You can’t build a SaaS company in 2018 without significant funding
Published (updated: ) in Startups. Tags: Startups.
When I started Server Density in 2009, the company operated on a very low cost, bootstrapped model. I received a small amount of cash from Seedcamp in 2009 and then a few angels in 2011 but for the first few years, the total raised was only around $200k. The company grew off organic revenue with very low costs for the first few years and only more recently raised VC funding.
The years 2009 to 2011 were still very early in SaaS. The opportunities were mostly SaaSifying an existing on-prem business and both the number of SaaS businesses and funding sizes were small.
After 2011, SaaS was considered the business model of the future so competition ramped up and more companies were formed. This resulted in an increase in the capital required to build out and support a “proper” business.
Unless you had achieved a certain revenue scale, it was about to become very difficult to compete and even then, it was quite easy for a better funded competitor to overtake you.
As of 2018, I believe it is now impossible to start and scale a SaaS business without significant capital. Even established businesses are finding it challenging to scale when up against intense competition because of the cash requirements of so many areas of the business:
- The product must continually evolve. Feature comparison is now the standard way of looking at the options when evaluating which product to choose as a customer. SaaS is the only sensible way to have software delivered in 2018 so the sales discussions are less about SaaS vs on-prem but SaaS Vendor 1 vs SaaS Vendor 2. Regardless of whether you actually need all the features on offer, it comes down to how many features a vendor has. This requires a large product and engineering team to regularly release updates and improvements as well as fixing issues.
- Sales teams are expensive, especially in key geographies like the US East and West Coast. They have a high front-loaded cost and take time to ramp up. Recruitment is challenging and very costly. All this needs cash before you see any revenue.
- Self-serve models are very difficult to build up because they require high volume organic traffic. Content marketing is saturated so unless you already have a good ranking, it takes years to build up. Marketing expertise is there but as with sales, it isn’t cheap and it’s time consuming to generate new ideas, build campaigns and pay the huge fees to sponsor and travel to conferences.
- Supporting customers through a proper customer success operation requires experienced people, management tools and a proactive approach which is high touch. Again, building the team is the most expensive area.
Bootstrapping SaaS to sustainable revenues and profitability is so hard in 2018 because of the time it takes to grow organically. During that time, well funded competition will appear, out-build and out-spend.
Funding doesn’t necessarily mean success but it does make competing more difficult simply because it does usually mean a more feature-rich product can be developed.
That said, it is still possible to gradually build up a profitable small software business in a niche area that can grow over time. Many of these businesses exist and provide a great quality of life for the founders or small teams. But this is not the type of business I’m talking about here.
Instead, I’m saying that the model that Server Density took in 2009 to build a large scale, SaaS business around a critical business need like systems monitoring is no longer possible. To get into SaaS today you have to have a major differentiator, rapidly prototype, get some initial revenue and then raise significant capital. And not just that, you have to do it within a short 12-18 month window.
It’s certainly cheaper and easier than ever to form a startup. However, it is has never been more expensive and difficult to scale.
Following this post, on Feb 8 2018 I recorded a podcast with Seedcamp discussing this post in more detail.