A micro Saas startup is an interesting phenomenon. It is an entrepreneurial initiative built around modest aspirations. The sky is not the limit for a micro Saas because it operates within self-imposed limits: It has a small total addressable market and relatively low revenue potential from the get-go. But why? Why would one settle for a business with a low ceiling when one could go for one with seemingly unlimited potential?
The difference between a regular SaaS startup and a micro SaaS, to a large extent, arises from the financing methods associated with each choice. Generally, whether a startup is bootstrapped or VC-backed has ramifications for the ownership structure, the growth strategy to be pursued, and how the company is run. The origin of the funds comes to define how the journey will shape up for a startup.
Of the two methods in question, bootstrapping refers to financing a startup using the founders' funds or the revenue generated by the product without any money raised from investors. On the other hand, when you raise funds from investors, you are actually selling them a portion of your ownership stake in your startup. This creates a whole different dynamic than bootstrapping.
Here are a few points to keep in mind while deciding whether to bootstrap your startup or look for venture capital.
Whether you are venturing into a red or a blue ocean will determine your marketing strategy and the budget you will need to implement that strategy.
As per Wes Bush's definition in his book Product-led Growth, a red ocean is a mature market where different companies compete with each other to grab a bigger share of the existing demand. The growth in such a market comes only gradually and at the expense of the competitors. On the other hand, a blue ocean is an uncontested market space where the first player has to create and capture demand. This kind of market lends itself to highly profitable, high growth as long as the product-market fit is realized.
Questions to ponder about before deciding on whether to bootstrap your company or look for investors include:
- Are you defining a new market category that you want to dominate?
- Do you have the intelligence that a potential competitor is working on a product like yours?
When you are racing against time, funds from venture capital investors can fuel your growth and help you gain strategic dominance over the market. You will certainly be bleeding money during the growth phase as your revenue growth won't be big enough to cover the increase in your marketing and development-related costs. This is where outside funding comes in handy.
Bootstrapped startups are, most of the time, also cash-strapped. They are used to operating at the edge of insolvency. They can't afford high rates of cash burn as they have a very little buffer, so they learn to prioritize profitability over growth.
Fundraising involves a trade-off—you accept some level of ownership dilution in return for capital injection. A decrease in your stake in the company will also translate into a decrease in your control over the company's direction.
Most institutional venture capital firms will look to have seats on the board of directors when they make a substantial investment in a startup. This might both be a curse and a blessing for the founders. Sure, it denotes a loss of independence and can trigger a set of events at the end of which the investors can look to oust the founders. However, the presence of investors on the board also brings accountability to the way founders lead the startup. The experience, vision, and network investors can leverage for the project can be a real asset to founders.
Risk-averse founders find themselves more at home leading bootstrapped companies where they can set the pace in accordance with the resources at hand without chasing aggressive growth. Founders willing to take more risks, on the other hand, will find that they can easily ally with VC firms willing to make a quick buck. After all, such firms tend to have a similar attitude toward risk.
The need to take risks follows from a startup's need to scale quickly. Once they secure VC backing, founders can quickly test out new ideas and experiment with new marketing tactics to fuel growth, subscribing to the "fail fast" mantra. Such a risky, growth-at-all-costs approach works for VC firms as they have many startups on their portfolios at any given time. They only need one or two of them to really pan out so that they can turn a profit on their whole portfolio.
A micro Saas startup is a textbook example of a bootstrapped company: A group of maximum five people with no aspirations to set the market on fire, led by a risk-averse founder who values managerial independence over liquidity and profitability over scaling. A company happy in its own skin, catering to and maintaining a personal touch with a limited customer base having a well-defined pain. A micro SaaS startup does not chase ambitious target metrics but instead tries to minimize customer churn and build brand loyalty.
Micro SaaS startups are proof that one can build a life-changing venture without engaging in endless marketing wars, experimenting with fringe business tactics, or answering to investors. These companies can generate healthy five-figure MRRs without the added stress of having to achieve year-on-year exponential growth. Micro SaaS startups are built to make their founders happy, investors be damned!