Venture capital funding vs. bootstrapping for subscription apps
Understanding the impact and implications of funding choices on app growth and autonomy.
How you fuel your project can mean the difference between a meteoric rise and a slow burn. Venture capital offers the allure of substantial resources and mentorship, propelling apps forward. Bootstrapping champions independence and organic growth, often fostering a deep connection between creators and their user base.
For subscription-based apps, this choice becomes even more nuanced. Indie developers and startups must weigh the immediacy and scale of venture capital against the autonomy and grassroots evolution of bootstrapping.
“The more you bring in outside folks and start involving other people in the business, I think there’s higher stakes, there’s more responsibility, there’s more accountability… I think you need to know if you’re in the mood for that… Or if you want to do something that’s more like your terms, your freedom and optionality, always.”Martín Siniawski, Podcast App, on funding vs bootstrapping
In researching this blog, we’ve drawn from a variety of interviews we’ve conducted with investors and app business owners. In particular, we’ve summarized much of the key information from our webinar on funding options for subscription apps featuring Nico Wittenborn, Tyler Tringas, and Eric Crowley.
Venture capital funding: the accelerator
Venture capital (VC) funding is a financial mechanism where investors, typically represented by VC firms, infuse capital into startups or early-stage companies with the potential for high growth. In exchange, these investors usually receive equity in the company, betting on its future success.
At the heart of every VC’s decision to invest is the potential ROI. Most VCs are on the lookout for the next big thing—startups that show promise to disrupt markets, fill crucial gaps, or introduce innovative solutions. They’re not merely passive investors; they’re strategic partners looking to actively drive growth, scale operations, and eventually achieve a lucrative exit, usually through an acquisition or an initial public offering (IPO).
Pros of VC funding
There are several pros to securing VC funding for your subscription app — and it’s not just about cash.
Rapid scaling and growth
The capital influx from VCs allows startups to quickly expand their operations, hire talent, increase marketing efforts, and solidify their presence in the market. With the right investment, a startup can expedite its growth trajectory and seize a significant market share.
Access to expert advice, mentorship, and network
More than just financiers, VCs provide startups with strategic guidance, industry insights, and introductions to key stakeholders. This mentorship can be invaluable, especially in the tumultuous early days of a company.
Enhanced credibility and brand recognition
Being backed by a reputable VC firm can bolster a startup’s standing in the industry. This stamp of approval can attract further investors, strategic partners, and top-tier talent, while also building trust among potential customers.
Cons of VC funding
As is the case with any type of funding or business decision, there are cons to VC funding as well.
Potential loss of control and equity
One of the most significant trade-offs of VC funding is dilution of ownership. Founders may find themselves ceding control over major decisions, especially if they no longer hold a majority stake.
Pressure to meet certain growth metrics and returns
With significant investment comes significant expectations. VCs expect startups to hit specific milestones and growth metrics, which can sometimes lead to a short-term focus at the expense of long-term sustainability.
Possible misalignment of long-term visions
Many founders and app developers dream of creating a lasting legacy with their company. They’re invested in the cause or purpose behind their company in addition to eventual ROI.
VCs, while they often have a belief in the product, typically prioritize fast ROI. This can lead to clashes in strategic direction, especially if the VC’s exit strategy doesn’t align with the founder’s vision for the company.
How to secure VC funding
Securing venture capital isn’t just about having a novel idea; it’s about demonstrating its viability and your ability to execute.
“Fundamentally we ask three very basic high-level questions: can this team build it, will people pay for it, and can they find greater than zero channels to grow it in. Having at least some kind of an answer in all three of these buckets is a really big hurdle.”Tyler Tringas on critical considerations before funding
Here’s what investors typically look for:
1. Prove people will pay for the app
Before they invest, VCs want evidence that there’s a market demand for your product.
“There are certain businesses for which the question of whether people will eventually pay you for this thing is not really a question,” Phil Schwartz of Corazon Capital told us when we interviewed him for the SubClub podcast. “There are other businesses that are inventing things where the idea that people will pay you for them is not inevitable.”
Those businesses, Schwartz argues, need to tackle the question of whether people are willing to pay for this app as early as possible. If they aren’t willing to pay, someone—on your team or your investors—will figure it out eventually, which will have consequences.
