Earlier this week we examined which software delivery methods (SaaS vs. on-premise) were fueling the growth of software companies on the 2014 Inc. 500. As a follow up, we wanted to examine the role of funding within the data set to identify any trends or broader relationships between funding and the growth of these companies. This post examines the breakdown of funded vs. bootstrapped software companies on the 2014 Inc. 500 list across the following areas:
- Year founded
- Three-year growth percentage
- Jobs added over the past three years
To begin, we can see that out of the 41 software companies who made the 2014 Inc. 500 list, 65 percent were funded and 35 percent were bootstrapped (based on publicly available information.)
Second, we examined the revenue breakdown between these two groups, as charted below:
For companies generating less than $10 million per year, there is an even distribution between funded and bootstrapped companies. However, as revenue exceeds $10 million annually, funded companies become the norm. Given the capital investment needed to scale a subscription-based SaaS company, this distribution makes sense. It would be harder for a bootstrapped company to achieve a payback period short enough to have the necessary funds to re-invest in marketing, sales and customer success programs, as well as staff to fuel the acquisition engine.
Below, we broke down the group by the year in which the company was founded.
*Eligibility criteria to apply to the Inc. 500 list requires applicants to to have generated at least $2 million in annual revenue the year prior to application. Given the ramp-up time to scale a SaaS company, the most recent "year one" for these companies was 2010.
This data illustrates two noteworthy trends. The first is that the majority of these companies were founded in the last 10 years. Second, though startups are far more capital-efficient today than they were 10 years ago due to less-expensive digital-acquisition strategies, there has been a sharp increase in capital to these companies from 2006 onward.
Returning to our analysis of software delivery model, we can also see that these younger companies not only are achieving higher growth rates, but the majority are using a SaaS delivery model. One potential reason for the increase of funding to newer SaaS companies is their formulaic growth based on aggressively tracking growth metrics and seeking additional funding rounds when certain benchmarks are reached.
Of course, each of these companies has achieved incredible growth, but the funded companies on the 2014 Inc. 500 list have realized the highest growth rates over a three-year period. There are several factors that could lead to this trend, whether because of obligation (pressure from investors/VCs, etc.), expert guidance on scaling a SaaS startup from their VCs/board or appropriate use of capital to scale teams that grow revenue (or all three).
We also looked at the number of jobs added in the past three years, broken down below:
Based on the data, the bootstrapped companies in this analysis appear to have grown lean, while the funded companies—especially after they have found product-market fit (at around $1.5 million in annual revenue)—scaled quickly. Likely, an important piece of this was the use of capital to hire key personnel and then scale their sales, marketing and customer success teams. Alongside formulaic growth metrics, efficiently scaling marketing, sales and CS teams has become a key element of growth for SaaS companies.
As displayed in the chart above, high-growth companies appear to be doubling down on adding jobs while they are in their growth phase. However, the consequence of this aggressive growth mode hiring is a potentially short-term reduction in revenue/head, as indicated below:
Ultimately, there's no definitive answer as to whether a software startup should seek funding, but the data does tell an interesting story of the longer-term trends in growth and company size over the first 10 years for some of today's fastest-growing private software companies and their decisions to seek funding rather than bootstrapping.
We are fascinated by how software companies are growing, including the associated metrics, benchmarks, team structures and growth strategies. There is no doubt that working with similar companies and helping them grow is one of the things we look forward to most at New Breed.
This post is Part II in an ongoing series benchmarking the growth of 2014 Inc. 500 software companies. You can read Part I here. If you're as excited about Part III as we are, please subscribe below to receive future posts.