Saravana Kumar is the Founder & CEO of Kovai.co, a company that is into Enterprise Software & Knowledge Management Space.
Whether to go with venture capital or bootstrapping is a question most SaaS founders face at various stages of their business—anywhere from initial product development to accelerating growth for multiple products.
While bootstrapping has worked extremely well for my SaaS company, so far, I would not advise it to every other SaaS founder. I believe the choice to bootstrap or opt for venture capital depends on the size of your product’s market, opportunities for accelerated growth and whether you have identified a successful traction channel.
When Bootstrapping Works
Bootstrapping works best when you achieve product market fit early and your product has a very niche market. The extent of competition in the market must also be considered because that determines the market spend required. Circumstances must also ensure that the founder and initial team can sustain themselves until cashflow is established and profits seen.
How Bootstrapping Worked For Me
In my case, when I launched an analytics software company, Microsoft had stopped concentrating on Biztalk, the server we used, so not many players were interested in developing products based on it. Therefore, we didn’t really have much competition. My technical blog worked as my earliest source of traction and did not involve any costs to maintain. Over seven years of consistent, quality posts led to a following of around 10,000 followers by the time I launched my product. Through the blog alone I acquired my first 30 clients.
Attending and speaking at small conferences throughout Europe and the U.S. was another way I marketed my product. For a SaaS company, acquiring clients is often your biggest expense. But my client acquisition costs were zero, except the time I spent attending the conferences.
Over a decade later, my company remains bootstrapped because we saved a lot of our earlier profits and kept reinvesting it into the business. This allowed us to develop and launch three more products and acquire one.
What To Consider With Bootstrapping
Due to our choice, we have been able to grow organically at a pace we are comfortable with instead of sticking to a timeline an investor set for the company. In 2019, when we accelerated growth, we did not have to justify investing in a high-tech office and expanding our staff.
The fact that we are growing at a gradual pace and remaining profitable has proven that all our products have achieved product-market fit. The financial discipline we exercised in the first eight years of running the company has also given us a lot of learning on financial management, prudent identification of working marketing channels, hiring right talent and day-to-day operations.
What To Consider With Venture Capital
Venture capital works better when even the initial building of the product will require heavy investment that the founder does not have. Instances include a product that requires heavy advertising, like a fast-moving consumer goods (FMCG) product or even a SaaS product with a wider consumer band that will take time to acquire customers and profit.
So, if you as a founder are bleeding cash, opting for venture capital or equity funding might be a good idea. It also works when you have identified channels that are bringing you traction, like if you spend $1 you get $2 and the market is large enough to achieve accelerated growth multiple times over.
Honestly, my company’s knowledge management product is a market leader in its space, but it has yet to turn profitable and is likely to require a lot more market spend.
A well-known venture capital can be a strategic investment, bringing in a lot more to the table than just money. The benefits include mentorship, access to other big companies and clients and credibility to your brand; this makes it easier to hire better talent and accelerate growth. In fact, multiple rounds of VC with the right product market fit can help you grow multiple times over in terms of revenue, and it gives you a clear exit route.
Cons include a lack of flexibility in pivoting your business based on circumstances and the time and effort spent keeping investors on board with your decisions. The excess funding can also be a distraction.
Would I Bootstrap Now?
When I look back at my journey now, I think during my company’s peak growth period from 2012 to 2015, if I had a team as large as I do now, I could have grown the business exponentially. If we had spent a lot then on marketing, branding and talent, I believe we could have grown four to five times larger. It may be one of my missed opportunities. My advice would be don’t write off venture capital. Even if you are bootstrapping your company and earning good revenues, you may be missing out on much bigger potential.
In conclusion, if you are taking in external funding, take smart money where you get a lot more than just money. But funding without an actual requirement or plan may lead to unnecessary expenditure, early dilution of your equity and even distraction from an already successful operation.