Is bootstrapping a path to wealth?
Hey all,
I was digging a bit into acquisition numbers and valuations, and was shocked on the gap between well-funded businesses and bootstrappers.
For a quick view into all this – Josh Pigford from Baremetrics recently published a post [mentioning that he almost sold Baremetrics for $3-5 million dollars] last year. Baremetrics makes somewhere around $1.4 million dollars per year, according to their open page, so that's a 3-4x multiple on their revenue. Plus, Baremetrics has rich, exclusive data on some big players in the SaaS space, a great marketing foundation and amazing people.
Cut to the big enterprises: Plaid was recently acquired for $5.3 billion dollars by Visa, with a revenue of $100m - $200m. That's a 50x multiple! Plaid surely has awesome people as well, and big data on some of the biggest enterprises in the world – so why is that multiple over 10x bigger?
There are different types of acquisitions. "Strategic" acquisitions usually involve much higher revenue multiples. This is because the acquiring company cares about more than just the revenue. In fact, they often don't care about the revenue at all. Instead, they have a strategic plan for how they can leverage the acquired company to achieve something uniquely important and lucrative.
For obvious reasons, this depends entirely on the acquirer. You can't unilaterally decide that your company is a strategic asset to someone else. They have to make that decision themselves, based on their needs and capabilities, which are usually invisible to you. I've seen acquisitions proposed or rejected for reasons that founders could never guess, based on various things happening inside the acquiring company.
Note that bootstrapped companies can be acquired for strategic reasons, and often are. (You may or may not be using one right now.) But this doesn't occur as often as it does with high-growth funded startups. Others more knowledgeable than me have likely written about why, but my guess is as follows:
To command strategic acquisition multiples, you need to be unique. Otherwise you don't have leverage, as the acquirer can easily just go buy one of your competitors for a cheaper price. Bootstrapped companies are, on average (but not always), less unique than funded startups. This is because we're more focused on generating revenue and doing so quickly, which means we (wisely) don't tend to compete in winner-take-all spaces. We rarely have the funding it takes to completely dominate a market.
The path to wealth as a bootstrapper is less about selling your business, and more about improving it: generating a healthy recurring profit that grows indefinitely, while simultaneously increasing the amount of freedom and control you have over your life.
Purchase multiples are also impacted by:
Depends on what your definition of wealth is really. The advantage of bootstrapping a side project you like is the relatively low risk for potentially high profit.
If your project never takes off, you'll at least have enjoyed making it, have learned something as well, and you probably haven't sunk that much money into it (software products are pretty cheap before you have users and revenue).
If it takes off, you get all that plus money!
Anyways, another reason Plaid's valuation is so much higher is because their growth trajectory is better. If you have a full team burning money to make a product grow faster, the valuation will take that growth into account. It's kind of like betting how high a rocket is going to go. If you have a rocket sipping gently on fuel, it's probably not going to go as high as the rocket burning through all of its booster tanks. Booster tanks of fuel = VC funding, in this analogy.
It’s the value proposition. Plaid is a platform for developers building fintech apps. Not only is it a solid business right now, but it has massive earning potential in the future as well. I’m sure baremetrics is a solid product as well, but the future growth potential is not as high.
This comment was deleted 5 years ago