path to building a unicorn in SaaS. That's 7,100% growth. Truthfully, very few companies have the potential to achieve this. There are limitations outside their control like market sizing, the timing of adoption, or business model (notice I didn't say talent or capital. That's a given). It's a law of small numbers.

Once you fall off the T2D3 growth curve, your fundraising options become increasingly limited. For most companies, this eventually results in cutting headcount to reach break-even. At the same time, your VC investors stop spending time focused on your business. His partners and LPs require him or her to make this decision, leaving you without a lot of help and few options.

You can try to sell the business but most won't be able to. It's hard to sell a sub-$5m ARR SaaS company at a price that's worth accepting. Even though you are no longer on the fast path to unicorn status, you've built a solid growing business. In fact, exceeding $3m+ in ARR puts you in the top 10% of all startups, so why doesn't it feel like a win?

Bootstrappers Work Too Hard

The alternative to VC is to self-fund your growth. Sometimes taken by choice, other times out of necessity but regardless, it's very hard work. Your growth rate is typically closer to the growth of the overall market, which for SaaS is often around 20-30% in the long run. At the high end of this growth range, it will take 17 years to achieve the 7,100% growth your VC-backed competitors are shooting for. This sounds about right when you look at MailChimp (20 years) and SurveyMonkey (20 years) as examples of successful boot-strapped unicorns.

That's a long, hard road, marked by a continual shortage of capital and talent. The truth is most bootstrapping founders are building for an exit below $1b, which often comes in the form of a PE buyout. This typically requires $15m ARR and positive EBITDA at a minimum. So your base case plan is to bootstrap for 8-10 years and then cash out fully or partially with a PE investment.

For most bootstrappers, the PE exit means being rolled up into a larger platform company owned by the PE firm. This can be a good outcome but by definition, it's no longer the company you started. It's part of a different larger company. You have stock in the larger company, not your own.

What Other Options Are There?

Software markets are not winner-take-all or even winner-take-most markets. They typically produce multiple winners. Sometimes a dozen or more. The majority of these are acquisitions in the $100m-350m range, well below unicorn level, but certainly still an amazing accomplishment, and far more frequent. It's no longer a law of small numbers.

The key is capital efficiency. If you raise a smaller amount of capital, you preserve the option to sell for $100m. By definition, raising a VC round takes this option off the table. To achieve scale with capital efficiency, you need lots of time (for example, Mailchimp) and excellent execution (for Atlassian).

We started Camber Partners to provide excellent execution to SaaS entrepreneurs who have built great companies that are no longer on the VC fundraising path or who have chosen to bootstrap. Our goal is to shorten the time to a compelling exit and dramatically increase the odds of getting there.

Our operating team has seen Silicon Valley-level scale and knows firsthand what operating excellence looks like. We partner with founders to fill leadership and technology gaps in their businesses for a period of time until the company is able to attract and can afford to hire its own management team. In our experience, this de-risks the path to scale, avoids mistakes common amongst first-time founders, and increases capital efficiency.

Capital efficiency underlies everything we do at Camber. In fact, we focus on Product Led Growth (PLG) SaaS companies because of their exceptional capital efficiency. For example, Pipedrive burned only $12m on a growth path from $1m to $100m ARR during just seven years. The PLG aspects of that business plus excellent execution produced a unicorn. Massive amounts of capital weren't required.We focus on providing execution excellence within data science and the go-to-market functions of marketing, sales and success. Gemini, our proprietary data platform, is deployed into the companies we invest in and used for channel-based attribution, product engagement analytics, and predictive customer health scoring. This powers data-driven decision making and drives focus. Both of which are friendly to capital efficiency. Our Team is comprised of leaders and individual contributors across GTM functions who bring best practices and proven playbooks into your company alongside your current team.

Importantly, we are investing to scale your company, not to consolidate your company into a mashup of several other related (or not) companies. We are seeking the same outcome you are, to see your company achieve its potential. This could be measured in terms of market awareness or exit value.

Lastly, we recognize the path from startup to scale can be long and challenging. We meet founders who, for a wide range of reasons, want to step out of day-to-day leadership roles. We see this as natural and will never seek to punish a founder for stepping down or even walking away. We don't ask founders to re-vest. Unlike a strategic acquirer, we don't link valuation to complicated earn-outs and we don't tie your hands for years into the future. Our investments are almost always a combination of secondary to current shareholders and primary for future growth.

The Other Option

We created Camber Partners to provide an alternative path forward with the mission of helping entrepreneurs to achieve the potential of their SaaS business. If you think another option is a fit for you, we look forward to learning about your business.

Posted December 13, 2021

By Scott Irwin