This “proof” could be collected via early sales, pre-orders, or a successful pilot program. The stronger the evidence, the more confidence an investor will have in your project’s potential for success.
2. Show the ability to build and scale
It’s essential not just to have a vision but also the capability to realize it. Potential investors want to see that you have both the technical know-how and the operational strategy to scale your product.
“A smaller percentage of [mobile subscription apps] should be funded by venture capital than a lot of other verticals,” said Nico Wittenborn, an investor at Adjacent. Investors are typically looking for big outcomes, and it can be difficult to scale mobile subscription apps to a place where investors will be happy with the outcome.
If you’re building a mobile subscription app, this may be the make-or-break variable that helps you decide between VC funding and bootstrapping.
3. The focus on growth channels and monetization
Investors are in the game to see returns. So, beyond the product itself, they want to understand how you intend to grow your user base and how you plan to monetize.
Schwartz gave some further insights into what VC firms are looking for, emphasizing the significance of having a clear monetization strategy built into your roadmap.
Bootstrapping: the independent journey
Instead of seeking funds from investors or venture capitalists, bootstrapping entrepreneurs rely on their own savings, revenue, and sometimes the goodwill of business partners, developers, and friends who believe in the product enough to go without pay in the short-term.
Instead of focusing on appeasing external shareholders, bootstrapped ventures prioritize their customers and product. It’s a journey marked by self-reliance, grit, and an organic growth philosophy.
Pros of bootstrapping
Bootstrapping is hard work and it may take a while to reap the rewards, but there are several pros as well.
Complete control and ownership
One of the most alluring aspects of bootstrapping is the retention of full ownership. Without external investors to answer to, entrepreneurs maintain complete control over their business decisions and the direction of the company.
Flexibility to pivot
In the dynamic world of startups, agility can be a superpower. Bootstrapped startups often have the flexibility to pivot their strategies or even their entire business model without needing to consult or get approval from external shareholders.
Potential for a deeper connection with the product and users
While it’s certainly possible for funded startups to build strong customer relationships, bootstrapped companies often have unique opportunities in this area. Without the external pressure from investors to rapidly scale and meet aggressive growth targets, bootstrapped startups can afford to focus more on nurturing their product and their relationship with users. This slower, more organic growth allows for a closer alignment with user needs and feedback, fostering a deeper connection.
A limited budget and resources mean that bootstrapped ventures are often forced to prioritize ruthlessly. This can lead to a sharp focus on the most essential aspects of the business, helping entrepreneurs center on what truly matters at the moment.
This is a sentiment shared by Nomorobo founder Aaron Foss on the SubClub podcast:
You just don’t know what to focus on as a startup. We can do this. We can do that. If you then have unlimited resources, you’re like: we’ll just hire this person and this person. All of a sudden the focus gets even less focused…Aaron Foss, Nomorobo, on how more resources can dilute your focus
Cons of bootstrapping
Founders have a natural grit and determination. As such, it’s easy to jump into bootstrapping headfirst thinking that grit will be enough to propel you through challenges. But even for the most determined of founders, it’s important to consider all the cons of bootstrapping before making your decision.
Slower growth potential
Without a substantial influx of capital, bootstrapped businesses might grow at a more gradual pace compared to VC-backed competitors. This slower trajectory can sometimes lead to missed market opportunities.
A common challenge faced by bootstrapped startups is limited resources. This can constrain the company’s ability to invest in marketing, hire top talent, or dive deep into research and development.
Greater personal financial risk
Bootstrapping often involves significant personal financial sacrifice. Entrepreneurs might pour their own savings into the business or forego a regular salary for extended periods. This can place a heavy financial strain on founders, especially in the early days of the venture.
The key to bootstrapping
With bootstrapping, the journey might be longer and more challenging, but it offers a unique pathway for entrepreneurs who value autonomy, connection, and organic growth.
Focus on what’s important
Coming back to our interview with Aaron Foss, he says “I have two timeframes: It’s now or later. Are we working on it now? Cool. Let’s do it. Or we’re working on it later. Sometimes later never comes.”
Focusing on what’s needed right now means you don’t take on work that will sidetrack you.
The last thing you want to do when bootstrapping is overextend yourself. It can be difficult to reign in the excitement and passion for your product, especially at the beginning, but that focus will help you grow slowly and sustainability for greater long-term success.
Set realistic expectations for growth
Retaining your focus will be far easier if you set realistic expectations for growth. You’ll be sacrificing a lot of time, money, and sometimes sleep in order to bootstrap, especially if you’re growing your company on top of a full-time job or other responsibilities, so it’s okay to take it slow. In fact, it will save you a lot of frustration (and probably be a lot better for your health).
Summary of the pros and cons
|Venture capital funding
|Rapid scaling and growth
|Complete control and ownership
|Access to expert advice, mentorship, network
|Flexibility to pivot
|Enhanced credibility and brand recognition
|Potential for a deeper connection with the product and users
|Potential loss of control and equity
|Slower growth potential
|Pressure to meet growth metrics and returns
|Possible misalignment of long-term visions
|Greater personal financial risk
Key considerations for subscription apps
Subscription apps come with their unique set of challenges and advantages. Unlike one-time purchase models, subscription-based apps rely on continuous value delivery to retain customers and ensure consistent revenue streams. This recurring revenue model, while stable, demands constant innovation, engagement, and user satisfaction. Whether you’re considering venture capital or bootstrapping, understanding the nuances of the subscription model is paramount.
Focus on metrics that matter
Metrics provide actionable insights and can make or break a subscription app’s success, especially when pitching to investors or allocating limited resources. Eric Crowley, a partner at GP Bullhound, says there are four main metrics buyers look at:
- Revenue growth: This is a primary indicator of a thriving user base and a business model’s sustainability. Investors are particularly interested in this metric as it demonstrates the app’s ability to scale and capture market share.
- Margins: Revealing the profitability after operating expenses, margins are crucial for investors to understand how much actual profit the business retains. It’s a direct reflection of the app’s operational efficiency.
- LTV to CAC ratio: The Lifetime Value to Customer Acquisition Cost ratio indicates the efficiency of the app in acquiring and retaining valuable customers. A favorable LTV to CAC ratio suggests that the app is not just drawing in users but is also successful in converting them into long-term, revenue-generating customers.
- Engagement metrics: For subscription apps, user engagement is a strong indicator of long-term viability. High engagement suggests that users find continuous value in the app, leading to stable and potentially growing revenue streams.
Read more on critical metrics for subscription apps >>
Tailor your strategy
Subscription apps vary widely in terms of their target audience, functionalities, and market dynamics. Therefore, the choice between bootstrapping and securing VC funding should align with:
- The nature of the app. Some apps might require rapid scaling to capture market share, while others might benefit from a slow, organic growth strategy.
- Target audience. Understanding who your users are, their needs, and their behaviors can dictate the pace and style of growth you pursue.
- Market dynamics and competition. The presence of competitors, especially well-funded ones, can influence the decision to seek VC funding for aggressive growth or to bootstrap and carve out a niche.
Because subscription apps rely on retention, leveraging data can help you:
- Attract the right audience. Knowing who’s likely to subscribe and why can sharpen marketing efforts to help you attract the type of users who won’t churn.
- Optimize conversions. Data can offer insights for crucial lifecycle events, like effective onboarding processes, compelling paywall presentations, or winback campaigns for lapsed subscribers.
- Analyze and optimize for growth. Regularly assessing growth metrics and user feedback can lead to iterative improvements, ensuring the app remains relevant and valuable.
This data is invaluable regardless of your funding choice. For VC-backed ventures, it showcases potential and growth; for bootstrapped businesses, it informs prioritization and resource allocation.
Choose the best path for your growth
Take time to reflect on your app’s vision, the resources at your disposal, and the current market and choose your funding and growth path accordingly. Every step of the way, take user value into consideration, as that will always be the cornerstone of growth.
When making these pivotal decisions, a robust data platform becomes your ally. Whether you’re fine-tuning monetization strategies or optimizing user acquisition, RevenueCat Charts give you the success-driving metrics you need to make informed choices for yourself or with investors.