Key Revenue Metrics for SaaS companies

Thanks to Nick Franklin for reviewing a draft of this post!

When I talk to SaaS startups and take a look at their metrics, it still happens quite often that some of the numbers aren’t quite clear to me and it takes some time to clarify things. I’m not referring to sophisticated reports or analyses but to the much more mundane question of what exactly people mean when they use a term like “revenues”.

It’s maybe not surprising that there’s sometimes confusion, given that there are several different ways to express revenues of a SaaS company and even more ways to label them: revenues, sales, turnover, MRR, CMRR, ARR, cash inflow, cash-in, billings, bookings, GAAP revenues, income and so on. That said, I believe most SaaS companies can focus on a small number of revenue metrics which aren’t overly complicated.

If everyone in the SaaS world can agree on the same nomenclature, I think that will make communication between founders and investors more efficient and will save all of us some time. So let’s take a look at the most important revenue metrics in SaaS.


MRR

Monthly Recurring Revenue (MRR) is, as the name suggests, revenue that you anticipate to recur on a monthly basis. If you’re selling monthly subscriptions, MRR is simply the price paid each month for the subscription. If your customers are paying you for more than one month upfront, you simply divide the amount you received by the number of months in the subscription period.

Say you’ve acquired two new customers. Customer A has signed up for a monthly subscription at $100 per month and Customer B has signed up for an annual subscription of $1100 per year. In this scenario, customer A increases your MRR by $100 whereas customer B increases your MRR by $91.67 ($1100/12).

This simple metric is the most important metric a subscription business needs to calculate, which is why ChartMogul (which for disclosure we’re an investor in) is highly centered on MRR. If you focus completely on MRR and calculate it correctly you’re in pretty good shape, so feel free to stop here and ignore the rest of this post. :-)


ARR

Annual Recurring Revenue (ARR) follows exactly the same concept. The only difference is that it measures your annually recurring revenue as opposed to your monthly recurring revenue, so your ARR is 12x your MRR.

Since both metrics are interchangeable, it doesn’t matter if you’re tracking MRR or ARR. I personally prefer MRR, but I can’t tell you why. Probably just out of habit.


Cash inflow

Cash inflow or “Cash In” is the amount of money that you’ve received in your bank account. In the example above, it’s $100 for customer A and $1100 for customer B. A related term from the accounting world is “Accounts Receivable” and refers to cash that is legally owed to you but which you haven’t received yet. Since SaaS companies are typically paid upfront, at least for a month of subscription if not a year, you usually don’t have to worry too much about this and can focus on cash inflow.


Revenues

Revenue means MRR plus any non-recurring revenue such as implementation fees, setup fees or charges for professional services. Let’s say you’re charging a customer $1000 for a data migration project that takes one month to complete, plus another $3000 for onboarding consulting in the customer’s first three months. In that case, the customer will increase your revenue by $2000 in the first month ($1000 for the data migration and $1000 for consulting) and another $1000 in month two and three each. But since these revenues aren’t recurring, don’t include them in your MRR.

Note that this definition of “revenues” is what I believe is usually the right way to look at revenues at the management and board level whereas the numbers which your accountant will produce for your financial statements will likely look slightly different. The reasons are a couple of subtleties in the way software revenues are recognized based on US GAAP and other accounting standards, which brings me to...


US GAAP Revenues

Since I’m not an accountant and don’t even have an MBA we’re now entering territory which I’m not very familiar with, so proceed at your own risk. :) US GAAP Revenues means revenues in accordance with the “Generally Accepted Accounting Principles” adopted by the SEC. Your US GAAP revenues will usually be close to your revenues based on the definition I outlined above, but there can be some differences. For example, US GAAP revenue is typically calculated using a daily recognition model as opposed to the more practical monthly model. That means that if a customer signs up for a subscription at $100 per month on January 15th, according to US GAAP you should only recognize $50 of those $100 in January, despite the fact that that customer is adding $100 to your January MRR. Another difference is that as I’ve learned when doing some research for this article, apparently you may have to recognize things like implementation fees over the subscription period as opposed to the period in which the implementation service is being provided.

This topic is a science of its own, and if you’re interested you can read this 150 page manual from Deloitte about software revenue recognition, but the good news is that you don’t have to worry too much about it. Find a good accountant who understands SaaS and let him figure it out.


Bookings

I’ve seen several definitions of the term “bookings”. Broadly speaking, bookings are the total dollar value of all new contracts signed, but it’s not clear if the number should be annualized for contracts that are larger than one year, nor if non-recurring revenues should be included. Even worse, if your contracts have different subscription periods (e.g. one month and one year), the bookings number can be very ambiguous and misleading. I would therefore recommend to not use this metric and largely agree with the Bessemer Cloud Computing Law #2 which famously stated that “booking is for suckers”.


