So you’re building your SaaS company, and you’ve decided to bootstrap it — because you want to do things on your own terms, in your own way.
Now, if you’re looking for business advice and guidance, there are plenty of online resources that you can reference. For instance, we find the Epic Guide to Bootstrapping a SaaS Startup from Scratch pretty useful; this is written by Clifford Oravec, the founder of SaaS tool Tamboo.
Once you’re done with reading up on the best practices of bootstrapping a SaaS company, be sure to look into the financial aspects of bootstrapping. Your finances play a huge role in influencing the success (or failure) of your company — so don’t just put all your time and energy into building your product, and neglect your finances along the way.
In this article, we walk you through six key points that you should keep in mind when bootstrapping a SaaS company. Read on to find out more!
1. Payback Is The Most Important Metric
As a SaaS business owner, you’ll want to keep an eye on the different SaaS metrics, including Revenue Growth Rate, Gross Margin, MRR Churn, Customer Acquisition Costs, Payback Period, Operating Cash Flow, Quick Ratio, and Churn Risk.
(Quick aside: to learn more about these metrics, read our article: 8 Performance SaaS Metrics Every Owner Must Manage).
Out of all these metrics, the most crucial metric that you should hone in on is Payback Period, which is calculated using the following formula:
Payback = (CAC) / (Gross margin per year, per client)
Essentially, your Payback Period measures how long it takes you to earn back your acquisition cost. If you’re bootstrapping your SaaS company, you’ll need to aim to minimize the Payback Period – at least under a year (we’ve seen as short as one month, if you want to challenge yourself).
Why is having a short Payback Period important? Simply put: the faster Payback occurs, the faster you make money on a client. The faster you make money on a client, the faster you can spend that money on acquiring more clients. In other words, a short Payback Period frees up Customer Acquisition capital faster, allowing you to reinvest in growth.
2. Cash Is King
Should you have your clients pay upfront, or bill them only at the end of the month? It’s ultimately up to you, but since you’re bootstrapping your SaaS company, we’d argue that having customers pay upfront is key in allowing you to grow quickly.
Consider this: funded companies have plenty of cash on hand to pay for their marketing costs, employee payroll, and miscellaneous expenses. Bootstrapped companies, on the other hand, are working with significantly less resources — and once their initial capital is gone, they’ll have to make every single cent that they want to spend.
Bearing this in mind, we recommend billing your customers upfront — this will give you the cash position required to expand your team, and to invest in marketing. What many SaaS companies do is to give their customers a steep discount if they pay an entire year upfront — this makes the client less profitable, but it also gives you the cash to acquire extra customers earlier, making the total profit higher.
(Quick aside: to learn more about earning SaaS revenue, read our article: SaaS Numbers – Bookings vs Billings vs Revenue).
3. Churn Is More Expensive Than You Think
When addressing issues relating to churn, many SaaS founders have this mindset: regardless of what I do, I’ll never be able to completely eliminate churn. So why bother? I have other problems to focus on.
That said, this isn’t the right approach to take. While it’s true that you can never reduce churn to zero, it’s still important to minimize churn as much as possible. Consider this: if you have a 5% monthly churn, this means you’ll lose 46% of your MRR in a single year. This means you need to attract 46% of your current MRR in new clients, just to stay at your current MRR — which in turn means that your marketing costs will increase.
At the end of the day, churn measures the effectiveness of a company at retaining customer revenue. If you have a high churn rate, this means the lifetime value of your customers is lower, and this limits the money you can spend to acquire a customer. That’s definitely not ideal!
4. Focus And Discipline Are Key
If you’re bootstrapping your company, you’ll have to be focused and disciplined when working on your product. You don’t have the resources (or time!) to spend on pet projects or nice-to-haves.
Running in the same vein, with bootstrapped companies, it’s important to not put too much stock into vanity metrics such as number of downloads and number of followers. Instead, pay attention to the metrics that truly matter (number of conversions, conversion rate, etc), and invest your limited resources in optimizing for those key metrics.
5. Control Your Costs
Earning revenue is just one piece of the puzzle — as the owner of a bootstrapped SaaS, you’ll also have to learn how to manage your costs effectively.
Building A Team
Say you want to build a team, but you don’t have much capital to spend on payroll. Here’s our advice: if you want to hire for non-critical roles, work with freelancers or independent contractors so that you can scale your operations up and down as needed.
If you’re hiring for a critical or revenue-generating position, on the other hand, it’s worth investing in A-players. These employees might be more expensive, but they’ll be able to contribute exponentially more to your company than regular staff can ever do. Also, consider hiring remotely — this allows you to get access to A-players for a more affordable price.
6. Making Decisions With Limited I
A key part of building a business is decision-making, and SaaS founders who bootstrap their business often find themselves struggling to make the right decisions because they have limited resources on hand.
Here, you’ll simply have to get comfortable with making decisions using the limited information you have on hand. The Pareto Principle (which states that 80% of effects come from 20% of causes) comes into play here — if you can identify the 20% of the information or factors that contribute to 80% of your results, you can hone in on these factors and close an eye to the less important data.
Unfortunately, there’s no way to go about this other than to experiment, and engage in trial and error. Remember — in business, it’s often better to build a Minimum Viable Product (MVP) quickly and iterate along the way, as opposed to spending a great deal of time on perfecting your product (then realizing it might not be a good fit with the market).
A Final Word On bootstrapping A SaaS Company
Bootstrapping a SaaS company is no easy feat. You’re navigating all the challenges of building a business from scratch with limited resources, and you’ll have to constantly keep an eye on your cash flow to ensure that you don’t run out of money.
If you need help with getting your SaaS business on track, or understand the financial aspects of running a SaaS business, consider consulting with a Virtual CFO from ABEL. Our Virtual CFOs can help you identify opportunities to grow your business and revenue, and structure your finances to optimize cash flow.SCHEDULE A FREE CONSULTATION