This post is the third part of a series covering the age of the “Incremental SaaS”. In this one I focus on the consequences of building an incremental SaaS from a founder perspective.
1. It’s ok to bootstrap first and raise later (>$1M ARR)
I always had issues with opposing the bootstrap and VC models. I do understand that antagonizing these two models is a good way to attract attention and create engagement on social media, but the drawback is that it has instilled in the mind of many founders the belief that they should either raise VC money or bootstrap their company their whole life. It almost became an ideology in certain cases.
I think it’s wrong to oppose these two models. Especially for people who launch an incremental SaaS. I’m convinced that more SaaS founders would be successful if they would first bootstrap until they reach $1M ARR and then raise with VCs if the opportunity makes sense (or continue bootstrapping).
It’s still a minority, but I do speak with founders who have adopted this playbook. Most of them are founders who have previously raised with VCs and now start companies that focus on generating revenue asap rather than hitting milestones to fundraise every 18 to 24 months. And they are not “hardcore bootstrappers” who would die on this hill and claim they would never take any VC money. They are open to it, but just not at the beginning.
2. You can raise money with BAs and alternatives to VCs in order to reach profitability
Now, bootstrapping a company is a great thing on paper, but in reality, many projects need initial funding to get off the ground. And a good way to do it is by raising a couple of hundreds of thousands dollars/euros with BA syndicates, alternatives to VCs and by leveraging government subsidies/loans. Ideally between $300k and $1M.
You’ll probably tell me that there’s nothing new here. But I think that a major difference today is that, first, you have many more syndicates and alternatives to VC available. And second, the founders who raise these rounds can do it with the clear aim of reaching profitability.
They do not need to think in terms of “What growth/product milestones do I need to reach in order to raise the next round?”. But they can think in terms of “I will just raise an angel round that will help me reach profitability”, because business angels and alternatives to VCs are more open to this path. It’s impossible to get a traditional VC aligned with this aim.
It’s a major difference because you do not build a company the same way (org structure, product development, sales and marketing motion, time horizon etc…) if you plan to reach profitability with $300k – $750k compared to building a company that needs to hit VC milestones in order to raise money every 18/24 months.
3- Embrace the grind: It’s hard to create momentum with an incremental SaaS
Building a startup is an experience that probably requires more mental strength than technical skills. It takes a lot of drive and perseverance to succeed. And finding “momentum” is a great way to carry founders throughout the early stages of a startup.
The best momentum is revenue or user growth momentum. If you manage to get it, then everything gets easier. However, with VC money, startups can buy “vanity” momentum such as PR/media momentum (it’s why fundraising is so celebrated on social media and tech blogs), traffic momentum by buying ads or other sources of traffic, branding momentum if you raise with top tier VCs (etc). With VC money you can “buy” – to some extent and for a limited amount of time – vanity momentum that will push you through this early stage journey.
But when you’re building an incremental SaaS, it’s very, very hard to find these pockets of “momentum”. It’s usually hard to fundraise as you get a lot of VC rejections, it’s hard to get featured in the media, it’s hard to get your peers excited. And as I explained in the previous article, by nature, it’s hard to unlock fast user or revenue growth with an incremental SaaS.
Incremental SaaS are by nature more “grind oriented” than “momentum oriented”. So if you launch one, be prepared to embrace the grind
4. Exiting a profitable incremental SaaS is easier than exiting a non profitable VC backed SaaS.
The past couple of years, in parallel to the rise of bootstrapped SaaS startups there’s also been an increasing number of entities that acquire profitable SaaS companies. And at every level: From micro SaaS companies making just a couple of hundreds or thousands of dollars of MRR to bigger bootstrapped companies making millions.
The recurring nature of the SaaS business model makes this type of business a very interesting acquisition target. You can acquire a micro SaaS to grow it or you can acquire bigger SaaS companies to create a portfolio of cash generating businesses. This is why there’s been an explosion of specialized funds, rollups, PE firms and even individuals who buy profitable SaaS. You even have an increasing number of marketplaces such as acquire.com where you can source and buy such companies.
As a consequence founders of incremental SaaS that haven’t raised VC money have definitely more optionality when it comes to exiting their company compared to VC backed founders. You have scenarios where a founder will get life changing money by exiting their very successful incremental SaaS company, but you also have scenarios where a small but profitable SaaS business can still be sold if the founder wants to exit it. This is a far less likely scenario if you have raised money with VCs.