Five ways to build a $100 million business

Some time ago my friend (and co-investor in Clio, Jobber and Unbounce) Boris Wertz wrote a great blog post about "the only 2 ways to build a $100 million business". I'd like to expand on the topic and suggest that there are five ways to build a $100 million Internet company. This doesn't mean that I disagree with Boris' article. I think our views are pretty similar, and for the most part "my" five ways are just a slightly different and more granular look at Boris' two ways.

The way I look at it can be nicely illustrated in this way:

The y-axis shows the average revenue per account (ARPA) per year. In the x-axis you can see how many customers you need, for a given ARPA, to get to $100 million in annual revenues. Both axes use a logarithmic scale.

To build a Web company with $100 million in annual revenues*, you essentially need:

• 1,000 enterprise customers paying you $100k+ per year each; or
• 10,000 medium-sized companies paying you $10k+ per year each; or
• 100,000 small businesses paying you $1k+ per year each; or
• 1 million consumers or "prosumers" paying you $100+ per year each (or, in the case of eCommerce businesses, 1M customers generating $100+ in contribution margin** per year each); or
• 10 million active consumers who you monetize at $10+ per year each by selling ads

Salespeople sometimes refer to "elephants", "deers" and "rabbits" when they talk about the first three categories of customers. To extend the metaphor to the 4th and 5th type of customer, let's call them "mice" and "flies". So how can you hunt 1,000 elephants, 10,000 deers, 100,000 rabbits, 1,000,000 mice or 10,000,000 flies? Let's take a look at it in reverse order.

Hunting flies

In order to get to 10 million active users you need roughly 100 million people who download your app or use your website. This is of course a gross simplification, and the precise number depends on various factors like your conversion rate, how active your users are, churn, etc. But it doesn't change the take-away: To get to $100 million in ad revenues, you need dozens of millions of users. I know of only two ways to achieve that (plus one mega-outlier which breaks all rules, Google). The first one is to have a product that is inherently social and has a high viral coefficient (Instagram, Snapchat, WhatsApp). The second one is a ton of UGC (user-generated content), which leads to large amounts of SEO traffic and some level of virality. Good examples of this second option include Yelp or our portfolio company Brainly.

Hunting mice

To acquire one million consumers or prosumers who pay you roughly $100 per year, you need to get at least 10-20 million people to try your application. This is – again – a gross simplification, but I believe it's order-of-magnitude correct. To get to 10-20 million users you almost certainly need some level of virality, too – maybe not Snapchat-like virality, but some social sharing or "powered by"-virality. Great examples of this category include Evernote and MailChimp. If you're an eCommerce business you might be able to acquire one million customers using paid marketing, but it requires huge amounts of funding.

Hunting rabbits

Most SaaS companies that target small businesses charge something around $50-100 per month, so their ARPA per year is around $1k. To acquire 100,000 of these businesses you need something in the order of 0.5-2 million trial signups, depending on your conversion rate. Let's assume that your CLTV (customer lifetime value) is $2,700 (assuming an average customer lifetime of three years and a gross margin of 90%) and that you want your CLTV to be 4x your CACs (customer acquisition costs). In that case you can spend $675 to acquire a customer. If your signup-to-paying conversion rate is 10% that means you can spend $67.50 per signup (assuming a no-touch sales model where your CACs can go entirely into lead generation).

So how can you get one million signups for less than $70 each? Most SaaS products aren't inherently viral, there usually isn't enough inventory to make paid advertising work at scale, and cold calling usually doesn't work at this ARPA level. There's no silver bullet, but the closest thing to a silver bullet is inbound marketing – besides having a fantastic product with a very high NPS (net promoter score) and being obsessively focused on funnel optimization. I've written about this in more detail in my "DOs for SaaS startups" series: Create an awesome product, Make your website your best marketing person, Fill the funnel, Build a repeatable sales process. Another option is a an OEM strategy (i.e. getting your product distributed by big partners), which can work but comes with its own challenges.

