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Efficient growth? No problem, bootstrapped startups say

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Investors these days want to see not only growth, but also a path to profitability — and it isn’t always easy for venture-backed startups to suddenly correct course. But their bootstrapped peers have a leg up, a recent report shows. Let’s explore. — Anna

Cheaper growth

In 2021, Alex and I wondered out loud if startups eschewing venture capital could have it all. The answer this year seems to be yes.

Indeed, Capchase’s recent Pulse of SaaS report contains an interesting finding: In 2022, bootstrapped SaaS companies are doing better than VC-backed startups in many respects.

“Despite the war chest of funding that VC-backed firms raised last year, bootstrapped companies are doing better than VC-backed companies across nearly every metric we analyzed,” the SaaS-focused fintech wrote.

There’s also a geographic component to this success: “U.S.-based bootstrapped companies have fared especially well, maintaining revenue growth and margins while spending efficiently,” Capchase said.

But while the trend is more pronounced in the U.S., Capchase found that it is bootstrapped companies in general that “lead the way in efficiency” — which is timely, because the Rule of 40 is back in fashion.

“While growth is in the same ballpark for bootstrapped and VC-backed companies, bootstrapped companies have significantly better margins,” Capchase said of its data sample.

Capchase’s findings are based on data from some 500 private SaaS companies, captured both pre- and post-downturn. The latter reflects the April–August 2022 period at companies based either in the U.S. (60%) or in Europe (40%). Of the companies, 66% are VC-backed, while the remaining 34% are bootstrapped.

Retention on everyone’s minds

There’s one performance metric by which European bootstrapped SaaS startups are outperforming all contenders, and it’s no small area of success: retention. Overall, however, bootstrapped companies “saw a notable dropoff in customer retention in the post-downturn period,” the report found.

As we noted before, retention is key in the current period because it’s typically cheaper to retain existing customers than to acquire new ones. This makes it crucial to track not only net dollar retention, which includes upsells and expansion, but also gross dollar retention, which doesn’t, and may therefore reflect more truthfully how healthy a business really is.

However, retention is significantly dependent on the type of customers that a SaaS company serves and is typically lower in the prosumer segment. This adds weight to Capchase’s hypothesis that this metric’s decline for bootstrapped companies may partly be a result of them “having a larger percent of SMB clients versus enterprise clients.”

Still, bootstrapped SaaS startups may want to pay attention to recent advice on how to improve retention, from adopting better pricing to getting product and customer success teams on the same page. Oh, and a special mention for this piece penned by Vijay Sundaram, the chief strategy officer of Zoho, a company that famously became a unicorn without external investment.

During a recession, look to drive growth through customer retention

On a final note, Capchase’s report is worth reading in full; as our own Rebecca Szkutak noted, it also shows that SaaS startups that ignored VC advice to cut sales and marketing were better off this year. And if you like to nerd out, you may also want to take a look at the underlying data or compare your favorite startup to these benchmarks.

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