The first in a series of articles exploring “$1 to $100m revenue with Notion Capital"
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Setting the scene
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 a company successful at one stage may well hinder them 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 revenue and doing so 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 the returns, so every company we invest in must have the possibility of a credible pathway to $100m in revenue and be acquired or listed for a billion dollar plus outcome within the ten years of a fund. We know of course that outcome is highly improbable. But just how improbable?
We have started with a cohort of SaaS and Cloud companies founded between 2005 and 2022:
Source: Sources: Dealroom, Companies House, OpenCorporates, company website information, 2023. Data used was from 2005 to 2023, where data availability allowed. For revenue data, 2016-2023 was used. The analysis looks at the number of companies, the proportion of companies (as a proportion of the total number of companies), total investment levels, valuation, and the headquarter locations of companies selected. The most recent valuation was selected to reflect the current value of these companies and state of the market in 2023. For instances where a valuation range was provided, the midpoint was calculated and used.
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. We extended our analysis to also include companies from this cohort that were also acquired or IPO’d for $1BN or more.
From 13,789 SaaS and Cloud companies that all raised more than $3m, we identified 243 companies that had either achieved $100m ARR and / or been acquired and / or listed, equivalent to 1.8%, or approximately one in 50.
There are a number of tracks for companies to achieve a high value outcome - the main ones we focus on here are $100mn annual recurring revenue, a $1bn acquisition or a public listing. For the majority of companies, the way they become one of the 1.8% is by becoming a centaur - though this isn’t mutually exclusive from achieving a $1bn exit - 87 companies, or 36% of high achievers managed both $100mn ARR and a $1bn exit. 29% of companies successfully floated, or were bought for $1bn or more, without having achieved $100mn ARR. We have tried to summarise using this Treemap slide.
Zooming in on the centaurs
If we work on the basis - which I for one agree with - that the most important success criteria for any VC backed SaaS company is achieving $100m revenue (in less than ten years), as opposed to unicorn status, then it is important to focus on the centaurs, of which we identified 168. This tells an even more interesting story; just 1.2% of our control group achieved this milestone. So just 1 in 100 of companies that raised $3M or achieved $100m ARR. It's tough. It's rare. But what is perhaps extraordinary is the number of companies that achieve this milestone in less than - often significantly less than - ten years.
168 SaaS and Cloud Centaurs (independent, acquired or listed).
1.2% of all VC backed SaaS with >$3m raised
20% of these Centaurs achieved $100m ARR within 6 years
Median is 9 years
65% reach $100m in less than 10 years
The reality for VC-backed SaaS founders and their companies
1.2% - approximately one in 100 - achieve $100m revenue and a total of 1.8% in total achieve $100m revenue and / or a billion dollar outcome. So more than 98% do not.
That 98% does not necessarily imply failure, many companies have great outcomes at smaller revenues, especially if they have not raised too much capital and / or strike a balance between growth and profitability.
This took us down another rabbit hole and so started to dig into some data to help us understand the journey for the 98%. We were fascinated by some research kindly shared with us by Openview, summarised below:
As part of Openview’s annual SaaS survey, founders self-reported (anonymously) on various data points. Openview shared the data with us and we extracted their reported ARR and years since founding, which you can see above, with the number of companies in each revenue band, the range of time they took to achieve that revenue band and the average. My overly simple conclusion is that focusing on the 2% success rate masks the simple fact that most companies simply get stuck at very specific revenue milestones.
The $2.5-$10M ARR mark is an under appreciated 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).”
Andy Leaver (Operating Partner at Notion) and I were intrigued by these findings, not least because they correlated so strongly with our experience of working in and investing in more than 100 SaaS companies over a 20 year period. We believe VC-backed SaaS companies fall into one of five categories, post $3m in fundraising:
Emergence Operating Partner, Doug Landis re-enforces our view that there are substantial obstacles represented by revenue milestones: “VC-backed SaaS companies get a lot of pressure to follow the T2D3 path to growth. This means when a company is at $3M they are pushed to get to $9M or at $4M they are pushed to get to $12M. But growing 3x in the early days requires more pipeline than most companies are aware of, and they probably haven't figured out yet exactly where that pipeline is going to come from. This usually leads to the first of many revenue misses. If a company can figure out how to navigate these early murky waters and hit those targets they set themselves up for another difficult hurdle, getting past $30M in revenue. Usually, at this point the goal is to double again to $60M. To do this, most often a company will consider launching new products or exploring new markets. These are two additional, very difficult transitions to make that most companies don't get right.”
