My Approach to Investing in Bootstrapped SaaS

Rob Walling

United States
Startups
Long-Term Investor

Who are you and what’s your story?

I’m Rob Walling. I’m a serial entrepreneur. I’ve built and sold several startups — most recently a SaaS application called Drip. I’ve been helping bootstrapped and mostly bootstrap startup founders since 2005—first, through more than 100 essays I wrote at RobWalling.com, then through a book I wrote that became popular in the bootstrapping circles that’s called Start Small, Stay Small: A Developer’s Guide to Launching a Startup.

These days I run the largest online and in-person community for mostly bootstrapped SaaS founders called MicroConf, as well as a startup accelerator focused on SaaS called TinySeed.

I’m originally from California but I live in Minneapolis, where we moved after selling Drip in 2016.

I started writing angel checks back in 2011, before I should have in terms of how much capital I had to invest at that time.

My first angel check was written to WordPress Engine which is now one of the — if not the largest — WordPress host in the world. I connected with the founder, Jason Cohen, when I invited him to speak at one of our MicroConf conferences back in 2012 or 2013.

Jason had spoken at a few of our events and as he began starting his next company he asked if I’d like to invest, given my experience and operational knowledge of SaaS apps. With my confidence in Jason Cohen’s ability to grow companies this investment was a no-brainer. We (my wife and I) scraped together enough cash to not quite meet the minimum, but it was enough that he let us in that first round. That was an incredible outcome for us seven years later.

My focus is on mostly bootstrapped B2B (Business to Business) SaaS applications (Software as a Service). This is software that charges on a recurring basis.

I focus on that because that’s my area of expertise. I’ve been thinking about, talking about, and writing about SaaS (plus building, growing, and advising them) for more than 16 years, so I have a good grasp on these businesses. I can look at a SaaS company’s metrics and tell you when it’s going to plateau and why, and have thoughts on how to fix it.

It’s a world I understand, but also a world where I can add value to those founders who are often doing it for the first-time founders. They may have built a great business but have some blind spots because they haven’t done it before.

In terms of the WP Engine investment I referenced above, I was involved in the series A where they raised around a million dollars and the series B where they raised $1.7M. This is 2011 and 2012 so the valuations were obviously not as high as they are today. The early investors, myself included, were cashed out by a $250-million dollar round raised from Silver Lake in early 2018 — so it was about seven years to liquidity from the first check.

I don’t believe the returns are public, but doing loose math on the above valuations and you can assume it returned north of 40x on the original check. It was substantial enough to have returned a multiple of every other angel investment we’ve made, combined.

Walk us through your process of identifying and executing on investment opportunities?

Between my personal angel investments and investments through our accelerator, I’ve made north of 55 investments, almost all in B2B SaaS.

My investment philosophy is that there is an industry iceberg in software. What I mean by that is Silicon Valley and the venture capital industrial complex focuses on unicorns and now decacorns — these $1 billion, or $10 billion companies. There are very, very few of those in any given year.

The iceberg that I’m talking about is the substantial number — the thousands, if not tens of thousands — of smaller SaaS companies that are bootstrapped or mostly bootstrapped. They might raise a small amount of funding and then become extremely profitable and grow into the seven, eight or even nine figures with barely any capital raised.

These companies are not written up on TechCrunch. They’re not written up on VentureBeat even when they hit $10 million or $100 million in revenue; even when they exit for $10 million or hundreds of millions of dollars. It’s very rare that you will see a mention of these companies.

My investment philosophy and the investment philosophy that we use at TinySeed is that these companies have been ignored by traditional venture capitalists (you can read our full investment thesis here). I’ve had 16-plus years of exposure to these types of companies both running multiple myself as well as mentoring, advising, writing books in the space, running events for these companies and just hanging around these founders for quite some time.

I have a long list of things that I’m looking for. I actually wrote it out when we started TinySeed. It’s a bulleted list of about 35 or 40 points that looks at: 

  • How much traction does the company have?
  • What does the founding team like?
  • How much experience do they have in this space?
  • Do they have an unfair advantage?

It’s a big list.

The cliff notes or the summarized version of that, for me, it comes down to three Ps. 

It’s the “People” which is the founding team and it’s:

  • Have they done this before or have they figured this out if they haven’t done it before?
  • Have they shipped software?
  • Have they gained traction either on their own or with a small amount of funding?
  • Have they been scrappy, capital efficient and built a business instead of asking people for permission?
  • Have they built a business instead of building a slide deck?

The second P, is Product Market Fit. Product Market Fit is the concept of building a product that people want and are willing to pay for.

It’s a lot harder than it sounds. A lot of folks, they spend months building software and they bring it to other businesses or consumers and no one cares. It just doesn’t solve a problem. So Product Market Fit, by my definition, is that you’ve built something that people need and are willing to pay for and in my case, it’s businesses’ need and are willing to pay for. It’s not binary. It’s not one or zero. It is a continuum and there’s a spectrum.

Product Market Fit is looking at:

  • How many customers are interested in this?
  • How wide is the funnel?
  • What percentage of sales close?
  • What is your churn like” — obviously, lower the better.

The third P is “Price sensitivity.” Really, it’s pricing. 

Bottom line is if you build software as a service app and you can’t charge more than $10-20 a month for it, it will be near impossible to build an eight-figure business. It will be really, really hard to build a seven-figure business.

The companies that I see that grow quickly, they either have higher price points — $100, $500, $1000 a month and up — or they have what I call a “dual funnel” which is where they might have lower-end plans of $15-$20 but they also have higher-end plans where larger companies, mid-market and enterprise are paying them $2000, $5000 or more per month. That’s where this third P of “Price sensitivity” can be a huge factor in terms of predicting a business’s growth.

Since startup investments are, by their nature, illiquid, I hold them until a liquidity event. Oftentimes, that is a sale. I will say that in my private investments, I have had two or three companies start to cut dividends this year because SaaS companies can have net profit margins in the 30 to 50% range. So running a SaaS company for the long term is certainly a viable approach and they can throw off a lot of cash.

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

The best day in my startup investing career was the day I got an email from Jason Cohen saying that WP Engine, our first angel investment — where we had scraped money together to invest. He emailed and said, “Early investors have been cashed out and you’ll be receiving a wire in the next day or two.” 

An interesting part of that story is that I had stock certificates and so did some loose math on what I was going to receive and I thought to myself, “That’s a solid return. I’m happy with that.” 

What I wasn’t aware of is that they had done a three for one stock split at some point and for some reason, I had missed it or hadn’t been notified. When I went to sign the docs for the close, it turns out the return was three times what I had calculated, which was mind-blowing. That made the return something that I will be chasing for quite some time.

What books, platforms or resources have you found useful? 

As far as I know, there aren’t any books written on investing in SaaS or in startups for that matter but there are books written on how to build startups and to understand them. 

For me, the most useful resource is my experience. For better or worse, that is the advantage that I have is that I’ve operated these companies and have seen inside and know how they work intuitively and therefore, it makes it easier for me to evaluate them.

That’s not to say that you couldn’t potentially learn quite a bit of this from the SaaS communities online if you decided you want to be a startup or a SaaS investor.

There are communities like SaaStr headed by Jason Lemkin. They have a conference and virtual events. Jason has a blog and that community is about Silicon Valley kind of venture-back SaaS.

I run a community called MicroConf. It is also an online community virtual events, in-person events, and it is for bootstrapped and mostly bootstrapped SaaS founders. Folks who are part of that usually—in fact almost in all cases — want to build their own SaaS company. They’re often looking to quit their day job and build something that’s a repeatable, relatively predictable, 6-7 or 8-figure company without raising venture capital.

Another platform is “This Week in Startups” which is from Jason Calacanis. It’s a podcast that has run for many hundreds of episodes and it’s a good look at how the Silicon Valley engine works. “This Week in Startups” also runs multiple events and has a venture fund.

These are the podcast news sites and resources that are valuable in my space.

What advice would you give to someone who’s just starting?

For me, my best deals have been ones where I had a connection and it was a founder that I knew that either I asked if they were raising or they reached out to me. It was not an AngelList syndicate that was publicly available. It was not a crowdfunding deal. I found that the valuations on those are usually astronomical. The deals that I’ve done where I’ve gotten the best returns are from the network that I’ve built.

When I started I was an outsider. I did not have friends in the startup space. I did not know any investors. I did not know any SaaS founders when I started talking about this and then starting companies.

I started a podcast and wrote a book and built the network. I think it’s tough to come into a space like we’re in with bootstrapped and mostly bootstrap founders who don’t necessarily trust the Silicon Valley complex and traditional venture capital.

For me, it is helpful that I have been around doing it for this long and that I’m a founder just like they are.

In my world the biggest mistake investors make when evaluating opportunities is investing in astronomical valuations. One investment I consider a mistake was an early stage SaaS company that had a $10-million valuation and it was through an AngelList syndicate. That company, four or five years later, sold for what I believe is around $14.5 million.

Some of my other investments, I’ve invested at $1 to 2 million valuations. If that had been the case, I would have made between seven and 14 times return on my money. But in this case, I put in $10,000 at a $10 million valuation and I got back $14,000 after four or five years. I should have invested it in the stock market. The mistake that I made was not paying attention to valuation.

I have heard more traditional venture capitalists say valuation doesn’t matter that much because they are unicorn hunting. The companies like the Ubers and the Facebooks and Googles that become billion or deca billion-dollar companies or more, it doesn’t matter if you invest at $1 million or $10 million or $20 million because the multiple is insane. But in my world of these more “base hit” SaaS companies that might sell for $5 million, $10 million, or $50 million, the valuation you invest at does matter.

What investment opportunities are you excited about at the moment?

I’m a huge fan of SaaS companies because they have recurring revenue. Revenue compounds over time. I also focus on those that serve other businesses. They’re very stable. Price sensitivity is lower. There are tremendous opportunities in thousands, if not tens of thousands, of different niches. I have been bullish on B2B SaaS for 15 plus years and I continue to be moving forward.

I’m very excited about our next TinySeed accelerator batch that we’ll be announcing here in the next month. It’ll be early May by the time we announce it.

Where can readers go to learn more about you?

I’m @robwalling on Twitter. Robwalling.com, if you’re interested in hearing me talk about this topic of bootstrapped SaaS for about 30 minutes every week, I’ve been doing it for a decade, 545 episodes, on Startups for the Rest of Us. You can find that in any podcatcher or visit startupsfortherestofus.com.

Thanks to
Rob Walling

 for doing this interview.

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