It still needs to be said, even in the age of AI-first startups: The default case for 80-90% of SaaS startups is never to raise VC funding.
VC funding has always been the exception and not the rule in the software business. This isn’t changing.
I’m not against big VC bets on AI-first software startups and AI platforms. Even some SaaS companies that aren’t all about AI.
I’m saying most software companies in the US and especially around the world will not produce VC-scale returns. Life is very painful for the founders if you can’t scale up and sell fast enough.
Most software companies are not shooting for big horizontal marketing opportunities. They focus on verticals with their deep industry knowledge or “niche horizontals” with special advantages.
Most software companies outside Silicon Valley are trying to make a great $3M, $10M, or $20M ARR business with high optionality, sustainable profits, and a ready market of buyers at practical multiples. VC funding doesn’t work here.
It just doesn’t take a round of funding to build a product and grow revenues for most B2B software startups. AI is already making it cheaper and we know that AI power will be cheaper next year..
The SaaS startup game has changed in the last 5-7 years:
- It’s very inexpensive to make software now and getting cheaper
- It’s easier and cheaper to go to market– if you are savvy
- VC funds are 3x bigger, so risks go up for founders
- SaaS is a big global market with thousands of great micro-markets
- Big exits in SaaS with crazy multiples will be rare for the next 5-10 years
New SaaS startup founders should start with the expectation that they won’t raise institutional funding EVER, with the possibility that they might raise a practical round someday later if the conditions are perfect.
VCs know that their funding is very risky for founders and that they are for a small minority of moonshot startup opportunities.
The default case for 80-90% of SaaS startups is never to raise VC funding.
Why isn’t “self-funding first” the default option in entrepreneurship classes and accelerator playbooks?
