Here’s an age-old question: should you bootstrap your SaaS company, or try and raise funding? Now, whether you accept funding from external investors will have a huge impact on how you structure and run your company — so this is a crucial decision that’s not to be made lightly.
In this blog post, we walk you through the various factors to consider when deciding between bootstrapping vs funding. We’ll also weigh up the pros and cons of each option, and give you our take on how bootstrapping and funding affects your company from a financial viewpoint.
What is Bootstrapping? What is Funding?
Simply put, Bootstrapping refers to the act of starting a company without seeking external funding. If you’re building up a company with whatever money you have on hand and from the profits you’re earning, that’s bootstrapping.
Raising funding, on the other hand, is when you seek out investors (typically Venture Capitalists, also known as VCs) and get them to invest money in your company. These investors provide you with capital in exchange for equity.
To learn more about bootstrapping, read this Investopedia guide. To learn more about how funding rounds work for startups, read this Forbes article.
Does your market favor bootstrapped or funded companies?
Should the market you’re in affect your bootstrapping vs funding decision? Of course it does!
Assuming you’re in a highly competitive “winner takes all market”, like UBER or Slack, this means that you’ll have to scale as fast as possible and become or remain the dominant player. This most likely means that you won’t be profitable in the near future and need investment to afford your growth.
If you’re in a fragmented market where many mid-sized firms co-exist, like Snappa or Buffer, then funding may not be necessary. Under these circumstances, you might be able to bootstrap your own SaaS company, and grow it yourself!
Bootstrap vs Funding: internal factors to consider
In deciding whether you want to bootstrap or seek external funding for your SaaS company, here are a few factors to consider:
- Your goal
- Exit or not?
- Potential for growth
Are you building a long term stable growing business, or are you aiming for the moon and beyond? The goal your working to achieve affects your decision to bootstrap or seek external funding. For bootstrapped companies, the goal is generally to become profitable. Funded companies, on the other hand, tend to aim to maximize revenue growth; these companies hope to eventually become a market leader.
Exit or not?
First up, ask yourself whether your long term ambition is to continue growing your SaaS company forever, or to exit in a couple of years. If it’s the former, then bootstrapping is a good option; if you’re striving for the latter, then raising VC money to scale faster may be the right fit, as VCs typically invest with a target to exit in about 3 to 10 years.
Potential for growth
Next, think about what kind of growth you want to achieve. Obviously, when you bootstrap a company, you’re working with limited resources, which means that you’ll have to make do with a slower growth rate. If you’re funded by a VC, on the other hand, you can grow and gain traction much more quickly. Needless to say, both can achieve a good score on the Rule of 40. (That said, some people argue that when you’re funded, you tend to have less financial discipline — this means you wouldn’t make the most of your money, like how you’d do if you’re bootstrapped. Food for thought!)
Next, when it comes to the freedom and control of the owners, you’ve got a lot more flexibility assuming that you bootstrap your company. If you want to push back or bring forward a project, goal or milestone, you’re free to do just that — no one will question you about it. When you’re funded, though, timelines tend to be more structured and rigid, and you’ve got less room for last-minute changes.
On a similar note, your ability to pivot is also constrained when you’re funded by a VC. When you accept funding, this essentially means that your company isn’t 100% yours anymore — and you’ll have to consult with your VCs and get their buy-in before you pivot, explore a different business model, or do anything that isn’t part of the original plan. If you’ve bootstrapped your company, again, you’re free to pivot and make all the changes you wish.
Bootstrapping vs funding: weighing up the pro’s & con’s
Want to weigh up the pros and cons of bootstrapping and funding, and decide which is the better fit? Check out our handy infographic:
The bottom line: is bootstrapping or funding better?
At the end of the day, bootstrapping and funding both bring their own benefits to the table. There’s no one option that’s inherently better or worse off than the other; it depends on which fits your situation and goals better.
From a finance point of view, having funding gives you more power to scale, but it also comes with high stakes and a “grow or die” mentality. At the same time, you’re looking at a somewhat fixed horizon where you’ll exit the market in 5 to 10 years.
When it comes to bootstrapping, this makes it harder for you to scale your company, but while you might grow a little slower, you’ll have the advantage of owning and controlling the whole pie.
A final word on bootstrapping vs funding your company
Should you bootstrap or raise funding for your SaaS company? Only you can decide. Consider this, though: even if you don’t raise funding now, it doesn’t mean you have to be bootstrapped forever — it’s possible to raise funds later on in the game. (You might even get a better valuation for your company if you raise funds later, when you’ve demonstrated your product-market fit and/or profitability!)
If you’re preparing to raise your seed round, check out the ABEL Finance Fundraising Preparation Program, a 13 weeks coaching program that maximizes your chances of closing your round.
Need advice about whether fundraising or bootstrapping is the better choice for your business, or need help with managing the financials of your SaaS business? Our Virtual CFOs help you grow faster and more profitable.
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