The role of venture capital is to help startups achieve growth and scale beyond what they could on their own. But does that always pan out? New research shows that for some early-stage companies, it doesn’t really make a difference.
A new report from startup lender Capchase found that SaaS startups with between $1 million and $15 million of ARR saw nearly identical levels of growth, on average, over the last year regardless of whether they raised venture capital. The report looks at financials from 900 of Capchase’s early-stage startup customers located in the U.S. and Europe and split 49% bootstrapped and 51% VC-backed.
The report found that venture-backed SaaS startups showed a 42.8% year-over-year growth from June 2022 through the end of May 2023, compared to bootstrapped companies, which saw 44% growth over the same time. The numbers are close, sure, but given that the venture-backed startups raised external capital, we can safely assume that they spent more to achieve what is effectively the same growth rate as their bootstrapped peers.
Capchase co-founder and CEO Miguel Fernandez said he initially was surprised to see how similar the numbers were for both venture-backed startups and bootstrapped companies, but once he talked to some bootstrapped founders, it began to make more sense.
“The most obvious thing is that bootstrapped businesses have been a little immune to the downturn in tech, and the reason why is that they live in a perpetual downturn; there is no money for them,” he said. “They have to make sure their spend is very aligned to revenue and cash flow.”
Part of this — especially when considering the timeframe the report looked at — is that bootstrapped companies weren’t receiving investor pressure to cut costs over the last year, he said. Many VC-backed startups that had to find ways to cut sales employees or marketing teams probably took a hit to their growth because of it. Capchase’s benchmark report last year also found that startups that cut marketing saw a notable hit to their growth.
“VC-backed companies have gone through a recalibration of their whole business economics and profitability models and so on,” Fernandez said. “They’ve had to rebuild the processes and operations with less people and less capital.”
Rendever, a startup that creates VR content for older people meant to combat loneliness — and one of the bootstrapped startups included in the data — illustrates this. Co-founder and CEO Kyle Rand said that his startup has seen 40% year-over-year growth, on average, and this last year, which was tougher for many venture-backed startups, was no different.
The other piece here worth noting is that these bootstrapped companies were able to reach that level of growth with significantly lower customer-acquisition costs. The report found that venture-backed companies were spending an average of $21,000 per customer, whereas bootstrapped companies were tracking around $5,000.
“The value of the dollar is really well understood here,” Rand said about being a bootstrapped founder. “That is because since day one we have had to be really cost conscious. If we are going to spend X amount of money, what can we expect in ROI?”
His company’s customer lifetime value to customer acquisition cost ratio (LTV/CAC) has been around 8:1, meaning the money it gets out of a customer is 8x what it spent to acquire them. This is a much better metric than the report found for VC-backed companies: a little less than 2:1. This could also imply that some companies are overspending on acquiring customers just because they have the money to do so.
“We are really in this opportunity of executing on the land and expand model, which means that we get to be really, really diligent in how we’re deploying resources and just kind of keep delivering on our playbook, which is awesome, and I don’t believe that we need any additional capital in order to do that,” he said.
This doesn’t mean that venture capital isn’t a good fit for SaaS startups. This data doesn’t show that all SaaS companies should be bootstrapped or that taking VC isn’t a good idea. Rather it shows that startups can achieve stronger growth without it than founders may have realized. For some, this means it might make more sense to stay independent — at least for a while.