Interestingly, hunting rabbits looks much less straightforward than hunting flies or hunting elephants. Why we have a strong focus on rabbit hunting SaaS companies nonetheless is something for another post.

Hunting deers

If you're a deer hunter and want to acquire 10,000 customers paying you $10k per year each, most of the rabbit hunting tactics still apply. An ARPA of $10k per year usually isn't enough to make traditional enterprise field sales work, and you likely still have to get 100,000 or more leads. The main difference is that when you're hunting deers you can use an inside sales force to close leads, potentially also to generate leads. It also means that you can pay VARs and channel partners an attractive commission, although I've rarely seen this work in SaaS.

SaaS companies sometimes start as rabbit hunters and expand into deer hunting over time. This can work very well and we're very excited about these types of businesses, but to successfully execute this strategy, SaaS founders with a product/tech/marketing DNA usually have to bring in an experienced VP of Sales who has built an inside sales organization before.

Hunting elephants

Like it or not, most of the biggest SaaS companies derive most of their revenues from selling expensive subscriptions to large enterprises. Workday, Veeva, SuccessFactors, Salesforce.com, you name it. Jason M. Lemkin, another friend and co-investor, once said (I'm quoting from memory) that if you have a good solution for a significant problem experienced by large enterprises, building a $100 million business is relatively straightforward. After all, you only need 1,000 customers, and the $100k you need from each of them is less than they spend on the salary of one executive. I think there's a lot of truth in that.

The other part of the truth, though, is that it may take you several years and millions of dollars to find out if you really are solving a problem (a.k.a. product/market fit), and once you're at that point, you still need tens of millions of dollars or more to finance the enterprise sales cycle. This does not at all mean that elephant hunting isn't attractive. It just requires very different skills, which usually means a founder team with enterprise sales DNA.

That leaves me with the million dollar – sorry, one hundred million dollar – question: Which other ways to build a $100 million business are there that I've overlooked? Let me know!

[Update: I've posted a follow-up post, "Three more ways to build a $100 million business".]

[Another update: Here's an infographic version of this post.]

[Yet another update: We turned the post into a poster!]

[One more update: Here's a webinar that I did about the topic a few days ago.]
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* If you have $100 million in annual high-margin revenue, you will likely be able to exit for $500 million to $1 billion or more. That's the kind of exit most venture capitalists are looking for, although we as a small fund can achieve a great fund performance with somewhat lower outcomes. 

** For eCommerce companies, which naturally have a much lower contribution margin than purely digital businesses like SaaS and are therefore valued at much lower revenue multiples, it makes more sense to target $100M in contribution margin.

The 7th DO for SaaS startups – Build a repeatable, profitable sales process

The last post in my series on DOs and DON'Ts for early-stage startups was about lead generation. The next logical step is sales, and so I want to write about what you can do to convert as many of those leads into paying customers.

7th DO for SaaS startups

Build a repeatable, profitable sales process

Sales is a very different animal depending on the stage of your company, the market segment you're going after and on whether we're talking about inbound sales or outbound sales. For all the differences, though, the goal is always to create a scalable process which allows you to acquire customers for a small fraction of their CLTV. As a rule of thumb, you should aspire a payback time of 6-9 months, meaning that you spend 6-9 months' worth of subscription revenue to acquire a customer. It really is just a rule of thumb though, since depending on the customer lifetime and various other factors, you may want to accept a significantly longer payback period.

To achieve a payback period in that neighborhood you have three options:

1. If your ARPA is around $20-50 per customer per month, you need to be able to generate a large amount of leads for little money and convert them with little to no human interaction (self-service with no/low touch sales)
2. In order to support an inside sales force you need customers who pay you around $100 per month, preferably significantly more (often called "transactional sales").
3. If you need a field sales force to sell your product, assume that your ARPA needs to be at least $3000 per customer per month if not higher (enterprise sales).

Most people would argue that you need much higher prices to make inside sales work (including Jason M. Lemkin, who says you need at least $300/m), but several of our portfolio companies have shown that due to a combination of high conversion rates, fast sales cycles and sales people in countries where salary levels are 50-80% lower compared to Silicon Valley, you can use inside sales people to profitably acquire customers at much lower price points.

