In this second in our series on $1 to $100m journeys, we dig into the fundamental challenges of Start, Build and Scale.
It’s tempting to think of the startup journey as a continuum; once a company raises their Series A there is a natural procession to scale. The reality is quite different. Thousands of startups are founded every year; a handful achieve scale. Things change profoundly along the way: common principles seem to apply along the journey but so too do the common mistakes.
In the first in the series - From $1 to $100m ARR, an introduction - we explored the realities of those journeys looking at the numbers of companies that raised $3m plus between 2005 and 2022 and their journeys to scale and realisation. We learned that 1% of the companies that raise more than $3m go on to achieve $100m in ARR and 2% achieve $100m in revenue and/or a billion dollars plus realisation. So the converse is also true: 98% do not. I don’t think that should be a surprise, but nevertheless, it's sobering. Of course not all of the 98% represent failure. Far from it. But it does sharpen the mind as - especially with VC-backed SaaS companies - achieving $100m revenue (in less than ten years) is the foundation of our investment.
We also shared our hypothesis that companies stall at certain revenue bands that relate to specific outcomes: 20% never find product market fit or reach $1m ARR; 40% never achieve $3m, failing to move past Founder Led Sales; 60% fail to build a GTM model and hit $10m ARR and 80% fail to create repeatable GTM model and pass $30m ARR. Of the 20% that do pass $30m ARR, only 10% will grow sufficiently fast to achieve $100m ARR within ten to fifteen years from founding. This does not necessarily mean bad outcomes. Along the way, if companies fall off the $100m revenue track but achieve revenue of $10m plus, with slower growth but cash flow positive they can still continue to grow organically, self-funded, recapitalise, merge or be acquired.
My colleague Andy Leaver calls this "The rule of 1s and 3’s, “companies continually fall down at these revenue milestones. A big part of that is that the things that make them successful in each revenue milestone will make them unsuccessful at the next.”
What we are interested in is breaking down the startup journey into distinct phases to maximise the possibility of success - whatever success might mean to the founder and shareholders.
We also learned that the majority of SaaS companies that achieve $100m revenue do so in less than ten years and that after ten years the likelihood of achieving $100m is less not more. There are a number of reasons this might be the case: technical debt, technological obsolescence, founder fatigue, and shareholder pressure. Notwithstanding this - achieving $100m in revenue - in any time period - is an elite undertaking and something to be extremely proud of.
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Again, it’s tempting to think of the startup journey as a continuum, moving smoothly through the gears from the Seed round to the A and onwards to a NASDAQ listing. The reality is quite different. Dramatically over simplifying, I know, but this is how we see it play out:
We call these phases: Start, Build and Scale.
We like these words because they talk specifically to the challenge.
They work as verbs to describe the work being done: starting, building, scaling and they work as nouns to describe the people you hire: starters, builders and scalers.
This is the classic, crazy, do-what-it-takes startup stage, taking a business from something to nothing. “Someone dumped a thousand-piece jigsaw on the table and threw away the box,” says Doug Landis, an operating partner at Emergence, “and founders need to figure it out for themselves, everyone working together to find the edges and the corners of the puzzle.”
For me, the essence of the START stage is a founder answering one question. “Is this problem worth putting my life on the line for a quarter of my working life to build a massive company?”
The people of course are exceptional, but they are generalists, every one of them doing anything and everything needed to build a product that customers will buy.
We think about START as one stage and two phases: $0-$1m - building the MVP and establishing a product that customers will buy and use; and $1-$3m - discovering an approach to acquire customers and make them successful and starting to move beyond founder-led sales.
This stage must accomplish five critical objectives - typically alongside revenue milestones of $1m and $3m ARR, ideally achieved within 3-5 years of founding. Someone times companies find PMF fast, but it is not uncommon for this period to take longer.
Nick Mehta explained to me that if he had his time over he would spend 4-5 years in this stage, until he had 30 customers, who were all advocates, who generalised to a very large market: "I want a small number of customers that advocate for me and generalise to a very large market." Or in short "companies that generalise and humans that advocate."
Speaking for myself, if I was cautious with my capital, I wouldn’t care how long it would take to get to that first $1m ARR. I’d just want everything as close to perfect as possible: ideal customers, ideal use cases, and a massive market opportunity.
It’s good to romanticise the START phase - thousands of companies started every year and of course, admire the companies in SCALE and beyond. But 70% to 80% of SaaS companies founded never reach a Series A and of those that do (the 14,000 in our analysis) 40% never go beyond $3m ARR and die on the vine.
BUILD is the hard yards. It is a massive transition from the chaotic and crazy, “whatever it takes” days, shifting gears to build repeatability across many functions, not least go-to-market.
Rachel Turner, in her book, The Founder’s Survival Guide, describes this transition as moving from “Fearless Warrior” to “Considered Architect,” helping build processes and systems, hiring people who bring professionalisation and deep specialisation. This is an apt analogy and one that captures the very essence of the change. From leading from the front, to mastering the details, this is a shift that many founders and leaders struggle with.