The rule of 1’s and 3’s?
Andy Leaver, Operating Partner at Notion believes companies invariably get stuck at common revenue milestones, which he describes as “The rule of 1’s and 3’”. Each of these revenue milestones 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 revenue 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.
The startup journey in three words: START, BUILD, SCALE.
Going back to the start: 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.
We know only 2% hit significant enterprise value, while only 1% hit $100m in revenue.
We also believe - backed up by our friends at Openview and Emergence - that there are common but little appreciated obstacles on the way to $100m.
We summarise the startup journey in three words: Start, Build and Scale and will be exploring this journey in far more detail in the next in this series, so this is just a taster.
Cutting through the noise
The Start phase is best summarised as finding product market fit but also, as PMF emerges, moving beyond founder led sales. In this stage everyone is a generalist, solving problems and finding the path. As Doug Landis so eloquently put it to me: “In the start phase someone has dumped a 1,000 piece jigsaw puzzle on the table and thrown away the box!.
Three questions for me best sum up the challenge:
This last point is really interesting. My conversations with folks Nick Mehta, CEO of Gainsight on this topic have been very illuminating:
“If I had my time over I would spend as long as it takes, staying as lean as possible, until I identified a small number of ideal customers that generalise to a massive market. That’s the essence of product market fit.”
Nick further summarised:
“I want customers that generalise and humans that advocate!” I love this. And I love Nick too :-)
Build is all about, well, building. In particular with a focus on repeatability. It is an architectural phase that requires a very different approach and - often - very different people.
We have established that “small number of customers that generalise to a very large market” and now we need to build, build, build.
Scale is different again, of course. We need to push the very limits of growth, understand our growth engine intimately and ensure it hums. We are on our way to dominating our category and of course exploring adjacencies: new products, new markets, build vs buy.
This is a world of different challenges, increased complexity and again different people.
A few aspects hold true throughout
While the individual stages are distinct and challenging, there are a few things that hold true in terms of how companies grow, the people they hire and the value they give and get.
How we grow
Three things for me hold true throughout…
Who we hire
This is everything. Get this right and the rest takes care of itself. Well sort of, in an ideal world. Three things to bear in mind:
The value we give and get
The value we give and get is fundamental and seemingly so often under thought and overlooked. Again three things:
More on all these in the coming series.
The power of negative thinking and avoiding the most common mistakes?
We all know the things that are bad for us - eating too much, drinking too much, sleeping too little, failing to exercise - and we know that if we avoid these things our lives will be better. The idea of negative thinking is one well understood - you can read more here the power of negative thinking. That doesn’t mean these things are necessarily easy to avoid.
The same is true for business. There are mistakes that we see over and over which undermine success. If founders can avoid them surely their chances of success are improved? That doesn’t mean, of course, that we avoid risks and that we won’t make mistakes, but let's make our own mistakes, not the ones that everyone makes.
Again we will be digging into this in more detail and focusing on how these mistakes relate to the stages of start, build and scale, but here are a few to get us thinking.
One more from me that I think bears repeating is the mistake of winning non-ideal customers who flatter your top line, drain your resources and then churn!
Adapting to the “new reality”
As the world of SaaS adapts to the “new reality,” with global uncertainty and scarcity of capital, there is an urgent need for a new way of thinking about the startup journey” on the way from 1 to 100m ARR. Especially when we consider the probability of success. Just 1% of VC backed companies from the last 18 years have achieved $100m in revenue, and just over half achieved that within ten years.
There is a lot to be learned from the probability of $100m outcome and the reality of the thrills and spills along the way, the major obstacles represented by a series of revenue milestones.
So a few final words to conclude: