Tuesday, November 04, 2014

Three more ways to build a $100 million business

It seems like my recent post about five ways to build a $100 million business resonated very well with a lot of people. I also got some really good comments and suggestions, and so I'd like to follow-up with another post on the topic.

Introducing: the Brontosaurus!

A reader by the name of "Vonsydow" commented that another way to get to $100 million is by having 100 customers, each paying you $1 million per year, and mentioned Veeva as an example. True! Veeva's ACV is around $780,000. That's almost an order of magnitude higher than the $100,000 ACV of the "elephants" category, so it's a different kind of animal. I'd suggest that we call Veeva's customers Brontosaurus (or Apatosaurus, which seems to be the correct name) but I'm open to other suggestions by people who know more about biology (or paleontology) than me.

Interestingly, it seems like there are only two Brontosaurus hunters in the SaaS world, Veeva and Workday*. What does that mean for SaaS entrepreneurs? Take a look at the backgrounds of the founders of Veeva and the founders of Workday. If your background looks similar – 20+ years of experience selling enterprise software, domain expertise and an extremely strong network in your target industry – get into the Brontosaurus hunting business. If you don't have a background like this, I think it's likely that you're better off starting with smaller animals (but I'd be happy to be proven wrong!).

Whale hunting?

Whale hunting is not the best topic for jokes, but if you know me (who has become a vegetarian a few years ago) you know that I can only mean this figuratively. And the category that I'm going to talk about now just has to be named after the blue whale, the largest animal ever known to have lived on Earth. I'm talking about companies with an ACV of $10 million. If you can sell a SaaS solution at an ARPA of $10 million per year, you need only ten customers and bada-bing, you've got a unicorn.

Does that make it easy? Of course not. I'm aware of only one SaaS company which might have an ACV in the neighborhood of $10 million: Palantir, as pointed out by Jindou Lee. In his excellent book "Zero to One", Peter Thiel writes that Palantir's "deal sizes range from $1 million to $100 million". I don't know if these amounts refer to the price of an annual subscription and I don't know which part of it is non-SaaS revenue, but it sounds like Palantir's ACV could be in the $10 million ballpark. Either way, the conclusion along the lines of the conclusion of the Brontosaurus category is: If you're Peter Thiel, hunt whales. If not, chances are that you should start at a lower end of the market.

Hunting microbes

I'd like to add another species at the other end of the spectrum, too. Jeff Judge pointed out that WhatsApp monetizes its users at about $0.06-$0.07 per active user per year. That means that even if Facebook increases monetization by a factor of ~15 (which I'm sure they can do if they want to) and reaches $1 per active user per year, that's still an order of magnitude below the $10 per active user per year that I've described in the "flies" category, so another category is justified: microbes. If you're making only $1 per active user per year, you need 100 million active users to build a $100 million business. That means you'll need hundreds of millions of downloads or signups, which requires an insanely high viral coefficient. If it happens, awesome, but hard to bet on it in advance.

With that, here's the updated chart, which now shows eight ways to build a $100M business:

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.

PS: One of my best childhood friends saw my post, and I don't want to withhold from you what he wrote me: "Mathematically, there are many more ways to build a $100 million business. The easiest one is to start with a $200 million business and lose $100 million".


* Salesforce.com has a number of Brontosaurus as well as some whale customers. As far as I know, with few exceptions these customers were acquired at a time when Salesforce.com was a $100 million business already. Since this post is focused on ways to build a $100 million business in the first place, I haven't included Salesforce.com in the Brontosaurus and whale category.


Stephane Allard said...

Love the comment from your friend! :-D

vonsydow said...

The main reason few startups go Brontosaurus (love both the name and graph!) is that not many teams can attract the initial funding (and investor patience) needed to build, sell and deliver at +$500k ACVs for multiple customers.

Besides investor confidence, you really have to love the market, problem, customers, and team you're working with - it's not for the faint of heart to economically sustain and culturally survive the full cycle of:

(1) building a rock solid software platform that runs like clockwork from day one - or risk getting sued,
(2) solving a very important problem that neither their own IT team (likely 10x larger than your entire company) or any incumbent have previously solved (otherwise you're competing on cost, which rules out the price tag)
(3) find, convince and sell into enough customers to ensure just *one* bluechip reference, and
(4) use that reference to sell into five more potential reference customers that never heard of your business,
(5) convince them to buy a mission critical service from a company that may go out of business or get acquired in next week,
(6) despite IBM, Oracle, SAS, Accenture, SAP and all their partners claiming that they can do whatever you do but more, better, faster - and at a lower TCO...

We're easily talking 3-4 years of hand-to-hand combat, assuming you got product/market fit nailed and the right team in place... But the reward of having pushed thru is awesome - CxO level references, incredible economics and cashflow compared to transactional SaaS/PaaS, AND it's crazy tough for other guys to catchup given that all that time you spent building just one successful customer they now have to put in knowing that every sales call they're generating an inbound lead to the perceived thought- and product leader, which is you :)

I'm very happy to see you shining a light on other ways of building SaaS business' and that more and more startups seem to get the chance to go down the Brontosaurus path from day one, especially in applied/vertical analytics for some reason.

As a consequence, interesting things are happening on the organisational and financial modelling front which will hopefully give VCs more confidence to invest at an earlier stage in teams without Dave Duffield pedigree hahaha.

chrija said...

Great points – very insightful comment, thanks very much!

vonsydow said...

I've had a couple of years to think about this, following the recipe described hahaha...

Konstantin Klugman said...

The previous chart, with 5 animals, I like more. Perfection is good in rocket building, categories with 1-2 players are marginal information. Anyway, thanks a lot for both posts!

Jasdev Singh said...

Wow. This is an interesting perspective. Thanks for sharing. :)