Metrics That Matter: The Climb to $10M ARR
By Mike Kreaden, who has helped hundreds of startups get to market during his 14 years at Salesforce. Check out what he’s doing at startups.salesforce.com
I have had the privilege of working with hundreds of SaaS startups during my time at Salesforce. Some of these startups were breakout successes, like Conga, BracketLabs, CRMFusion, Apptus, ServiceMax, and FinancialForce. Others did not fare as well. I pondered the question “What is it that our successful startups do, that the unsuccessful ones don’t do?”
What Makes a Startup Successful?
The answer to this question is not simple. Some companies are venture backed, while others bootstrap themselves beyond the point of initial traction. For the purposes of this discussion, a successful startup has proven their model and achieved a sustaining level of cash flow to survive and grow. If I had to pick a revenue number, it would be somewhere between $1M and $3M ARR. Companies that make it to this point, can see what needs to be done to get to $10M ARR.
But what does it look like to go from initial start to $10M ARR? In our upcoming book, The SaaS Startup Founder’s Guide, we feature Jason Lemkin, Aaron Ross and Tien Tzuo talking about what it takes to build a successful SaaS company. Jason Lemkin and Aaron Ross discuss this in even greater detail in their new book, From Impossible to Inevitable. What follows is my distillation of the key points to take away from their collective wisdom.
Tien Tzuo, founder and CEO of Zuora, has talked metaphorically about “The Climb” from initial revenue to $10M ARR. He likens the proven path to success ($10M ARR) as being more like hiking switchbacks, as opposed to climbing straight up the face of the mountain. The analogy of switchbacks helps us understand the requisite pivots that are required in the early stages, when we are discovering our product/market fit.
Prove the Idea
That initial stage, where we are proving our idea, is a critical point in the lifecycle of a successful SaaS company. I have seen too many founders “flying blind” in the early days, because they lack the optics and discipline to understand the key business metrics that are indicators of success. You have to track your prospects, document next steps, document reasons for not buying (may be lack of features, immaturity of company, competitive solution, etc.) and track usage metrics across your app. In this phase, you are not only concerned about signing up new customers, you are also a fanatic at tracking adoption of your solution. Savvy startup founders understand the value of using a customizable CRM solution, like the Salesforce Sales Cloud, as means of tracking and analyzing business data associated with their customers. As Jason Lemkin and Aaron Ross point out, you need to “find your niche” in this initial stage. What patterns do you see repeating? Customer segment, industry, size, etc. Once you see usage and buying patterns repeating, it is time to focus on and build a repeatable process to scale sales and your customer base.
Prove the Product
At this point, you may be closing in on initial traction ($1M-$1.5M ARR), and now you want to focus on your product. What are customers using in your product? What more do they need from you? What customers were lost (attrition or competitive losses)? This will guide you to prioritize what needs to be done now (to accelerate sales) versus what can wait for a future release (roadmap). Discipline in Product Management to focus development in areas that result in closed deals, will be very important at this stage. As sales are ramping up and customers coming on board you will be finding out what your niche is. This is the time to plan accordingly, so that you are set up for success in the next phase. You should start to leverage known channels to market, like the AppExchange, to increase your lead flow (for those of you with B2B solutions). You should have a solid roadmap at this point, and a product that prospects see value in using. A proxy for value delivered is your renewal rate. Happy customers renew. Customers who do not see the value your solution will attrit.
Prove the Market
With the confidence of moving through the prior stages of growth, you can now focus on building that killer sales and marketing machine to propel you to that magic number of $10M ARR. It is at the beginning of this stage that you must understand your total available market ($100M? $500M? $1B+?), the position that your company has in this market (are you competitive with other solutions?) and your ability to execute. If you were bootstrapping to this point, can you finance your expansion purely on cash flow? If not, you will be able to court VC’s and revenue financing to help you invest in this growth.
At this point in your journey, you likely have achieved success by finding your niche. This has allowed you to focus your development, sales and marketing to win this market segment. But now you will need to evaluate what your customers are telling you. You need to challenge yourself to see if your vision can broaden to include adjacent segments or other verticals. Doing so will allow you to prove some of your assumptions regarding your total available market. As you vision expands, so does your total available market.
Understand the Journey
Salesforce for Startups is uniquely positioned to help you understand the technology and tools to help you grow. As mentioned earlier, you can learn more on best practices from other SaaS leaders in our book, The SaaS Startup Founder’s Guide. The complete thesis on Finding Your Niche can be found in the upcoming book by Jason Lemkin and Aaron Ross, From Impossible to Inevitable. Both of these books will be released in San Francisco on February 9, 2016.
About Salesforce for Startups
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