In the third in our series on $1 to $100m revenue journeys, we dig into the biggest and most damaging mistakes we see at Start, Build and Scale.
Start, Build, Scale: 15 mistakes to avoid on the $1 to $100m revenue journey
In the third in our series on $1 to $100m revenue journeys, we dig into the biggest and most damaging mistakes we see at Start, Build and Scale.
Speaking for myself, I know the things that are bad for me and that if I avoided them my life would be better. But it is not that easy. I believe the same is true in businesses. The mistakes are often beguiling: The fast fix (such as building a big sales team before we have product market fit) or a more comfortable life (sticking with a leader who took me to $3m in revenue, but doesn’t have the skills or experience to take me to $10m).
We spend our energies planning for the things we will do, but less about what we won’t do, and in particular the mistakes and missteps that will undermine our success and that we should actively avoid.
Start: 0 to $1m and $1m to $3m - establishing product market fit;
Build: $3m to $10m and $10m to $30m - finding go-to-market fit;
Scale - $30m to $100m - scale to market fit or perhaps better, multi-market fit.
The startup journey is not a continuum; once a company raises their Series A there is no natural procession to scale. Thousands of startups are founded every year; handfuls achieve scale. Most fail at the revenue bands above, which we described in some detail in the first in the series: From $1 to $100m revenue: Scaling VC-backed SaaS with Notion Capital
In this the 3rd in the series we'll be diving into the most common mistakes on the journey to $100m in revenue in less than ten years.
Just before we do that it's worth revisiting why $100m in revenue and why less than ten years. Well, $100m in revenue for SaaS or Cloud companies has a far greater correlation with long-term success and enduring value than unicorn status and is in itself a manifestation of the mission: we have built a BIG company. And less than ten years? Well, there are a few ways to answer that question. The perhaps facile answer is that ten years is the typical term of a venture fund. I think the better answer is that if a company does not hit $100m in revenue in ten years or less, the likelihood of them doing so seems to become less probable not more. There are a number of reasons we can postulate for that: technical or organisational debt; technological obsolescence; increased competition; founder and investor fatigue. All and more of these reasons combine we think to mean that - where it makes sense - we should push for that goal of $100m (that is after all the ‘contract’ every SaaS founder signs up to with their VC), while ensuring that we continue to deliver the underlying capital and operational efficiency. Which all makes it sound very easy. Which of course it is not.
And that’s where the mistakes come in. We have invested in more than 100 European SaaS companies since 2009; each company is different but they have much in common. Those commonalities extend to the principles that underpin the very best and the mistakes that undermine success. And if there is one thing as a specialist SaaS fund we should be able to do (and perhaps be better at) is help our companies avoid the mistakes so many make. They will make mistakes of course - but their own mistakes, not the ones we see over and over.
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Setting the scene.
We know that hitting $100m in revenue in less than ten years is hard. Of course it is. On aggregate, only 1.2% of SaaS and Cloud companies that raise more than $3m in revenue achieve that goal. So 98-99% do not. That doesn’t necessarily mean failure, there are some good outcomes along the way. But it’s not what we all set out to achieve.
We believe there are very significant obstacles along the way to achieving $100m in revenue that are perhaps not as well appreciated as they should be. Things change significantly along the way, and we believe that understanding when and how to change along the journey is absolutely critical.
We simplified this journey down into Start, Build and Scale and within those stages different revenue milestones. And when we look at the reality of the outcomes for the 99% who do not hit $100m in revenue. We see very predictable failures at certain revenue milestones:
20% of companies never get past $1m ARR.
40% never get past $3m ARR.
60% never get past $10m.
80% never get past $30m.
And of the 20% that do pass $30m, only 5-10% make it to $100m.
And while there are many reasons companies fail, we feel there are common mistakes repeated over and over again.
My good friend Doug Landis, Emergence Capital Growth Partner, echoes our sentiment: “VC-backed SaaS companies get a lot of pressure to follow the T2D3 path to growth. This means when a company is at 3$M 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 way 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. And so it continues!
The five most dangerous mistakes in the Start stage.
We simplify the start stage into two phases: $0-1M revenue and $1M to $3M, which broadly equate to finding product market fit and starting to move beyond founder-led sales.
