[Carl]

Hello and welcome to the SaaS Growth Podcast this week. We're here with James Benham. He is a founder of several insurance tech companies as well as the author of the book Be Your Own VC, available on Amazon. So how are you today, James?

[James]

Having a great day. How about you?

[Carl]

I'm great. I'm great. Autumn's coming, which is scary in Finland, but it's all right. We'll get through.

[James]

Why is it scary?

[Carl]

Oh, autumn is fine. It's what's coming. It's like the end of summer.

[James]

Huh?

[Carl]

Going to start dropping to like negative 20 degrees Celsius any day now, so...

[James]

It's like the internet meme where the guy's holding a staff and he says, “Brace yourselves. Winter is…”

[Carl]

Exactly. Literally, winter is coming, and it's going to be brutal.

[James]

This is why I live in Texas because when winter is coming, it’s actually really welcome, because we get so tired of 105-degree-plus temperatures, or whatever you use—43-degree-Celsius-plus temperatures. We're ready. We're ready for winter because winter is great here. It’s fantastic. We have a great time in winter.

[Carl]

40 degrees Celsius is unimaginable to me, to be honest.

[James]

We have probably a good 70-plus days over 40, so yeah, it’s a lot.

[Carl]

About your book, talk me through Be Your Own VC and what led you to write a book on bootstrapping?

[James]

I will give a very brief thumbnail sketch of my background that'll explain why. I was born and raised in Baton Rouge, Louisiana, which is in the South of the United States and the watery swamps down there. But I was raised by an entrepreneur. My father grew up on a farm with no money. He went to the Navy for four years, went to college, and then tried working for somebody else. He didn't like it, so he started a hospital equipment, medical equipment company out of his garage with the cash he had saved from his job and his student jobs in college. He built that and sold it, then built a service company for hospital equipment and sold that, built a machine shop and sold that company, and then in 1979 when I was born, he built a Teflon company that became the fourth-largest producer of Teflon in the United States, and he sold that.

When I was 25, he made it clear that I would never be allowed to work for him, and he would never put me at his company. I was going to have to do my own thing. He wanted me to learn the hard way because he knew that the best lessons in business are often learned the hard way—not always, but often. And I went to college at Texas A&M, which is a very large 75,000-student university in Texas with a great alumni network. I did a couple of internships as an auditor security guy with PricewaterhouseCoopers, a big global accounting firm, and just wasn't for me.

So I went back to my dorm room, pulled a move like my dad did, and started this company 23 years ago with a few thousand bucks and, I think, a Pentium-class computer on the desktop of my dorm room. We built a lot of websites and a lot of software, then hired people and built more websites and more software. Eventually, three years later, I got into insurance software, three years after that into construction software, and 12 years after that sold the construction software company and then continued building the core business that we didn’t sell.

So I've had a really fun career, but I was mentored by a man who bootstrapped. Bootstrapping is doing the best you can with what you have. Bootstrapping is conserving, generating your own cash for your own enterprise, usually first with a job where you save money, then starting a business, and then taking all the profit you make and plowing it into growing the business. That’s bootstrapping, right? That's building what you have to build so you can build what you want to build. My dad was the master bootstrapper, and he mentored me through that process. I learned a lot of my own lessons too because I had a very different company. He had a manufacturing company; I had a software business. I had to travel all the time. He didn't have to travel all the time, but he sold globally, and I sold globally. I had to learn my own lessons, but I also learned a lot from him.

When we sold SmartBid in 2018, I said, "This needs to be written down." There are a ton of books, articles, and speeches about putting together your pitch deck, how to woo investors, how to impress investors, how to raise your seed round, how to raise your A round. There’s a lot of writing and discussion about that. I’ve got an undergrad and master's in business, and they talk a lot about leverage or debt, and I was like, "Man, there’s a lot of teaching about all the other ways of building a business, but there’s very little teaching about the core mechanics of bootstrapping." The first ten things you’ve got to do to keep you from running into the ditch—that’s what’s missing.

