Should your SaaS company be taking growth supplements?

Grow baby grow

Anyone who knows the SaaS sector knows how erratic company growth rates can be.  Growth rates also vary enormously depending on the stage your company is at in its lifecycle. Growth rate expectations also differ depending on who you talk to: investors, industry practitioners and entrepreneurs or subject matter guru’s! As a result we can’t give you a black and white answer, but we can provide some insights to allow you set realistic targets that reflect where you are in your growth trajectory.

Eyewatering

Very early stage start-ups can have extremely volatile growth rates. The lucky ones, and believe us they are in the minority, hit their product market fit early and can experience very high growth rates in the first couple of years. Two female founded SaaS that more recently hit the ground running are Frontapp and Meet Edgar. They reached almost $3m in under 2 years and $4m in 3 years respectively.

 

TwilioWorkday, and Zendesk managed to get to $100M in ARR in 6-7 years. They also kept growing at a rate of approx. 50-70% year-over-year after reaching $100m ARR. Outliers like Slack, reached $100M in ARR in just 2.5 years and Dropbox founded in 2007 reached $15m in 3 years and $116m in just 5 years.

Planet earth calling

Let’s bring things back down to earth. The reality is that the bulk of SaaS companies will never reach the growth rates and scale experienced by the Slacks of this world. But hey that does not mean a SaaS company will fail. Far from it, there are lots of cases where lower rates of growth and scale result in very profitable, successful SaaS businesses run by the original founders. Founders who manage to hold onto a good chunk of their companies equity, enjoy personal wealth and more than satisfy their investors.

Early stage

Ehtan Latka’s podcast interviews with early stage SaaS start-ups illustrate how growth rates after 3 years can be as high as 275%, but the medians are in the 40-60 percentile.

Scaling SaaS

But then can comes the good news. Scaling SaaS where the sales model has been established, particularly with ARR’s between $7m and $15m (median 65%), can experience explosive growth.

 

Source: David Skok Pacific Crest Survey 2016

That level of growth is great news, but can be very difficult indeed to manage. Of course, that pace of growth for the majority of SaaS businesses is unsustainable (unfortunately!) but many of the larger companies we have studied are still showing growth of between 25% and 34%.

Outliers

And before you say it we know that there are always the outliers – companies that almost defy gravity. Some of the more mature SaaS companies like Xero (founded 2006) and Shopify (founded 2004) continue to grow at 41% and 48% respectively.

So what’s the new normal?

Calculating your Net MRR Growth Rate is critical not only for your team to know where you really are in terms of revenues and growth and what to aim for, but it is one of the most important metrics for investors. A poll carried out by Profitwell found that 40% of SaaS companies were excluding or including incorrect metrics when they calculated their MRR.

0 – 100 in 7 years

The growth expectations are growing. From what we learnt at Jason Lemkin’s Saastr in Feb 2017 companies going from $1m ($83k MRR) to $100m ($8.3m MRR) growth rates look like this:

  • For the top 25% the expectation is they reach $100m in just 5.3 years
  • For the middle tier (50%) the time it takes to reach $100m is 7.3 years
  • For the bottom tier (25%) the period extends to 10.6 years to reach $100m ARR.

According to Pacific Crest 2016 survey of Private SaaS companies (with outside investment) growth rates are as follows:

  • $417k MRR ($5m ARR) on average takes 3 years
  • $830k MRR ($10m ARR) on average takes 4 years
  • $1.6m MRR ($20m ARR) on average takes 6 years
  • $3.3m MRR ($40m ARR) on average takes 8 years

 Benchmarks

VC’s as we know are more demanding when it comes to benchmarking growth rates. It’s in their interest/DNA to demand the businesses they invest in scale fast. They need a quick return on investment. BVP growth benchmark categorizes SaaS ARR as Good, Better and Best. Despite their high expectations the benchmarks they suggest for “Good” SaaS growth rates are more or less in line with actual growth rates reported by the private SaaS with investment.

Good = $83k MRR ($1m ARR) – $830k MRR ($10m ARR) in 4 years

Good = $83k MRR ($1m ARR) – $8m MRR ($100m ARR) in 10 years

 

Better = $83k MRR ($1m ARR) – $830 MRR ($10m ARR) in 3 years

Better = $83k MRR ($1m ARR) – $8m MRR ($100m ARR) in 7 years

 

Best = $83k MRR ($1m ARR) – $830 MRR ($10m ARR) in 2 years

Best = $83k MRR ($1m ARR) – $8m MRR ($100m ARR) in 3 years

Conclusion

The rate at which you grow your Net MRR is always going to be based on your growth stage. However, the benchmarks provided should give you some parameters to work within and of course to allow you to set realistic goals for your internal teams. As well as enabling you to back-up your position with outside stakeholders.

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