Is 5x the New 2x in SaaS?

Screen Shot 2014-02-20 at 5.39.20 PMBack in 2012, when the SaaStr audience was about 1/30th of what it is today, I wrote a post that a lot of folks didn’t like:  “Workday is Growing 90% this Year.  At $250m in ARR.  So Wake Up:  You Probably Need to Do A Lot, Lot Better.

In fact, it was the first post I wrote that people really hated.  They didn’t like it because they didn’t see Workday as a fair comp to almost any other SaaS company.  I see their point.  Workday is an outlier — the second highest valued, and fastest growing public SaaS company, started by grizzled veterans who sold their last company for $10 billion and had infinite resources to spend.  And of course, there are many paths to success.  See our classic case study on Pardot vs. Eloqua vs. Marketo on three paths here.

So fair enough.  Workday isn’t a fair comp for your SaaS company.  We can’t all be WhatsApp, either.

And yet, now we are here in 2014.  And I think the message That You Have to Grow Faster has turned out to have been right — at least if you Want To Be Hot.  To grab all that venture capital.  And probably, to attract and retain the very best talent.  To get that M&A offer.  Etc.

Recently I met with an outstanding SaaS entrepreneur doing over $8m in ARR, with terrific in-bound lead velocity, and growing revenue almost 100% YoY, in a reasonably hot albeit crowded space with a strong group of existing investors.  And yet he couldn’t get funded.  Why?  It wasn’t good enough.  Growing ~100%, Year-over-Year, at $8m in ARR.

Let’s flip it around.  The other day, ZenPayroll (which has an outstanding team of founders) announced it had closed a $20m round at a $100m+ valuation.  At materially less ARR (I assume) that the company we just discussed.   Why?  Why was funding (and probably hiring, etc.) so much easier here?  Well, according to TechCrunch, “As of last Summer ZenPayroll was processing $100 million in annual payroll, a number that has increased to $400 million [in 9 months].”

Very well-funded Gainsight recently sent out a similar newsletter, touting 500% growth after their mega round:

Screen Shot 2014-02-20 at 5.43.24 PM

In both cases: ~5x growth on the way from $1m to $10m in ARR.  (I admit, on top of vanity metrics from an external perspective.  Neither company disclosed absolute revenues, which is totally cool by me).

Not just a smidge faster than the first company though.  But far, far faster growth.  Albeit from a smaller base.

And here’s the thing, from where I sit.  It makes sense.  Because it’s all about the velocity you build up going from Initial Traction ($1-$2m in ARR) to Initial Scale (~$10m) in ARR.  No one really cares how long it takes you to get to $1m-$2m ARR, not really … but it’s critical how fast you get from $2m ARR to $10m ARR.  The faster you get there, the more exit velocity you get to, the faster you get to that IPO or Mega Acquisition.

>> In fact, I believe the single most important thing you can do once you hit Initial Scale ($1m-$2m in ARR) in SaaS is run as fast as humanly possible to $10m in ARR.

It used to be >100% YoY growth post Initial Traction was “good enough” to be hot, in the ’05′-06 generation of SaaS 2.0.  Then the next wave came of Marketo, Yammer, etc.  They grew much faster.  150%-200% YoY or faster post Initial Traction.

Today the bar is even higher in this third wave of SaaS start-ups.  The mega rounds, the mega deals we’re seeing.  They do make sense.  Because while the absolute ARR may still be relatively low in some cases, if it’s early —  the growth pace in the best next generation SaaS companies is breathtaking.  Because the markets are so much larger today, that the best products should scale must faster.  Even my own EchoSign, a relatively old SaaS property, has quadrupled since our acquisition by Adobe, mainly due to market pull.  SaaS markets are scaling faster and faster.

So you need to grow faster and faster to keep up.  If you do, the rewards are there.  The nine-figure valuations.  The endless venture capital.

But if you’re at Initial Traction ($1-$2m in ARR) and aren’t growing faster than 125% Year-over-Year … I’d take a quick strategic pause.  Because you have to decide what track you are on.  Because no matter what you think, at this stage — your market is barely penetrated.  I’m sorry, there are no $2.3m or $3.67m TAM SaaS products that any of us would work on.  So if it’s feeling hard at $1.5m or so, it’s not a TAM issue.  It’s something else.

And figure it out.  What can you do to grow faster?  Or should you put your head down and grind it out?  Both can work.  But only the former is going to get the venture capital, the massive sales and success teams, and all that.

It’s not fair our colleague above at $8m in ARR, growing almost 100%, can’t get funded.  It’s not fair.  And I don’t like it.  $8m is only an order of magnitude away from $80m, an IPO, and a big liquidity event.

But 5x is The New 2x in SaaS.  It explains the crazy, mega rounds.  At least, I think you need to strive for 150%+ YoY growth from $1m to $10m ARR.  At least try.  It’s just the world we live in.

Unicorn hunters, us all.

Screen Shot 2014-02-21 at 1.17.41 PM

Unicorn Hunter image from here.

14 comments

  1. some of the growth numbers are also a function of time and small numbers. For example, it is easy for a company to grow 100% YoY from $500k to $1m to $2m and even $4m…..but it gets really hard after that. You need a tremendous amount of momentum to go from $4m-$8m….or a big VC round to push the snowball up the hill. The trick is to time appropriate funding when the velocity, momentum and #s are at their peak value. : )

  2. Understanding investor mentality is one thing, but not the main thing. It’s more important to understand what the real opportunities to grow your company are and the expected growth rate and why things are constrained.

    We sourced some stats at The Small Business Web Summit (http://www.thesmallbusinessweb.com/summit) you might have liked. Too bad you couldn’t make it!

    The SaaS market is growing at 20% YoY. Total B2B cloud software revenue is only around $20B/year (SaaS in total is $59B/year). So, what really is the total available market and how fast can a company grow?

    CRM is the fastest growing segment inside of SaaS, and yet only 40% of CRM sales last year were SaaS. (14% of all CRM sales were Salesforce.)

    My analysis is that most B2B SaaS companies are still selling to other SaaS companies, followed by other Internet-based companies (ecommerce, digital agencies, creative professionals, online media). The biggest SaaS companies are Internet native tools (e.g. email marketing, social media, SEO, payments, ecommerce platforms). I don’t see this changing for a long time.

    I gather that the really huge companies have crossed the chasm to other verticals that aren’t necessarily Internet-focused (e.g. manufacturing, real estate, construction, health services, food services). However, most companies stuck on this side of the Internet chasm are constrained by the overall market growth of the platform (the Web, mobile, or a cloud platform such as Salesforce, NetSuite, Google) they are built on.

    What I believe that means is that you can blow your brains out (or rather, burn a VC investment) selling to everyone in your core vertical to get to $10M ARR, but if that core vertical is “tech”, you’re on weak footing. Tech is fickle and it’s small. If you haven’t found non-tech core verticals to hammer down, you have a real limit on maximum market size and growth velocity.

    • This is certainly true and all this is great data: “My analysis is that most B2B SaaS companies are still selling to other SaaS companies”

      What I can tell you though is that the companies that are getting to $10m quickly aren’t having any trouble accelerating from there. We started selling to tech companies, and accelerated at $10m ARR. There are some that are really techie (e.g., Marketo, or Gainsight in piece). Marketo accelerated from $10m.

      I don’t think I agree with this analysis, or at least, it’s skewed by focusing on very small businesses.

  3. Some of the companies you mentioned have TAMs that are 10-50x larger (e.g., payroll) than some of the niche-ier SaaS vendors out there. I think it’s a fair yardstick to use 5x if you want the monster rounds but most companies will likely grow 100% y/y with declining marginal growth until they hit the $40-$50M range.

    And we need software companies like that too. They’ll likely get rolled up, traded-sold or exist as a profitable “lifestyle business” for years to come.

    • Absolutely. If you are growing 100% YoY you are doing great. It’s just, you Can’t Be Hot anymore at that level, that’s all. That may be OK. But it limits your options.

      Personally, I believe “lifestyle businesses” are a bit of a myth. The great ones — Craigslist, 37Signals, etc. — all have pretty epic businesses under the hood. Most “lifestyle businesses” end up being harder work in my experience than those that grow a bit faster, because you end up getting more help and more resources, and have less competitive risk.

      But yeah no need to do 5x. But if you think you are gonna be Hot at 2x … those days are long gone, that’s all ;)

  4. The key element missing for me is the cost of growth. It’s a lot easier to grow 5x when you have the resources and grow your sales and marketing spend by 10x or 20x. I think a key metric to watch is the incremental revenue per new sales head. As long as their contribution revenue exceeds their (fully loaded) compensation, then it makes sense to keep adding people. In a SaaS model, this is often not the case.

    • Absolutely. The key if you have some cash in the bank is just to see sales make a positive revenue contribution.

      These days this is really pretty standard once you are at $1-$2m in ARR so I don’t think this is the issue it was a few years back.

  5. Personally, I think the biggest takeaway from this is i) demonstrated traction and ii) proven ability to accelerate and scale quickly once traction is achieved. The fact that we’re talking about absolute growth regardless of starting base revenue makes TAM – niche or massive in size – irrelevant. I won’t pretend that resources don’t play a critical role, but execution speaks for itself plain and simple. Great read by the way.

    • Yeah that’s one key corollary. TAM doesn’t really matter, as long as you have true velocity as you approach $10m. By definition, you have a $100m+ market that is growing quickly, if you can accelerate to $10m ARR fast enough.

  6. Pingback: Bootstrapped, Episode 35, “Hate the SaaS!” at Bootstrapped

  7. Pingback: Zero to (Sales) Hero – Best Practice for the Sales Ramp | Georgian Partners

  8. Pingback: Zero to (Sales) Hero – Best Practice for the Sales Ramp | Georgian Partners

  9. Pingback: How To Get A Meeting With Anyone | Datanyze Blog

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 10,243 other followers

%d bloggers like this: