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

trainuphillIf 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.

Train image from here.  A longer version of a Quora post.

There are 34 comments

  1. Start-Up Success in SaaS? You Have to Bend the Odds In Your Favor. Some Thoughts on How to Do It. « saastr

    […] Crystal Clear Vision to Success, to a $100m ARR.  This is the one where I think people come up the most short.  Even if you have the Great Team, and are pursuing a theoretically Huge Market Opp, and are Convinced People Will Buy Based on Real Market Intell and Real Legwork — do you and the team 100% clearly see how to build your start-up into a $100m business?  Yes, you may be wrong in so many details, you will have to tilt and evolve and all that.  But if you lack crystal clarity on how to get to $100m in SaaS at least — assuming you hit all your tactical goals and execute to almost perfection — if you don’t know how that at least gets you to $100m in ARR, I don’t see how you ever get off on the right foot.  You will waste so much time, time you don’t really have.  I would pass on doing that start-up.  I know some will say we’ll figure it out.  Maybe that works with eyeballs in consumer.  Maybe.  In SaaS.  Not so much.  Because SaaS doesn’t explode — It Compounds. […]

  2. Awedience (@awedience)

    Hi Jason,

    Nice post. Your big assumption, however, is that a SaaS service needs to carry a very low monthly price tag. This isn’t always the case. Saas works best when you can justify an enterprise-level price as this mitigates the initial build cost of the platform.

    Chris Arnold
    Founder of Awedience

    1. jasonlkn

      I don’t think so — I probably got something wrong in the post and will edit. SaaS compounds no matter what the price, and in fact, I think it compounds more the higher the price, because churn is lower …

  3. From Initial Traction to Initial Scale (~$10M in ARR): The Hardest Phase. But — The Cavalry is Coming. « saastr

    […] Inevitability in SaaS comes around $10m in ARR, plus or minus.   Once you hit this point, you have a brand, you have a fully baked team, you have a robust product, and you have a self-generating stream of new leads and new business.  Will you get from $10m ARR to $100M ARR?  I don’t know.  Is an IPO in your future?  Not sure.  But once you hit $10m in ARR or so, you cannot be killed by anything.  That’s the power of compounding SaaS revenue.  And actually, as we’ll get to, $10m in ARR — this is when it really gets fun. […]

  4. The Hardest SaaS Growth Phase: Getting to Scale | OpenView Labs

    […] Inevitability in SaaS comes around $10m in ARR, plus or minus. Once you hit this point, you have a brand, you have a fully baked team, you have a robust product, and you have a self-generating stream of new leads and new business. Will you get from $10m ARR to $100M ARR? I don’t know. Is an IPO in your future? Not sure. But once you hit $10m in ARR or so, you cannot be killed by anything. That’s the power of compounding SaaS revenue. At $10m in ARR — this is when it really gets fun. […]

  5. The $64,000,000 Question: When Things Become Unstoppable | saastr

    […] Momentum builds on momentum.  Get to where you have a real brand, and 1000s or 10,000s of customers, treat them well, keep investing, and $20-$30m in ARR and … Then it will be different.  Not easy per se — SaaS never is easy — but different.  It will all come together.  Even if your product isn’t perfect, even if the competition is all over you, even if you haven’t even done a new release in a year, even if your sales efficiency is going down, even if Salesforce or Google or whomever builds the world’s most awesome competitive app … even if almost anything.  So long as you get to Unstoppable.  You can be slowed still.  But you can’t be stopped. […]

  6. The $64,000,000 Question: When Things Become Unstoppable : Enterprise Irregulars

    […] Momentum builds on momentum.  Get to where you have a real brand, and 1000s or 10,000s of customers, treat them well, keep investing, and $20-$30m in ARR and … Then it will be different.  Not easy per se — SaaS never is easy — but different.  It will all come together.  Even if your product isn’t perfect, even if the competition is all over you, even if you haven’t even done a new release in a year, even if your sales efficiency is going down, even if Salesforce or Google or whomever builds the world’s most awesome competitive app … even if almost anything.  So long as you get to Unstoppable.  You can be slowed still.  But you can’t be stopped. […]

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