Saravana Kumara is the founder and CEO of Kovai.co, a company engaged in Enterprise Software & Knowledge Management Space.
Whether it’s venture capital or bootstrapping is a question most SaaS founders face at various stages of their business, from initial product development to accelerating growth for multiple products.
While bootstrapping has worked extremely well for my SaaS business so far, I wouldn’t recommend it to any other SaaS founder. I believe that the choice of whether to start or go into venture capital depends on the size of your product’s market, the opportunities for accelerated growth, and whether you have identified a successful traction channel.
When bootstrapping works
Bootstrapping works best when you fit into the product market early and your product has a very niche market. The degree of competition in the market must also be taken into account, as that determines the required market expenditure. The circumstances must also ensure that the founder and the first team can support themselves until the cash flow is achieved and the profit is seen.
How Bootstrapping worked for me
In my case, when I launched an analytics software company, Microsoft had stopped focusing on Biztalk, the server we were using, so not many players were interested in developing products based on it. That’s why we didn’t really have much competition. My tech blog served as my earliest source of traction and involved no maintenance costs. More than seven years of consistent, quality posts have led to a following of approximately 10,000 followers by the time I launched my product. I acquired my first 30 clients through the blog alone.
Attending and speaking at small conferences across Europe and the US was another way I marketed my product. For a SaaS company, customer acquisition is often your biggest expense. But my client acquisition costs were zero, except for the time I spent attending the conferences.
More than ten years later, my business is still on the starting blocks because we saved a lot of our previous profits and reinvested them into the business over and over again. This allowed us to develop and launch three more products and purchase one.
What to Consider at Bootstrapping
Our choice has allowed us to grow organically at a pace we’re comfortable with, rather than adhering to a timeline set by an investor for the company. In 2019, as we accelerated growth, we didn’t have to justify investing in a high-tech office and expanding our workforce.
The fact that we are growing at a gradual pace and remain profitable has proven that all of our products have reached product-market fit. The financial discipline we have exercised in the first eight years of running the business has also taught us a lot about financial management, wisely identifying working marketing channels, hiring good talent, and day-to-day business operations.
What to consider with venture capital
Venture capital works better when even the initial build of the product requires heavy investments that the founder does not have. Examples include a product that requires a lot of advertising, such as a Fast-Moving Consumer Goods (FMCG) product or even a SaaS product with a wider consumer reach that takes time to acquire customers and turn a profit.
So if you as a founder are losing money, it might be a good idea to opt for venture capital or equity financing. It also works if you have identified channels that give you traction, for example if you spend $1, you get $2 and the market is large enough to achieve accelerated growth several times over.
Frankly, my company’s knowledge management product is an industry leader, but it has yet to become profitable and will likely require a lot more market spend.
A well-known venture capital can be a strategic investment, bringing much more to the table than just money. The benefits include mentorship, access to other major companies and customers, and credibility for your brand; this makes it easier to hire better talent and accelerate growth. In fact, multiple rounds of VC with the right product market adjustment can help you grow multiple times in terms of revenue, and it gives you a clear exit route.
Disadvantages include a lack of flexibility in running your business based on the circumstances and the time and effort it takes to keep investors on board with your decisions. The excess funding can also be a distraction.
Would I bootstrap now?
Looking back on my journey now, I think I could have grown the business exponentially during my company’s peak growth period from 2012 to 2015 if I had a team as large as I have now. If we had spent a lot on marketing, branding and talent back then, I think we would have been four to five times bigger. It might be one of my missed opportunities. My advice would be not to write off venture capital. Even if you boost your business and earn good income, you may be missing out on much greater potential.
In short, if you are taking on external financing, take smart money where you get a lot more than just money. But financing without an actual need or plan can lead to unnecessary expenses, premature dilution of your equity and even distraction from an already successful operation.