Getting to Initial Traction

How To Know You’ve Hit Initial Traction In SaaS. The Moment When You’ve Got A Real Company.'

Jason Lemkin

firstliftoffThere’s a common meme in Venture Capital that traction is tough to quantify, but you know it when you see it.

Well, let’s take a stab at it anyway.  Quantifying it.  Because I don’t think Initial Traction is at all nebulous in SaaS — and I think it occurs earlier than many think.

Here’s a Discrete definition of Initial Traction:

  • ARR of $1m or more
  • ARR/MRR Growing >=100% a year, annualized
  • With >50% of new revenue acquired from zero-cost marketing, i.e. viral, ether, word-of-mouth, whatever … because these compound.

Ok why this test?  Well it means two things:

>> First, that your SaaS product’s customer base (and revenue) is compounding.  Not from a large base yet, but it’s now started compounding, albeit at a small scale.  And that’s where the power and leverage is in SaaS.

>> And Second, it means that you’ve begun to build a brand.  A micro-brand at this phase, but word-of-mouth is starting.  At least within a tiny community of potential customers.  Leads and customers from the ether.  This is what will enable you to scale.  Because the brand will begin to self-reinforce at this point.

Some people don’t hit this test for quite some time — especially the 3d prong.  If you’re at $1.5m in ARR but still out there bringing each customer in yourself — well you’re doing great, but you haven’t really hit Initial Traction.  Some companies won’t hit this until $2m-$4m in ARR, or even later.  Some, maybe even most, won’t believe it even then until it seems easier, more repeatable.  But I think with hindsight at least, we can often see Initial Traction as early as $1m ARR.  {Though before that, you’re just too small.  Before $1m in ARR, your revenues are not big enough to be self-sustaining … even if all your leads are viral or from the ether.}

Now let me tell you.  When you hit Initial Traction — it won’t feel all that different.  It will feel the same.  You’re still struggling to achieve escape velocity.  After all, with $1m or $1.5m in ARR, or whatever the number is … you may only have 8-10 employees.  It’s hard to feel like you really have something concrete when you’re all still taking out the trash, answering support tickets, struggling to make payroll.  It actually won’t feel that real until you’re far further along, $5m in ARR or more, once you’ve got 30, 40 folks all pulling together.  With some redundancy.  With a micro-brand that is evolving into a mini-brand.

But Trust Me.  When you hit Initial Traction — it’s time to accelerate.  And invest.

Now at the last key step, at 10 Unaffiliated Customers, you had something.  Not yet a company then, but the start, the heart of something.

Initial Traction — this is the next step.  You’ve got something real now — a tiny, but real, compounding SaaS company.  You’ve established the self-sustaining base of a compounding, powerful SaaS business model.  As long as it’s $1m+ in ARR, growing >=100%, with primarily organic customer flow … things are about to get good.

You may not see it, and I know it was a struggle to get here … but trust me.  Now it starts to get fun.  And if you can get through the next phase — then you will make it.

Don’t miss it, This Moment, The Start of First True Traction.  Just ignore those who don’t see it, or don’t agree.  Instead, force yourself, your team to see it.  Celebrate it.  And most importantly — take a pause and double down.

If and when you’re there — Congratulations.  Now you’ve got something real.  A real SaaS company.  Now, for the first time, fate … is entirely in your own hands.

Published on January 24, 2013