Why ‘non-VC-compatible’ SaaS companies are increasing and what it means

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If there’s one aspect of the SaaS landscape that I saw changing tremendously the past 10 years, it’s definitely the rise of bootstrapped SaaS companies.

Financing a SaaS business with VCs or by bootstrapping is becoming a bigger topic of discussion. Founders aren’t only sharing their experiences bootstrapping and growing their businesses, but many of them are sharing their disillusionment with VCs as well.

Since it’s a topic that I discuss quite often with early-stage founders—and that impacts VCs too—I wanted to address it properly and share my point of view in this post.

4 types of SaaS companies

For the purpose of this article, I’ll distinguish four types of SaaS companies:

1. Funded SaaS: These are companies that finance their business with VCs (aka equity against money). From early-stage startups with no revenue to companies going public with hundreds of millions of dollars of accounting rate of return (ARR), the range is extremely wide.
2. Bootstrapped “scaling” SaaS companies: SaaS companies that manage to pass the US$10 million ARR threshold without VC money. Examples of this are Mailchimp or Atlassian (which raised VC money but at a very late stage). These “unicorns among unicorns” are very rare.
3. Bootstrapped SaaS companies: These are bootstrapped companies that manage to reach the US$300,000 to US$10 million ARR range without VC money.
4. Bootstrapped micro SaaS: These are companies with one to three people that operate in the US$1,000 to US$300,000 ARR range without VC money.

What’s important here is not so much the ARR range, but the trends for the different categories.

The trend is moving toward category 1 (SaaS companies being funded). However, the company remains linked to the capital available and the VC’s will to invest or not. I also think we’re seeing more of the companies in category 2, but they are still very rare and can’t be classified as an explosion.

If ever there is an explosion that is changing the SaaS landscape, it’s definitely happening in categories 3 and 4. When I entered the SaaS world 10 years ago (building a product on top of Flash), I knew very few founders running bootstrapped SaaS companies. Raising money was the way to go. But this has changed, and I now encounter awesome bootstrapped and micro SaaS companies almost on a weekly basis.

Why bootstrapping is an increasingly viable path

The available market is getting bigger. More businesses buy SaaS products, and building and distributing a SaaS product has become easier, faster, and less expensive, thanks to developer tools, APIs, and the emergence of software platforms (e.g. SalesForce, Zapier, Segment, etc.).

All these factors make bootstrapping a SaaS company beyond several million dollars of ARR a more viable and proven path.

The rise of ‘non-VC-compatible’ SaaS companies

An important characteristic of this growing trend is that a big chunk of them are not “VC-compatible.” Here are several reasons why:

• The founders want to bootstrap their business. This happens very often because they have previously worked in VC-backed companies and don’t want this model anymore and because being experienced helps tremendously when bootstrapping.
• The company operates in a crowded category where it’s almost impossible to scale but where it’s possible to run a lean and profitable SaaS business.
• The company is more a feature than a product that can be monetized on SaaS platforms.
• The company addresses a niche or a very specific need that is not replicable/scalable.
• The TAM (total addressable market) is not big enough for a VC return but big enough for a very profitable bootstrapped company (read Prasanna K’s comment for more details).
• The company has a strong local component which is hard to expand.

The majority of these companies have their sweet spot in the tens or hundreds of thousands of dollars of monthly recurring revenue (MRR). Once they reach this, they’ll continue to grow but slower, and they won’t scale to an MRR of millions of dollars. A minority will enter category 2 and become the new Mailchimp or Atlassian.

Some words on being VC-compatible

Consequences of this trend

A VC-compatible checklist

Conclusion