Originally published on Medium
This year’s been an exciting year for SaaS. Last week, SAP preempted Qualtrics’ IPO, scooping up the customer experience platform for $8B. The deal marks SAP’s largest acquisition to date and a 75% premium on Qualtrics’ IPO valuation. The outcome is a fantastic one for Qualtrics.
Yet, in a world of cash-burning, unprofitable companies and outsized funding rounds common to Silicon Valley, one can’t help but notice that Qualtrics doesn’t look like its Silicon Valley brethren. The company’s been cash flow positive since its inception. It delayed taking on venture funding until it was 10 years old. Even when it raised venture funding, it barely touched it, and the primary capital raised still sits on the company’s balance sheet today. When it filed for an IPO, it was both profitable and growing at a healthy rate, a rare occurrence for IPO-bound companies. Through all this, the founders protected their ownership, owning a whopping 46% of the company when it filed for IPO. Although Qualtrics took longer to build, it’s arguably more valuable than its peers.
Knowing all of this, it’s easy to jump to the conclusion that Qualtrics’ alternative approach makes it an anomaly. But is it? Let’s take a look at how Qualtrics stacks up against some of its peers that filed to go public this year.
ARR v Time to Filing S-1
Qualtrics had stronger annual recurring revenue (ARR) than its competitor SurveyMonkey despite taking less time from founding to filing to go public. Qualtrics was only trumped by Dropbox which achieved ARR of $1.2B in 11 years.
VC Dollars Raised v. ARR
With the recent flood of IPOs, one number we’ve been looking at is the ratio of VC Dollars Raised to ARR at IPO, also known by some as the hype factor. The ratio is a good way to measure how efficiently a company generates ARR. For example, Qualtrics took $400M in VC dollars to reach $288M in ARR, for a ratio of 1.4.
In comparison, Qualtrics’ Utah-based peer Domo raised $730M in VC dollars to reach $107M in ARR, for a ratio of 6.8. Qualtrics blows Domo out of the park on this metric, generating ARR much more efficiently than Domo. If we look at the amount of VC dollars left on the balance sheet for each company, this would likely tell a different story, one that’s even more favorable to Qualtrics.
Founder Ownership v VC Dollars Raised
Qualtrics founders held 46% ownership in the company when it filed for its IPO. This is substantially larger amount than the Elastic (36%) and Dropbox (35%) founders. For context, a study by Founder Collective that analyzed 71 tech IPOs found that founders typically have ~15% ownership at IPO.
Key Takeaways for Founders Considering Bootstrapping
As a founder, it’s important to consider the different approaches you can take to build your SaaS business, specifically when to raise capital and how much. If you’re thinking about bootstrapping your SaaS business, like Qualtrics, you should keep a few things in mind:
- Focus on planned growth: It will take you longer to get to a level of ARR where you can spend for growth. This may be obvious but if you take on venture funding, you can aggressively spend this capital on hiring and growth. If you’re a revenue-backed company, you’ll likely be capital constrained until $10–15M in ARR and will want to keep a close eye on competition. Once you hit $10–15M in ARR, you’ll likely be in a position to start spending incoming cash flow more aggressively and ultimately fuel faster growth.
- Start with SMBs: Your go-to-market will likely start with SMBs (small and medium-sized businesses) and move up market over time. At the bottom of the market, sales cycles are typically shorter and you need less experienced sales and marketing talent to close deals. This strategy is less expensive and works well for bootstrapped companies that don’t have much cash on hand.
- Look beyond the valley for talent: You should consider building your team outside of the San Francisco Bay Area. Talent in the Bay Area, especially engineers, can be 2–5x more expensive than other locations. It’s not a coincidence that the shining examples for bootstrapped SaaS companies, Qualtrics and Atlassian, were started outside of the Bay Area.
Capital efficient companies like Qualtrics show that you can build a massive $100M+ ARR business with minimal venture capital. They ultimately show that slow and steady can win the race.
Note: This data was gathered from publicly filed S-1s. Implied ARR was calculated by multiplying quarterly subscription revenue by 4. The implied ARR metric for DocuSign couldn’t be calculated based on the information in it’s S-1. Founder ownership was derived from the Principal Stockholders listed in the S-1.