There are remarkable success stories about bootstrapped companies, but they aren’t told as much because they’re private transactions. There’s no VC behind them doing announcements, and often the owners are very quiet about how they do this. I was like, we need to put some writing and thought leadership out there on bootstrapping—not just bootstrapping a business, but bootstrapping innovation inside of a large company because often people take the same approach. So that’s why I put together the book Be Your Own VC: Be Your Own Venture Capitalist, 10 Bootstrapping Principles to Generate Cash and Keep Control. It’s about the playbook for how to not raise money, whether you’re doing it for a startup or inside a large business.

[Carl]

What would you say is the main reason people should be bootstrapping versus going the more explosive VC funding route?

[James]

There’s nothing wrong with raising money. The only wrong way to do this is to go out of business. If you can grow and sell a business or grow and operate a business, those are the two good outcomes. There’s a third outcome: You grow and grow yourself out of business, or you don't grow and you shut down. So, you have those three options. There's nothing morally wrong with raising money, but you give up a ton of control. You have board members with votes; you often get outvoted. You can get fired from your own company, or have decisions overridden. A lot of people you raise money from have a fund window and need to return capital, so you’re on an artificial timeline that may not match the natural pace of the business.

I’ve been involved with and advised companies that were amazing—really amazing companies—that were on the verge of real greatness. They achieved product-market fit and were starting to get customers, but not fast enough for their funding partners. The funding partners cut them off, and they shut down because of it. Everyone hears about the wild success stories because they’re loud, with seed rounds, A rounds, B rounds, and 10x valuations. But no one talks about the other eight out of ten that return capital or shut down. Bootstrapping gives you the ability to control your product, your timeline, and stay in the business for as long as you want without someone forcing you to sell or exit.

[Carl]

That makes sense to me. I’ve definitely seen examples where companies were great but needed more time to cook. Then a cash flow problem happens, and they shut down a perfectly good business because they don’t have the cash.

[James]

Right? Yeah, it’s a real shame. You’re like, "That could have changed the market!" but they had a funding window, or the funding partners pulled out. The problem is, when you get addicted to OPM—other people’s money—it’s hard to cut back and go break-even. When you're heavily subsidized, it’s tough to scale back. You can see that happen all the time, especially in SaaS companies. And people always point to exceptions like Amazon or Facebook, but those are top 1/10th of 1% outliers. What about the other 80 to 90% of companies?

It’s really hard when you get addicted to other people's money. Over the last year and a half, as we record this in September of 2024, the VC funding market has ground to a crunching halt. Getting an A round now means you need to have 5 million in annual recurring revenue (ARR). Seriously, that’s some of the metrics I’ve heard from VC funds—they’re like, "We’re not funding any A rounds unless you’re already at 5 million ARR." That used to be the exit point, and now it’s the entry point. That should tell you how much more selective and careful they’re getting about deploying capital.

So you’ve got this issue where it’s a lot more difficult to get funded, and a lot of SaaS companies have had to lay people off and trim operational expenses down to where they’re close to breakeven. They all, of course, talk about their "path to profitability" or their "path to breakeven." But when you're spending other people's money, you tend to overpay for things—outside firms, labor, whatever. Look at what WeWork did: they drastically overpaid for leases. If you watch the documentaries on WeWork, they made wildly irrational decisions because money felt free.

[Carl]

Yeah, I’ve seen that with companies overcommitting and then having to shut down.

[James]

Exactly. And WeWork’s big problem was that they bought long and sold short. They bought expensive, long-term leases, but sold short, non-committed leases to clients. It was a terrible business model. There was no need for them to spend that much money. They could have negotiated tougher deals with landlords. It’s just one of a million examples of companies overpaying when there’s too much capital.

When you’re a bootstrap entrepreneur, you’re forced to be super capital efficient. You worry about costs, money in the bank, savings, expenses, and burn rate. That drives good decision-making. But sometimes it can drive people to underinvest in sales and marketing, which is dangerous because then you won’t grow. You can cost-manage your way out of business. You can control expenses, but you can’t control revenue. It’s a fine balance.

[Carl]

So, it sounds like one mistake in bootstrapping is cutting expenses you shouldn’t. Are there any other common mistakes you see?

[James]

Yeah, there are. When you're in a bootstrap business, you’ve got to play long-game chess. One of the most dangerous pitfalls is comparing your growth rates to heavily funded competitors. You’re playing 20-year ball, and they’re playing 3-to-5-year ball. They have a heavily subsidized sales and marketing budget, so they can dump tons of cash to acquire market share, often at a loss on a per-unit basis. I’ve seen SaaS companies that lose money per unit but think they'll make it up in volume. Bootstrap companies see that, start comparing themselves, and feel pressure to keep up. You’ve got to remember, you’re in it for the long term.