Burning money trying to grow before we are ready. I think this is the most important mistake we must avoid until we know who our best customers are and have established the foundations of product market fit. Building a large sales team because we have set some ambitious goals, but we haven’t really nailed who our best customers are. Investing more and more in customer acquisition when we haven’t established how to onboard them and make them successful.
Outsourcing product-market fit to salespeople. Finding PMF is the founder's responsibility, not the salespeople's. It is not their job. Their job is to repeat a sales motion to acquire an ideal customer. Simple as that.
Acquiring non-ICP customers who simply churn. This isn’t just a START stage mistake. This is a mistake we see all along the journey. The customers you choose at this early stage establish your destiny, and we overcomplicate our lives and dilute our capital and resources by spreading ourselves thin and winning customers who simply churn. We need to ensure our positioning and value and sales, marketing and success is all focused on the customers I really want to win. I often come back to a classic Michael Porter quote: “Competitive strategy is all about winning the customers you choose to serve uniquely well.”
The founder as the sales hero with every deal a minor miracle. At the very earliest stages, this is probably true, every customer win feels like a miracle. The founder pulled the rabbit out of the hat again. But this is simply not tenable and remotely scalable. I like to describe this stage of the founders role as learning how to sell, not just selling. And importantly documenting their experience so that their first salesperson or leader can start to build a repeatable process.
Forgetting that in SaaS selling is just 5% of the job. Winning an ideal customer is vital, of course, but making those customers insanely successful - onboarding them, getting them to value, turning them into advocates, not just renewing them but expanding their revenues. That’s the game right there. It's a loop. I win an ideal customer, I make them insanely successful, I turn them into advocates and I win more ideal customers just like them.
Never lose sight of this question: “Is this idea worth putting my life on the line for the next ten to twenty years to build a massive company?"
As the founder, establishing PMF is my job. No one else's.
Stay lean until you have established PMF (and for quite some time after!). You will get pressure to grow fast. Resist that pressure until you are ready. Nick Mehta, CEO of Gainsight puts it like this: if I had my time over I’d stay lean and mean until I nailed PMF with 30 customers, all advocates for me, who generalise to a massive market.
Invest in customer success early! Jason Lemkin was quoted as saying a few years ago that Customer Success should be one of your first ten hires. He’s so right.
Lastly, as the Founder you are probably the best salesperson - and arguably always will be - but you must make yourself redundant.
The most damaging mistakes in the BUILD stage
40% of SaaS companies that raise a Series A never get past $3m ARR, and that’s fine. Most likely the hypothesis simply didn’t play out. The problem wasn’t painful enough. The value wasn’t big enough. The time was just wrong. But if you can get to and through $3m ARR with a high degree of PMF and a big market opportunity - 30+ ideal customers that generalise to a massive market - then failing in the BUILD stage should be far more avoidable. And yet certainly in Europe this simply is not the case. So many companies seem to fail in creating the repeatability to grow from $3m to $10m, let alone from $10m to $30m. Failure at this stage really should be more avoidable and yet we know that 60% of companies never get past $10m ARR - they failed to establish a go-to-market model that is repeatable - and 80% never get past $30m - they failed to make that GTM model predictable.
Avoiding the playbook reflex. I took this from Frank Slootman’s book, Amp it Up, and it really spoke to me. Frank explains that adopting someone else’s playbook is the worst reflex - I think particularly so at this stage - in essence assuming that a GTM motion that worked at another company will work for you. It might, but it is a dangerous assumption that can have far-reaching implications. So resist the reflex to copy and resist the executive who turns up with a pre-baked GTM playbook. Learn from what has gone before, but design your GTM on first principles informed by your customers, your market, and your product.
Assuming PMF in one segment implies PMF in another segment. Take the time to test and validate your assumptions before you invest.
A diluted go-to-market, spread thin. We like to say companies should be uncomfortably narrow in their customer choices. If I know who my very best customers are, I want all my resources focused on winning those customers. I don’t want them selling to slightly worse or slightly less valuable customers. I want to focus all my attention on winning the customers that buy the fastest and the most, who see the greatest success, who drive the most advocacy. To do otherwise does not make sense.
