In 2002, Atlassian was like most other just-founded start-ups: it had no customers and thus, no annual recurring revenue, also known as ARR.
By 2010—just eight years later—things had changed dramatically. The Jira creator hit $50M ARR and boasted over 20,000 customers.
And it was all bootstrapped.
Today, we all know Atlassian as a software as a service (SaaS) giant. Leaders in development, project management, collaboration, and code quality are well aware of its success. With millions of customers and popular tools like Jira and Confluence, you’d have to be coding under a rock not to have heard of it.
Yet despite Atlassian’s impressive bootstrapped SaaS ARR growth, its co-founder and co-chief executive Scott Farquhar urges founders not to bootstrap. Citing readily available funding and more competitive markets, Farquhar says there’s no need to go without capital.
Is that true for every SaaS business? Is it true for yours?
Let’s dig into the pros and cons of each option to find out.
The argument for SaaS fundraising
SaaS fundraising is on the rise.
- In January 2020 (pre-pandemic), a total of 36 SaaS businesses received funding, according to SaaSworthy.
- Despite dips in funding over the next year, that number had mostly recovered to 31 SaaS businesses by January 2021.
- Less than a year later the number of SaaS businesses that received funding more than tripled to a staggering 112 for September 2021.
Fundraising is typically associated with maximizing ARR growth, for good reason. Plenty of cash makes it easy to:
- go to market quickly
- get, and stay, competitive
- hire aggressively early on
- rapidly scale marketing and sales, and
- grow, grow, and grow some more.
Venture capitalists (VCs) are interested in promising SaaS start-ups and scale-ups because of their short-term revenue potential. They know that with enough capital, they can turn around great earnings in ten years or less. That’s promising for businesses that find support.
The simple rule is to only “raise when you need the capital,” Darwinbox co-founder Rohit Chennamaneni says.
It’s not about becoming more visible or having a great VC mentor—though those things certainly help. It’s about making a smart financial decision for your SaaS or subscription business.
But this can be a tricky decision to navigate for the uninitiated.
Fundraising drawbacks for growing your SaaS ARR
As Chennamaneni hints at, fundraising comes at a cost. Money isn’t free, after all. SaaS leaders who fundraise can expect:
- tight timelines for hitting milestones (think Rule of 40, T2D3, or even T3D3)
- less control, as VCs must be included in decision-making
- increased pressure to perform well, and
- artificial product-market fit that fails after initial success.
“Many entrepreneurs conceptualize product-market fit as the point where some subset of customers love their product’s features,” VC firm Floodgate co-founder Ann Miura-Ko says. “This conception is dangerous.”
Miura-Ko warns that true product-market fit is much more important than scooping up all the customers you can in early growth stages. Fail to ascertain the actual fit of your product and customers will simply churn out rather than grow with your business and contribute expansion revenue. This lost revenue cuts your company’s ARR growth off at the ankles.
If you’re fundraising, be ready to do your homework.
Bootstrapping ARR growth works for many
In addition to Atlassian, big SaaS subscription businesses like Calendly, MailChimp, and even Qualtrics have bootstrapped their way to massive ARR growth.
For many, it’s because fundraising wasn’t an option at the time of founding. Some founders simply don’t have the connections or can’t get the traction they need to catch VC attention early on.
For others, the bootstrapping business model is a tactical strategy—without a VC looking over their shoulder, they can leverage:
- full ownership and decision-making power
- flexible timelines and adaptability
- more agility and ability to do what makes the most sense for the business, and
- organic business and ARR growth.
Organic growth has many benefits, including customers that are less likely to churn. Founder and CEO Zeb Evans attributes ClickUp’s success in bootstrapping to $20M ARR to this powerful outcome.
“Most companies…pump their VC windfall into sales and marketing; not R&D to build a better product,” Evans explains. “At ClickUp, we did the opposite.”
ClickUp reached 3 million users in less than half the time it took competitor Monday.com: just three years to Monday.com’s eight. The subscription model project management SaaS business even did this without spending millions on marketing and sales.
That’s product-market fit!
Finally, bootstrapping also encourages founders to spend carefully—it’s their money, after all. And, if things reach a point where more money would bring the business over a hump, fundraising is still an option. For those without VC-backed competitors, bootstrapping may make sense.
The drawbacks to bootstrapped SaaS
Of course, just as with fundraising, bootstrapping has its shortcomings. Some of these include:
- resources being limited to what founders can afford
- lack of access to top talent
- constraint to the bottom of the market
- putting the cost of development on customers, and
- longer time to significant ARR growth.
While bootstrapping founders may be free of VC pressure, funding growth on their own also certainly comes with its own brand of stress. Putting everything into a product can put someone with a fear of failure into dangerous situations.
“I was scared,” Calendly founder Tope Awotona admitted regarding traveling to Ukraine during the height of the country’s 2013-2014 revolution.
After draining his savings, maxing out his credit cards, and taking on a business loan to get his SaaS product off the ground, Awotona had no choice. He needed a business in Kiev to help him build out the tech to make Calendly work.
“Calendly was my life. I felt like I had no option. . . . Looking back, it was probably stupid for me to go.”
While not every bootstrapping SaaS founder will enter war zones to build their technology, Awotona’s story is a reminder of how strained things can become for founders who empty their wallets and/or go into debt to build their products.
Ensure your bootstrapping doesn’t leave you in dire straits. Make a financial plan with firm boundaries early on and prepare to take things slow.
To bootstrap or to fundraise? What’s your ARR growth strategy?
For SaaS or subscription businesses entering competitive global marketplaces, fundraising is all but required. If your competition is VC-backed and you can’t supply similar levels of funding on your own, it’s almost functionally impossible to compete.
While VCs can impose pressure on founders, they also act as mentors and often have a network of potential VPs and other talent to hire from. As with everything, there’s a give and take.
However, if your product is niche enough, there may not be any major existing brands in your market. In this case, a more slow and steady bootstrapping approach becomes more viable.
With enough financial discipline, you can safely fund your own product and ARR growth with natural product-market fit and excellent customer relationships. Bootstrapping certainly comes with a certain amount of pride, and if you’re planning to stick with your SaaS business for the long haul, it works as a long-term strategy.
In the end, the right annual recurring revenue growth option for your business takes careful consideration. And as we’ve seen, there are advantages and disadvantages to both.