Another common mistake is thinking that hiring a great salesperson will solve all your problems. I’ve heard founders say, "If I could just hire a great salesman, everything will be fine." Often, that salesperson costs a lot of money, and they may have been successful before because they had an amazing marketing and sales enablement team behind them. In a bootstrapped company, you don’t have that infrastructure, and one person isn't going to fix everything.

What I see more often is that bootstrapped founders don’t want to be the chief salesperson. They don’t want to be the "Chief Evangelizing Officer." They don’t want to do demos, go to conferences, or visit client sites. But you have to do that. I still do demos every week, even 23 years into this business. I still travel to client sites, speak at conferences, and help close deals. You can’t delegate that too early in a bootstrapped business.

[Carl]

I can definitely see that. Especially when you have limited capital, the founder being out there selling makes so much sense.

[James]

Exactly. And you’ve got to be willing to do every job, especially in bootstrapping. I was the only coder when we started. I was the only project manager. I was the IT guy, running the servers, doing phone support—everything. My co-founder Sebastian and I did it all until we could afford to hire people. And even today, my co-founder is still writing code, and I’m still doing demos. We’re very hands-on.

One of the first things to delegate, though, is the BS administrative tasks. And I say "BS" not because they’re unimportant, but because they’re things you shouldn’t be doing as the founder. You need to focus on what adds value. There’s a great book called The One Thing, which is all about focusing on the singular priority that makes the biggest impact. If something isn’t part of that one thing, you should delegate or outsource it.

For me, that’s accounting, payroll, and administrative work. There’s no need to hire someone full-time for those tasks when you can outsource them to a bookkeeping firm or a Professional Employment Organization (PEO). I see too many founders trying to do everything themselves, but outsourcing those tasks early can save you money and keep you focused on what really matters.

[Carl]

That’s a really practical way to look at it. Outsourcing admin stuff makes sense when you're starting out. But you mentioned earlier about investing in sales and marketing too early. When do you think is the right time to invest in that?

[James]

Great question. In the early days, your job as a founder is to land the first two or three clients yourself. If you can’t generate leads and close them on your own, you probably shouldn’t be in business. You or your co-founder has to be able to do that. After you land those first two or three clients, get the product live with them, and collect feedback. Make sure you’ve got something that works and that they like using. If they love it, that’s even better.

Once they’re willing to be reference clients, then you can start thinking about sales and marketing. But don’t spend money on it too early. If you’re still working on your first few clients and trying to figure out if the product is good enough, spending money on marketing is a waste. You’ll run out of cash before you figure it out. So, the right time to invest in sales and marketing is when you’ve got live customers who are happy and willing to refer you.

And when you do go to market, pick a niche that’s small enough for you to get noticed. There are SaaS products for every niche you can imagine, and you need to focus on one that’s not too crowded. Going after a niche where people have a real pain point is crucial.

[Carl]

That makes a lot of sense. It’s all about timing. Do you have any advice for people trying to choose the right niche?

[James]

Yeah, when picking a niche, the main question to ask is, “Is there a big enough pain point for people to want your product?” Greenfield markets, where no one’s built a solution yet, are rare and expensive to go after. You're much better off going after a niche with an existing pain point that you can solve better or more efficiently.

A great niche for bootstrappers is one where the market already has legacy technology—especially if it’s old, on-premise software like mainframes, AS/400s, or COBOL. Those markets are ripe for disruption because the tech is outdated, but the pain points are still there.

[Carl]

Legacy systems definitely sound like an opportunity. Thanks for the insights! Is there anything else you'd like to share before we wrap up?

[James]

I’d just encourage people to check out Be Your Own VC. You can find all the details at jamesbenham.com, where you can sign up for my newsletter and check out my podcast The InsurTech Geek. Connect with me on LinkedIn, and if you're interested in bootstrapping principles, I think you'll find the book useful. Thanks for having me, Carl!

[Carl]

Thanks for coming, James! This has been a great chat—very eye-opening on the bootstrapping space. And for everyone else, we’ll see you next week!