What You Want to Hit: 50+20 at 10 (million in ARR)
The first SaaStr post that got widespread distribution was this one — “Want to Understand SaaS? ¬†If Nothing Else — Understand That It Compounds.”
The excerpt here:
“What does this mean, that SaaS compounds?
- It means it‚Äôs 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‚Äôll 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‚Äôt going to evaporate, unless churn in massive ‚Ä¶ which it most likely isn‚Äôt 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‚Äôt know which.¬† But I know it‚Äôs 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‚Äôt gonna be stopped by no one.¬† Until you disrupt travel and no one even needs a train anymore.”
I thought at that time this was true for every startup¬†in SaaS, but it turns out it’s really true more for a large but material subset of SaaS companies.
>> Because you have to hit 50+20 by $10m in ARR for SaaS to really compound.
What is 50+20? ¬†If you are doing it right, if your customers are super happy and your NPS is high and you are shipping product at a healthy pace, then:
- 50% or more of your revenue by $10m in ARR, or earlier, should be from “zero cost” marketing; and
- 20% or more of your revenue should be expansion revenue.
Most of the¬†best SaaS companies hit both, sometimes earlier than this, sometimes a little later. ¬†When you do, that means 70% of your growth is qualitatively fueled by customer happiness, and quantitatively, by almost zero cost marketing. ¬†This is what lets you scale efficiently.
Let’s break this down slightly, and discuss the implications.
Once you have a mini-brand (maybe around $2m in ARR) and then a real brand (as you approach $10m in ARR), something magical should happen. ¬†Second order revenue, and just in general, word-of-mouth should kick in. ¬†The bottom line is the best software and SaaS companies start to get 50%+ of their new leads from word-of-mouth, brand, “I heard of you”, and other “zero cost” lead sources. ¬† In fact, many get 80%+ of their new leads all from brand, word-of-mouth, and referrals.
This doesn’t mean these leads are literally zero cost. ¬†You still have to nurture these leads, do webinars, give them collateral, do a customer event, and sell them. ¬†The sales cost is still real and the marketing cost isn’t literally zero. ¬†But it’s very low, when the lead source is “organic.”
And second, what should happen except in perhaps the most SMB-y models, is that your start to have material “net negative churn” by or well before $10m in ARR. ¬†That your customers buy more from you over time. ¬†Net of actual churn, that ideally is 120% cohort growth year over year, or more. ¬†Net net, you want to see at least 20% of your annualized growth come from your base by Year 3. ¬†This is super capital efficient, even if you pay your success team and your sales reps here.
This is pretty common for best-of-breed SaaS companies — 50+20 at 10. ¬†And if you can pull it off, you basically can go cash flow positive whenever you want, within reason. ¬†You can spend a fair amount on marketing programs, because the “free” leads will bring down your blended marketing costs. ¬†And you can pay your sales team well, because the true blended CAC is low, and the true CLTV is high. ¬†All this Magic Number stuff works, and magic indeed does happen as you scale past $10m ARR.
But it you don’t hit 50/20 at $10m in ARR, best case, you’ll have a capital inefficient mess of a business. ¬†You’ll be super “Magic Number” sensitive. ¬†You’ll scrutinize every marketing program and every sales spend. ¬†Your sales team will feel like a cost center, not a profit center. ¬†You’ll hold back on those extra SDRs and AEs. ¬†You’ll have to run ever faster to keep up with your targeted growth.
And importantly — you may never go cash flow positive.
So what’s actionable here?
- Broken record, but, focus like crazy on CSAT and NPS, at $1m ARR or even earlier. ¬†Measure it, raise it, make it happen. ¬†Even at just $5m ARR, it will almost be too late. ¬†And don’t be too confident¬†if you are at say $1m and growing like a weed, but your NPS and CSAT are low.
- Don’t pat yourself on your back because of your¬†‘pretty good’ Magic Number. ¬†Hooray, you pay back your sales and marketing costs in 13 months. ¬†But if you don’t have 50+20, you’ll hemorrhage cash at $10m ARR. ¬†A healthy Magic Number really assumes a lot of zero cost leads and strong, positive revenue retention.
- Be wary of comps. ¬†You’ll have a hard time getting a real picture of how those Hot SaaS Startups are doing. ¬†The higher the zero cost lead ratio, and the higher the revenue retention, the more they can actually be sloppy in the rest of their metrics.
- Don’t let a high burn rate creep up on you. ¬†Most of us don’t have this luxury, but if you are going to burn a lot, at least do it with intent. ¬†If you are venture-backed and can’t hit 50+20 at 10, your burn rate may well grow linearly with ARR. ¬†That can be a trap it’s hard to get out of. ¬†At least pick a max burn rate and stick to it. ¬†And have that max quarterly burn rate always be less than your new ARR add that quarter, after the early days.
- More CSMs. ¬†Hire more customer success professionals on the way from $1m to $10m ARR. ¬†This can only help. ¬†Hire 50% more than plan. ¬†Make sure every customer has coverage. ¬†Make sure every single one of your top customers is visited every quarter, in person. ¬†No matter where they are.
- Know your lead sources. ¬†This may sound obvious, but we often come up short here. ¬† Many of the startups I meet with don’t really know where many of their leads come from. ¬†Track first, second and third touch. ¬†Ask¬†your customers during the sales process, before they forget (I didn’t pay my reps unless they logged the customer-stated lead source, and you couldn’t close the Opportunity without filling in this field). ¬†Don’t allow any material amount of “Don’t Knows” as your lead source. ¬†No, the lead source is not “Intercom”. ¬†You need to know. ¬†Or you won’t really know how you are doing in terms of zero cost marketing.
- Visit your customers. ¬†Not only will they love you more, but this is one of the only ways to really learn why you aren’t getting to 50+20, and what to do about it. ¬†Not on the phone. ¬†Get on a jet, or at least, into a Lyft.
- Invest in your long tail (if you have one). ¬†Your small customers may not seem worth it as time goes on. ¬†But if they are free / cheap to acquire and happy — then you can get 100-1000 extra brand ambassadors from your long tail from every single Big Co you close. ¬†They’ll blog about you, tweet about you, bring you into their next company. ¬†And sometimes, grow into a big company themselves. ¬†This is¬†usually a great marketing investment, even if it stops feeling that way after a while.
- Take action. ¬†If it isn’t looking after $2m ARR or so that these metrics are improving, that you’ll get to 50+20 at 10 … then take action now. ¬†While you have time. ¬†The closer you get to these metrics, the easier life will be as you approach and pass Initial Scale.
If you can hit/exceed 50+20 at $10m ARR, all will be good. ¬†It will.
If you don’t, it will be hard.
You can do it.
Make it so.