The first in a series of articles exploring “$1 to $100m ARR with Notion Capital.”
People often think of the entrepreneurial startup journey - building a market-leading SaaS company - as linear and continuous. But this is not the case. Things change dramatically as companies move from one phase to the next and the behaviours and people that make you successful at one stage may well hinder you at the next. The fact that the startup journey is tough, fraught with risk and often chaotic is well understood. The fact that it is discontinuous, less so.
Achieving $100m in SaaS revenue, within ten years, is a critical milestone for VC-backed SaaS founders and companies; ten years because that is the typical term of the majority of VC funds and $100m in revenue because that has a strong correlation with enduring value.
Thousands of companies raise Series A rounds every year, but a far smaller number achieve that $100m milestone. This inspired us to ask ourselves a few questions:
The possibility of an improbable outcome
Venture capital is built on the foundation of the power law; a small number of VC investments generate the majority of returns, so every company we invest in must have the possibility of a credible pathway to $100m in revenue and of course be acquired or listed for a billion dollar outcome within the ten years of a fund. We know of course that outcome is highly improbable. But just how improbable?
For simplicity we have started with a cohort of SaaS and Cloud companies founded between the 1st of January 2007 and the 31st of December 2017, tracking their outcomes through to December 2022.
Source: Pitchbook, SaaS and Cloud Tech companies, VC backed, that raised more than $3m in capital between 1/1/2007 to 31/12/2017 with outcomes through to December 2022.
Bessemer called out the importance of “The Centaur,” in 2002, companies that achieve in excess of $100m of revenue, pointing to the overriding importance of the $100m milestone for enterprise value creation. Their research of private SaaS and Cloud companies identified 160 private SaaS companies globally with more than $100m in revenue. All 160 companies achieved $100m ARR in less than fifteen years; 90 of them achieved that milestone in less than ten years; and 9 in less than 5 years.
So from 10,000 SaaS and Cloud companies, that all raised more than $3m, just 160 are still private and have more than $100m ARR, i.e. 1.6%. NB From this cohort Pitchbook identified 264 companies that are still private, and have more than $100m in revenue.
This doesn’t tell the whole story of course, as there are notable acquisitions and IPOs from this cohort, such as Snowflake or Figma, to name just two. Reverting back to Pitchbook this cohort generated 70 IPOs and 58 acquisitions with a value of more than $1BN, so another 1.3% of those 10,000 companies.
The value creators & the fund returners.
Taken together, this cohort of 10,000 companies has generated 160 companies with more than $100m which are still private and 128 companies that have IPO’d or been acquired, equating to 2.9%.
There are still many companies in this cohort yet to achieve $100m ARR and/or a realisation event, some of which were only founded in the last five years, so there is still more value to be created. So again this does not tell the whole story. Nevertheless, it begs the question: what about the rest? The 97% of companies that have not and probably will not achieve $100m ARR or a multi-billion dollar outcome.
So what outcome awaits them and what can we learn from this?
The reality for VC-backed SaaS founders and their companies
That 97% does not imply failure, many companies have great outcomes at far smaller revenues, especially if they have not raised too much capital.
Based on our experience investing in more than 100 SaaS companies over a 13-year period, we believe that VC-backed companies fall into one of five categories, post $3m in fundraising.
Openview in their annual SaaS survey identified very similar findings.
This is reported data, but directionally it is interesting showing the stumbling blocks so many companies face, in particular in the $2.5-$10M ARR mark. This is an underappreciated stumbling block for venture-backed companies, according to Kyle Poyar, Operating Partner at Openview. “My suspicion is that this is when folks are shifting from founder selling to a more formalised GTM motion and they risk either (a) going after the wrong target customer, (b) picking the wrong GTM playbook, or (c) hiring the wrong team to accomplish (a) and (b).”
Emergence Operating Partner, Doug Landis re-enforces this view. “VC backed SaaS companies get a lot of pressure to push on aggressively from $3-$12m, but so oftentimes they make it to $10M but the growth from $10 to $20m is long and slow and difficult. If a company can navigate these early building/murky waters of 1,000 decisions where any one of them could cause serious consternation or struggles then when they get to $30M they realize the next trench they must navigate, going to new markets or launching new products. This is another massively difficult transition that most companies don't get right.”
The rule of 1’s and 3’s?
Andy Leaver, Operating Partner at Notion believes that, “companies invariably get stuck at common revenue milestones.” Each represents profound changes and distinct challenges that founders need to understand. Andy goes on to explain, “In particular what makes a company successful at 0-1 or 1-3m will not only not make them successful at 3-10 or 10-30, it will lead directly to their failure.”
These stages are profoundly different and require a different mindset and approach, as well as different people and processes.
What do we learn from this?
Going back to the five questions we asked ourselves at the outset:
97% get stuck at key revenue milestones.
Which leaves questions 3, 4 and 5:
We think the answers are yes, which we will be digging into in more detail in the next articles in our “1 to 100 Series.”
To follow: The startup journey in three words: START, BUILD, SCALE.
It’s tempting to think of the startup journey as linear, so that once a company raises their Series A there is a natural procession to scale. We know the reality is quite different. Things change profoundly along the way and companies come unstuck at very similar stages of their journeys.
The next in this series will explore those profound differences in more detail, outlining the common principles that underpin success and the mistakes that threaten to take us off course.