How the boom of venture capital created a generation of lazy companies

Daniel Wikberg

CEO & Founder of Upsales

Daniel Wikberg

CEO & Founder of Upsales

When we started Upsales back in 2003, the SaaS industry looked very different.

Salesforce was a year away from its IPO, with news reports describing a “subscription-based method” for selling “that could shake up the software industry”.

Application service providers were just starting to build momentum, with use cases ranging from e-commerce to ERP.

The term “unicorn” was still reserved for magical horse-like animals.

The Upsales website, circa 2005, please note the trust-building “software box” and the cool mobile phone :)

At the same time, the majority of SaaS companies were growing bootstrapped. Strategies tended to focus on identifying a solution, start delivering, building proof-of-concept, and achieving growth. Venture capital (VC) was seen as something that came later.

Over the past few years, we’ve seen this flip. VC has become one of the first avenues to explore — and access.

The paradox of technology

The growth in VC has come amid a backdrop of constantly improving technology. New ways of measuring processing power may mean Moore’s Law has become less relevant. However, its central premise — that computing performance continues to increase exponentially — remains firmly in place.

In theory, this should mean new ways for SaaS businesses to grow. More efficiently, with less reliance on external funding. For example, when we started almost 20 years ago:

  • Hosting services: Making sure you had a suitable hosting server in place was difficult, and very expensive.
  • Open-source code: In 2004, our best developer spent 200 hours on developing code for a calendar pop-up. Nowadays, you can write one line of publicly available code to get the same output.
  • Fragmented technologies: There was no standardised code for web browsers, and no jQuery.
  • Marketing: Targeting ads online was not very sophisticated and marketing, in general, was really really expensive.

Despite these and many other challenges, it was possible to overcome them without accessing funding. Nowadays, SaaS attitudes to VC are very different, perhaps partly because of external macro-economic factors. Low-interest rates have been a fixture of many Western European economies in recent years. As a result, investors have gone towards private equity rather than low-risk interest funds.

We’ve seen this play out in the US, where investment is set to be 20X what it was in 2002. Naturally, this increase has opened up funding opportunities that may not have even existed five or 10 years ago. On one hand, this offers entrepreneurs a tempting shortcut to achieving growth.

However, it can also mean missing out on valuable — and essential — lessons along the way.

Nail it, then scale it

The first few years of growing a company involve plenty of trial and error. This experimentation will always be needed — no matter how much (or little) funding there is. However, VC-funded companies will always be more in the spotlight when it comes to those experiments.

For those still finding their product-market fit, “Nail it, then scale it” is often the way to go. You can focus more on finding out what works. Rather than focusing on what you’d do with a sudden influx of cash.

“I once talked to an American investor in restaurant chains, who told a restaurant owner the following. Open one restaurant, nail all the details. Streamline your process. When you’ve done that homework, we can open 200 restaurants in a year.”

If you look across the Nordics and the UK, the majority of fastest-growing companies do generate positive cash flow. However, when it comes to fast-growing SaaS companies, almost none of them are cash flow positive. That’s paradoxical, bearing in mind the high scalability and profitability potential SaaS has compared to many other industries. Is external investment the reason Saas is lagging behind?

Starting from the right place

An influx of VC funding can mean increased pressure. Investors expect things to happen. This can mean building an organisation too quickly. Before important questions get truly answered. For example:

  • How should we build our product?
  • Which price model should we choose?
  • What positioning should we have?

These are crucial questions that arise in the early days of a new business. To find the answers you need time, experience and creativity. Money alone won’t provide all that.

Necessity is the mother of invention

A bootstrapped company, where every penny/dollar/cent counts, needs to come up with effective solutions to survive. After all, fewer options or distractions often leads to more innovation. There’s no financial safety net. When the brown stuff hits the fan (as it will), you also learn more about your company. Who can handle the pressure, and who can’t.

Rather than embark on costly recruitment drives, bootstrapping means you’re more likely to look internally to solve challenges. In the process, you can uncover hidden talent with existing employees. It’s a way of democratising promotion opportunities. Talking of which…

Democratisation or inflation?

Technology is often cited as a great leveller of competition. Where anyone with an internet connection can educate themselves with MOOC lectures from renowned professors. Where someone can start an online bookstore that grows into the world’s biggest online retailer. And where businesses can access enterprise-grade infrastructure without requiring enterprise-grade levels of CapEx.

VC changes all that. Particularly for SaaS companies facing competitors pursuing a “Blitzscale” strategy. Deployed by the likes of Facebook, Uber, and Airbnb, Blitzscale requires businesses to:

  • Pursue a huge Total Accessible Market (TAM). Otherwise, potential rewards and exit value won’t be sufficient for VCs.
  • Operate in a winner-takes-all market. Think of marketplaces and platforms, where network effects mean that only one provider will be needed.
  • Growth at the expense of profit. Ultra-fast growth will mean profits follow, eventually and at high margins.

This approach is only sustainable for a small number of VC-backed businesses. The end result is a form of monopoly, with many SaaS businesses unable to complete. And we all know what monopoly means for innovation, productivity, and potential for new market entrants.

Investment & the signal to noise ratio

Let’s talk figures. Global funding has more than doubled in 2021 compared to 2020. Longer-term, investment is over 10X that of a decade ago. Unicorn valuations are up 350% in 2021 compared to 2016.

Of course, more investment should mean more job opportunities within new market entrants and disruptors. However, this also makes it hard to separate the signal (sustainable growth) from the noise (of the hype cycle).

When it’s time for venture capital

Venture capital helps businesses grow quickly. Without it, many rely on a steady rise in revenue. That may or may not be a good thing. It’s unlikely the likes of Spotify or Klarna would have become so successful if they’d been bootstrapped.

However, too much VC too early can be a bad thing. Many entrepreneurs have gone for early investment. However, this tends to work when an entrepreneur has previously built a similar company before. And that’s rare.

What’s more, most companies raising VC aren’t necessarily hyper-growth companies. They’re perfectly able to grow organically. Without accessing investment, and instead gaining the experience, creativity and knowledge that comes from bootstrapping.

Ensuring efficiency with venture capital

Examine your VC-funded competitors. What difference has their investment made to their operations? Then analyse your internal efficiencies. How much would a 10% increase in productivity be worth to your business? And what would it be worth after you added VC?

Apply a similar process to your sales and marketing. Deploy targeted, account-based, data-driven campaigns. Rather than “spray and pray” approaches.

It’s also crucial to deploy the Rule of 40 or E40. An influx of cash may boost growth, but at what cost to profitability? Understanding the impact will show where to focus resources, and indeed boost future valuations. Assuming that’s your ultimate goal, rather than going for the bootstrapped approach.

E40 = ARR growth rate + Free Cash Flow Margin

Doing it yourself is probably going to be the harder route. You may sacrifice some growth in the short term. You’re also likely to be more innovative, retain control, and build a sustainable business. One that’s able to grow for the next 20+ years and beyond.


/ Daniel Wikberg

CEO & Founder of Upsales

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