TAM is Great. But What Really Matters is That You Believe You Can Hit $100m ARR in 7 Years.

Screen Shot 2013-05-20 at 4.33.54 PMI have a strong, semi-proven thesis that in SaaS, market size doesn’t matter that much … at least in the traditional tops-down sense.

If you can get to $2m in ARR in 2 years, you can get to $4m the next.  From there, it’s on to $10m in ARR.  And if you can get to $10m in ARR in say 4 years … and that compounds, as it will … you have a real shot at $100m.  For real.  It’s will be incredible hard, yes.  You may not get there, yes.  But if you can get to $10m in any reasonably amount of time … your market is big enough to get you to $100m.

As we’ve talked about before, it’s a 7-10 year journey to get there (~$100m in ARR) for most SaaS companies, outliers aside.

And it’s better than that, these days.  Because SaaS markets are just continuing to grow.  It was just a little while ago that Salesforce was doing $1 billion in ARR revenue.  Now they’re a good chunk of the way to $10 billion.  Same software, dude.  Some solid updates, yes.  But same software.  The SaaS markets are growing faster than ever …

So when you’re trying to figure out how big it can all be for your SaaS start-up, I know you’re gonna put together a nice “Total Addressable Market” slide.  It’s going to show us all how you’re playing in a Billion Dollar Market.  That’s great.

But quickly, move on.  The #1 best recommendation I can give for you to learn, at Day 0, and in the early days, is — Build a REAL, Bottoms-Up Model, That Shows How You’ll Get to $100m in ARR in 7 Years.  And make sure you believe it.  Build it for you:

  • How will you get your customers?  And what mix?
  • What will your ACV really be?
  • How can that scale over time?
  • What evidence is there that you can charge what you think you’ll be able to?
  • How many sales reps, how much marketing spend, how many engineers will you really need?
  • What will it really, truly cost?
  • How will your conversion funnel work?  Does it make sense, and scale, from an input-output perspective?
  • How will you fund it?

And then get help.  Make sure your assumptions are crystal clear, and then have really smart, experienced SaaS executives (including marketers) review them and challenge you.  And make sure you really, really understand the public company comps.  Because you can learn so much from comps … just read their S-1s, 10Qs, and the like.

I did this myself, not as effectively as I could do today, but it was eye-opening:

  • It showed that we’d never get there ($100m) on freemium alone.  Ever.  And true enough … freemium only ended up being 20% of our revenue, at least strictly defined.
  • It also showed me we needed more money than I’d thought.  So we raised an extra $600k.  We probably should have raised $2m more, since it was offered.  And the model said we’d need it …
  • It also showed me that, barely, if you squinted, and the market grew just right … by 2013, there’d be $100m in ARR in our space.  And so it is, although we didn’t capture 100% of it ;)

My point: If you want to do something really worth your time in SaaS.  Worth hiring a sales team, raising some venture capital (even a modest amount).  Worth investing 7+ years of your life in.   Then at least believe you can hit $100m in ARR in 7 years.  For real, from a real bottoms-up model.

Even if you come up short, and/or even if it takes much longer, you’ll then have a real solid chance of creating something of value.  And if you don’t know how to get there … if you can’t honestly build a real, data-driven model that proves it at least to you … then that’s awfully telling.

—–

For a nice example, take a look e.g. at Hubspot’s growth and data — they share a lot for a pre-IPO company:

Screen Shot 2013-05-20 at 4.58.17 PM

10 comments

  1. Great post, Jason.

    What’s the significance of 7 years? Is it that you’re butting up against employee and investor patience re the slog of SaaS, or is it about the growth rate you need when you’re hitting initial scale? I think I read that Qualtrics didn’t hit $1M ARR until year 5, and now in year 10/11/12 they’re getting close to $100M ARR.

    • Yes I missed some hyperlinks in the post, will add shortly. My learning, and a theme from SaaStr, is getting to Big, say $100m +-, is a 7-10 year journey in SaaS. It sounds like it took Qualtrics 7 years if not from Day 1, then from $1m to do it. Outliers aside, that’s how long it takes to compound a recurring revenue business to $100m. So if you believe you can do it — awesome. If you don’t — I fear it won’t go well …

  2. Great post. Just finished reading an excellent follow up to a recent Pando Daily article that points out some key takeaways from the last 12 SaaS IPOs:

    – Company Age at IPO: Average of 9.5 years with median of 8 years
    – Rounds of Financing: Average of 4.5
    – Amount Raised: Average of $109 million with median of $75 million
    – Revenue: Average of $71 million with median of $61 million
    – Sales and Marketing Employees: Average of 35% of the workforce
    – Employees: Average of 532 with median of 363
    – Professional Services Revenue Percentage: Average of 20% with median of 17%
    – Compounded Annual Growth Rate: Average of 59% with median of 55%
    – Gross Margin: Average of 65% with a median of 66%

    Sources:

    http://davidcummings.org/2013/05/21/key-data-from-the-last-12-saas-ipos/

    http://pandodaily.com/2013/05/21/memo-to-this-years-yc-class-its-damn-hard-to-build-an-enterprise-company/

    • Yes – that Pando article is truly excellent. Everyone should read it.

      And David Cummings’ short, to-the-point posts are great. He’s on my list, too.

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