So – take the specific numbers with a grain of salt as they are highly dependent on a variety of individual factors. The important message is that your customer lifetime value defines what you can spend on customer acquisition. If you don't keep that in mind you'll end up in what Joel York, who created a nice visualization of the different models, calls the "startup graveyard".

In line with the theme of this series I'm going to focus primarily on the self-service and transactional models and want to break down my tips & tricks into three parts based on the stage of your company. I'm going to call them "pre product/market fit", "pre scale" and "post scale" (being well aware that the transitions between these phases are gradual). I'll focus on inbound sales in this post and will follow up with one on outbound sales shortly.

Pre product/market fit

• In the beginning, while you're still trying to figure out product/market fit, spend as much time with potential customers as possible. Don't consider the time spent with customers a sales expense – it's an essential investment that you need to make in order to solve a real problem of real people.
• Don't worry about scalability yet. In this phase it's perfectly fine to do things that are completely unscalable. As I wrote before, a good "unscalable hack" for SaaS startups is to spend huge amounts of time with early users.
• Don't worry about processes or tools, don't even worry about metrics (if you know me a bit you know that you won't hear me say this often!). Be "obsessively focused on getting to product/market fit", as Marc Andreessen put it.

Post product/market fit, pre scale

When you've found product/market fit and start to get more and more signups every month, some of the things that you did in the previous phase start to not work any more. As long as you get 50 signups a month you can still talk to every trial customer. Once that number gets into the hundreds or thousands, you need to hire people and put some processes and tools in place.

So the goal of this phase is to maximize the conversion rate of a large and ever-increasing trial volume while keeping customer acquisition at an acceptable level and starting to get a sense for the scalability of various sales and marketing channels. With that in mind, here are some tips:

• Set up an automated lifecycle email program to welcome new users, reach out to inactive users and follow-up with users towards the end of their free trial. Solutions like userfox (a portfolio company of ours) or Intercom make it easy.
• Send personalized messages to as many trial users as possible. Use any piece of information that you can easily get e.g. by looking at the trial customer's website or the way he uses your software to add some personal touch. This job can be done by junior customer support or sales people. The idea is to make every trial customer feel important and show him that you care, but do it in a highly scalable way. 
• Segment your trial users based on factors like potential account size, activity and brand and use this information to prioritize the queue for your inside sales people. A lot of this can be automated e.g. by checking a trial customer's Alexa rank or Google Page Rank to get an indication of the company's size. Also take a look at Totango, which can help you identify your most valuable prospects. You can also use this information to assign different types of potential customers to different types of sales people (e.g. small businesses are assigned to junior customer care people, bigger ones are assigned to more senior Account Executives).
• Set up a lead nurturing program for trial users who are only moderately interested in your product or don't have an immediate need for your product yet. Send them a newsletter, offer webinars, organize events... The goal is to provide them with valuable content and stay top of mind, so that when they eventually need a solution they'll think of  you.
• Track everything and do lots and lots of tests. A/B test different messages, find out the best moments and triggers for your lifecycle emails, test in-app messaging... In short: Try lots of different things and measure what works best.
• Avoid SaaS Metrics Worst Practice #3, which is to attribute all conversions to your sales team. To calculate the effectiveness and the ROI of your sales team you have to measure the conversion uplift relative to your unaided baseline conversion.  
• You can still do things that you know won't scale, but you should know what these things are and leave this phase with an excellent understanding of your CACs at scale.

Post scale

In this phase you're going to double down on what you've found to be working in the previous phase. Sounds easy, but it of course comes with its own challenges: Hiring, onboarding and retaining the right people; continuing to fill the funnel with enough leads to keep your sales team busy; adapting processes  and tools for a much larger sales team. At this point it's primarily a management challenge, and if you've come this far without hiring a seasoned VP of Sales, now is the time to hire one. And since this series is geared towards early-stage SaaS startups I'll leave it with this. :)