Not investing when you are ready to grow. This is obviously the counter balance to the “don’t invest to grow before you are ready” from the START stage. This is really hard: understanding when we can move from constrained resources to increasingly unconstrained resources.
The wrong people in the wrong roles. When we think about all the challenges on the customer lifecycle from initial contact to advocacy there is a huge amount of complexity and therefore we need to hire people across the lifecycle who know how to do the jobs you need to get done. There is an understandable desire to believe that the people who got me through the START stage will also get me through the BUILD stage. They possibly could, but they probably won’t. That doesn’t mean you need to lose those people but you may need to redeploy them - perhaps to open up a new market - and replace them with professionals and specialists at every stage.
Key takeaways from the BUILD stage.
Firstly, from $3m to $10m, build your GTM model based on first principles and then from $10m to $30m build YOUR playbook. That word - playbook - is appropriate at this stage.
Know your best customers and execute against them relentlessly, winning them well and making them successful. Everything builds from there.
Execute sequentially to build momentum. This applies to projects, products and in particular segments. Identify the most important product to build, project to deliver or segment to dominate and focus exclusively on them. Think about segments sequentially - priority 1, 2, 3 for example - focus exclusively on segment 1 and only move to the others when you have reached critical mass.
Build a growth engine that is unique to you. This is about first principle thinking: who are my best customers, what’s my value, how best to execute a strategy to acquire those customers at scale and make them successful.
Invest in repeatability by first understanding each step of the customer life cycle and establishing the processes that lead to success. And then focus on enabling your people to deliver on the promise at each stage.
Use lead and lag data across the customer lifecycle, looking at demand creation, sales conversion and success realisation.
The top five mistakes at the SCALE stage.
So now we are getting into the upper echelons of success. From $30m to $100m maximising and optimising and efficient growth and from $100m to $300m dominating a category.
20% of companies hit $30m in revenue, which is no mean feat, but there are still a lot of obstacles to overcome and less than 10% of the 20% pass $100m in revenue.
Assuming what made you successful last year will make you successful this year. We have to be constantly testing our understanding of growth - our customers, the preferred strategy, and the size of the market.
Running out of road. This is a big one. As we move from $30m to $100m in revenue we have to massively increase our pipeline, so is the market big enough to sustain our growth target. If not what about adjacent markets? What about new products? What about M&A? Many more challenges to consider.
Failing to productise onboarding. The only thing that really scales is product, so make sure as far as possible you are building best practice onboarding into the customer experience. If selling to enterprise customers failing to productise professional services so that is highly repeatable.
Failing to address technical debt. Another shout-out to David Kellogg, in his presentation he talks very eloquently and persuasively about the importance of systematically mitigating technical debt. When you hit $100m in revenue you may well be on the 3rd version of your product. If not, it may well be creating a lot of drag.
When you look around the room and every leader is in the biggest jobs of their lives, you know you need to take action, though it may well already be too late.
And one bonus mistake, falling for the myth of growth degradation, which is basically the belief that growth naturally declines year after year - so if we grow 100% this year, next year will be 80% and the year after inevitably. We see exceptions where this is just not the case, so don’t build it into your thinking. Push the limits of growth, as Frank Slootman explains in his book and challenge yourselves to grow as fast as your market allows. The important thing to take away is that you really need to know how growth happens and how the machine works and we are challenging ourselves of the headwinds and tailwinds and executing with a full understanding of the headwinds and tailwinds of our market.
Some key takeaways from the SCALE stage.
You still know who your best customers are and you are executing against them relentlessly.
You should be thinking about how to extend your TAM by entering new markets and with build or buy product strategies.
You have to invest in world-class tech and systems, with functions led by true leaders of leaders.
The CEO role changes again from the warrior in the start stage to the architect in the build phase to the monarch in the scale stage, which I stole from one of our executive coaches, Rachel Turner.
Lastly, which doesn’t really tie into the mistakes, is that you have to be laying the groundwork for maximising enterprise value - whether through M&A or IPO - while at the same time setting yourself up for enduring success.
So a few final words to conclude:
Pay close attention to your stage and readiness.
Focus on the principles that underpin success and
Eradicate the mistakes everyone makes.
Consciously limit your options and narrow your focus.
Put the right people in the right roles at the right times.