Want to Understand SaaS? If Nothing Else — Understand That It Compounds

If you haven’t done a SaaS start-up before, it’s different.  The reasons are many, but I think they can almost all be summed up in one key factor:

SaaS compounds.

What does this mean, that SaaS compounds?

• It means it’s really, really hard to get revenues going.  You close a customer for $120 in annualized revenue, you only get to recognize $10 of that a month.  A lot of work for ten bucks.  Think of trying to get a train out of a station with a very small engine.  Tons of work, tiny revenues to start.

• It means you’ll really have to struggle to get to cash flow positive.  Unless you get a lot of annual prepayments, cash will lag.  This will be painful.

• It means once you get to about $2m in ARR, your business is real and solid.   It isn’t going to evaporate, unless churn in massive … which it most likely isn’t once you get to this inflection point.  Now is the time to invest, in team and product at least.

• It means once you get to about $10m in ARR, some level of real success is almost inevitable.  Next year, you will have a $14m, or an $18m, or maybe even a $20m+ business.  I don’t know which.  But I know it’s one of them.

• It means once you get to about $25-$30m in ARR, you are unstoppable. The flip side of the struggle to get any revenues going.   That train ain’t gonna be stopped by no one.  Until you disrupt travel and no one even needs a train anymore.

So if you really think you have something good, if you are 100% convinced of it (OK, at least 97% convinced of it) — at least push through to the next phase.

Get the revenues going, even if they are small.  Find a way to get to $2m or so in ARR, even if you know that’s not enough.  And once you get there, find a way to get just one more level further.  Because it compounds.  Success builds on success in SaaS.  It’s more than just recurring revenues, but it’s what recurring revenues + low churn beget.  Once you’ve {finally!} achieved initial traction in SaaS, you can still fail of course … but worst case you will fail slowly, and you’ll have a chance to avoid it if you stay paranoid, agile and committed.

(note: an updated version of one of the very first SaaStr Classic posts!!)