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How can early-stage and emerging software companies effectively balance topline growth with operational efficiency? The trade-offs between these priorities can look very different for companies at this stage. With that in mind, we are excited to introduce Scaling SaaS from $1 to $20M: building strong foundations in the early-stages.
This report details the key questions, metrics, and trends that matter for early-stage SaaS companies, including how to quantify product market fit, how to navigate the Growth Plateau, how to balance growth vs. efficiency, and what best-in-class looks like across the corresponding metrics.
While this report focuses on the quantitative outcomes of performance from $1 to $20M, we recognize that’s not all there is to it. Looking solely at metrics-based performance often blurs the “how” behind the outcomes, and you simply cannot measure the importance of the team, the product, and the market at this stage.
Select insights from the report are summarized below.
Throughout the $1 to $20M Stage
Year over year growth is the guiding principle
We believe year over year ARR growth should be the guiding principle for any SaaS company, regardless of stage. In the last few years, SaaS market turbulence has exposed a Growth Plateau that companies can encounter around $20-$25M ARR, a period in which year over year growth stagnates or declines as companies navigate growing pains and transition towards maturity. However, the data shows that via a combination of strong top-line velocity, retention, and unit economics, top quartile SaaS companies resist the Growth Plateau and maintain 3-4x YoY ARR growth as they scale from $1-$10M and 2-3x as they scale from $10-$20M.
Look for consistent quarterly net new ARR velocity
Top quartile SaaS companies consistently increase net new ARR quarter over quarter and maintain strong net new ARR velocity as they scale from $1 to $20M. We consider this a strong indicator of product market fit and a signal for companies to begin investing more in their GTM motion.
From $1 to $10M
Focus on new logo velocity and high-quality logos
The data shows exceptional new logo velocity from $1-$10M is one of the key characteristics that fuel companies through the Growth Plateau. After achieving $1M ARR, top quartile SaaS companies maintain 10-20% quarterly new logo velocity as they scale towards $10M. However, velocity is important to pair with quality. Landing high-quality logos in the ideal customer profile supports retention over time, which is another key indicator of product market fit and a stable customer base. Top quartile companies pair 95-100% gross dollar retention with strong new logo velocity, establishing a strong logo foundation early-on that can fuel customer expansion efforts at scale.
Invest in the product before expanding GTM
High growth velocity and strong retention should also be paired with sufficient investment in product during this stage. From $1-$5M, SaaS companies dedicate the majority of OpEx to product and engineering. Only once companies reach $5-$10M ARR on average do they begin to invest in maturing their go-to-market motion and S&M OpEx begins to exceed R&D OpEx.
From $5 to $20M
Continue landing quality logos and expand ACVs
As the customer base expands, early-stage companies continue to expand ACVs as they scale towards $20M. ACV growth is strong for enterprise-focused companies, whereas SMB-focused companies achieve less leverage via ACV growth and more leverage via continuously strong logo velocity at this stage.
Prepare for a significant uptick in customer expansion and start to index towards Net Dollar Retention
Once a healthy logo base has been established and retained, customer expansion increasingly contributes to ARR growth, driving 30-35% of new ARR on average as companies scale to $10M-$15M. Once customer expansion drives a more significant portion of growth for early-stage SaaS companies, we believe net dollar retention (NDR) should begin to carry more weight. Companies achieve 120-130% top quartile NDR and 105-115% median NDR as they scale past $10M.
From $10 to $20M
Understand the unit economics
As companies refine and operationalize the GTM motion, there is increasing focus on unit economics and efficiency. Magic number, the ratio of revenue generated per dollar spent on S&M, can be artificially high between $1-$10M, but becomes highly representative of efficiency around $10M ARR, when high growth velocity, strong retention, and relatively low S&M OpEx contribute to 1-2x top quartile net magic number
Track the burn multiple trajectory
At this stage it’s important to understand how burn multiple is trending to ensure there is a path to decrease burn while maintaining incremental growth. From $10-$20M, high burn is paired with high growth rates on average, translating to median burn multiples of 1.5-2x
Start using ARR per FTE as an anchor for hiring
The goal at this stage is to continue increasing productivity per full-time-employee as companies scale past $20M. Top quartile companies achieve $140-$150K ARR per FTE as they scale toward $20M, though an upwards trend matters more than achieving the benchmark at this stage
Published:
October 9, 2024
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