In a discussion with Matt Welle, CEO of Mews, a company that is now well into the upper ends of the SCALE phase he now looks back at this stage of the business as one of the most critical transitions. “I miss the START stage so much. I was involved in every aspect of the business. And before Greg Naidoo (Chief Commercial Officer), Richard and I sold everything and onboarded every customer. Then Greg stepped in and professionalised our approach. He brought in Craig Bonafont and together they brought professionalisation to sales. They were - and still are phenomenal - but I do miss those days.”
We think of BUILD as again one stage, with two phases:
“The 'founder privilege,' erodes at $10m,” says Andy Leaver, Notion Operating Partner, “You need professionalisation and specialisation across the full customer lifecycle. The company is getting in its own way. Too much friction. Systems not working. Tech failing. Process insufficient. There is a lot to do.”
There is a lot to be done in this phase which typically takes 3-4 years.
While the company is growing substantially - from $3m to $10m ARR and from $10m to $30m ARR - focus is critical. The early customers you choose, the product you build and the GTM model you develop establish your destiny. They have a huge influence on your future. So choose wisely.
A key watchword is consistency. Perhaps something we don’t hear enough about in SaaS, especially in terms of sales achievement. In his book, Amp It Up, Frank Slootman lays this out clearly: “Don’t rush sales before you cross the chasm. Then create systematic repeatable processes for delivering a compelling case to customers.” This goes to the heart of the BUILD phase. “Look to achieve consistent sales achievement: 1) understand who your best salespeople are and why successful; 2) focus on repeatable in-house hiring, 3) invest in enablement and 4) understand what’s required before adding new heads.
Ensure your people have the resources they need. Good and effective colleagues and managers.” Achieving this is all about the people. Slootman: “Never forget that it’s the front-line people and their managers that matter the most.”
The scale phase is when the SaaS startup becomes a SaaS machine: consistently, predictably and repeatedly winning ideal customers and making them insanely successful, all while driving world-class economics - CAC payback, growth, net revenue retention.
We should be able to imagine ourselves looking down on this machine, understanding how everything works and interrelates, fine-tuning and optimising every component.
Leaning in harder and harder, founders need to really own their growth model and distribution strategy, understanding the limits of growth, and pushing those limits, exploring how they can continue to grow fast. There is an acceptance that revenue naturally slows year over year, as shown in a recent report from Bessemer in which they showed a 0.7 relation between one year's growth and the next.
This diagram, taken from the Bessemer Cloud Index, shows companies from their private cloud index comparing revenue from current year to prior year.
Bessemer’s report goes on to state: “As the analysis below shows, when we plot the percentage of ARR Growth lost between each year, we find that it decays at a fairly predictable 30%. As a private cloud company, you should expect next year’s growth rate for your business to be ~70% of the current year.”
Bessemer is drawing a trend line on the graph, looking at the coefficient of 0.7 and then stating “an average of 70% of growth stays from one year to the next, or said another way, growth degrades by 30% a year.”
But that isn’t what the graph shows. What it shows is that there is very little correlation between last year’s revenue and this year's revenue. Look at the data: there is no pattern. In short. How you are doing today is not a predictor of how you will do tomorrow. Pick any vertical line on that graph and look at how spread out the data points are vertically. Massive variance. The correlation between last year’s growth rate and this year’s growth rate is essentially zero. The implications are clear:
We need to set a new agenda. Growth degradation is a myth. Just because a company is growing fast in one given year does not mean it cannot grow as fast or faster in the following year and continue that trend for many years to come.
What matters is a company's ability to truly understand its growth model and the limits and constraints of its model and market; its people and processes; it's systems and tech.
The machine needs to be broken down into its component parts - at an atomic level - this will teach you what works and what doesn’t. Everything needs to be resourced and managed, with nothing left to chance. Pipeline is essential and becomes an obsession; knowing where your revenue comes from quarters in advance is extremely hard but critical, as too is the ability to forecast, hit and report quarters consistently - an important ability as a company reaches the upper ends of the scale phase with $100m revenue and considers a public listing or a multi-billion dollar acquisition.
Changes abound across the business. Teams are levelling up. Leaders of leaders across each functional area, freeing up the CEO to look up and out. Layers of experienced managers. Product is becoming increasingly outcome-led, while the business becomes increasingly customer-centric. More than anything else - the watchword is focus. “Everyone must know their role and how they interrelate,” says Matt Welle, CEO, Mews.
Leaders of leaders, as Nick Mehta describes them, are critical at this stage, addressing many complex and critical issues, of which these are just a few:
“There is a lot to take in and moving past $30m in revenue at pace is no mean feat,” says Andy Leaver. “If companies do not have a very clear definition of the category they are solving, the problem they are solving and their ICP, they will fail.”
But product strategy is changing too. Engineering teams are large with multiple product teams, so maintaining focus on vision is challenging to say the least. Years of technical debt have built up that must be addressed. “I think of our product as The Ship of Theseus,” says Nick Mehta. “We are on at least the 3rd complete rebuild, but it's still the same product.” The same could be said for the business as a whole!
Want the associated resources, including a PDF guide, sent directly to your inbox? Click the button below.
Haven't had a chance to read our first article in the series? Click here to explore 'From $1 to $100m revenue: Scaling VC backed SaaS with Notion Capital'
In the next in the series, we will be breaking down the most common mistakes we see across the Start, Build and Scale journey.