Billings

The term “billings” refers to the amount that you have invoiced and that is due for payment soon. If your ARPA is low and most customers pay you via credit card and/or your bigger customers usually pay you on or about the time of subscription or renewal, this metric isn’t important. If you agree on longer terms of payments with your customers, it can become important for cash flow planning purposes.


Committed MRR

Committed MRR or CMRR is a projection of your MRR in the next month or future months based on your current MRR, adjusted by guaranteed expansion MRR and anticipated churn MRR. SaaS companies sometimes have customers that start with a low price but have already agreed to a price increase in the future. CMRR is a great way to track and show this type of guaranteed expansion MRR. If you adopt the CMRR metric to show guaranteed expansion MRR, make sure that you also take into account “guaranteed churn” in order to make it consistent. That is, subtract MRR which you expect to lose from customers that you expect to stop using your software in the near future.


Closing thoughts

I believe that most SaaS companies do well by focusing on MRR and Cash Inflow plus, depending on the nature of the business, revenues and CMRR. The only thing I’d add is that if you’re selling annual subscriptions but you don’t get the full payment upfront (or similarly, if you’re for example selling 2-year-subscriptions but get only one year upfront), you should monitor your MRR broken down by contract length. That’s because there’s obviously value in selling longer subscriptions vs. shorter ones but that difference won’t show up in your MRR nor in your Cash Inflow in these cases. If you think there are any other revenue metrics that I’ve missed, please let me know.

Finally, I’m well aware that while all of these metrics are easy to understand conceptually, there are still a lot of devils in the details. The purpose of this post is to come to a common understanding of the key revenue metrics – how to deal with some of the many special cases that you’ll inevitably see (discounts, refunds, currency fluctuations, metered charges, etc) might be the topic of another post.

Hyper-growth in SaaS

Following his well-received guest post about cohort analysis, here comes another guest post from my colleague Nicolas. Enjoy!

Status Quo

From an investor’s perspective, SaaS companies have a lot to love: High gross margins, predictable (recurring) revenues and capital efficient operations. On the flip side, most of them follow a common thread when it comes to growth. It might be too much to label it the ‘long, slow SaaS ramp of death’, but their revenues tend to develop slower than those for consumers plays. How come? In contrast to B2C companies like Uber, Delivery Hero or Homejoy for which it was critical to get the unit economics right, scaling distribution is usually the toughest challenge for a SaaS startup after it has found product / market fit. And this is understood by the markets.

If you are looking at the assumptions for frameworks like ‘T2D3’ and growth projections as outlined by Christoph recently, SaaS companies are typically expected to scale to $100m in revenues before approaching an IPO. You can also see this growth pattern in reality, here is a telling graph of the median SaaS revenue level pre-IPO that I borrowed from Tom Tunguz:

There is no question that growing to $100M in revenues in 7-9 years is an impressive achievement and doesn’t sound like a long, slow ramp of … anything. But if you compare that with Spotify’s estimated revenue of $1B in 2014, some 9 years after founding, you quickly see that there has been a significant difference in scale of successful consumer and enterprise businesses. This holds true for other consumer focused internet companies as well. As you can see, all but one member of this cohort have reached or are on track to reach $1B in year 6 (at the latest!):

At this point I want to stress that clearly all revenues are not equal and due to high margins, customer lock-in and predictability, $1 in SaaS revenue is really something else than say $1 in e-commerce revenue. But it’s fair to say that historically IPO prospects in the B2B field could not match the explosive revenue growth of successful B2C companies.

SaaS Growth in 2015

Something is changing though. Look at these growth curves:

(taken from this great presentation by Mamoon Hamid and slightly edited)

You guessed right, they are all SaaS businesses. And while you could argue that the revenue growth curves of Company B and C still roughly follow the slope of a long, slow SaaS ramp of death to an IPO and come in around the median we saw at the beginning of this post ($2.5M-4.5M ARR after two years and $8M-12M after three), Company A is on steroids! It’s Slack (and B and C are Yammer and Box respectively).

And while that is pretty wild, I couldn’t even fit Zenefits on there properly, because with $20M ARR in under two years and a goal of $100M after three, it’s literally off the charts. Admittedly, I can't say for sure that this reported 'ARR' is net revenues or what exactly their COGS structure looks like, but either way their pace is incredible.

Are we starting to see SaaS companies taking shortcuts and adopting consumer growth curves? Let’s quickly take a look at these two examples and see what they did differently.

Case 1: Slack

You are probably using Slack, but if not just have a look at the twitter love they get. Yes, looks like they are the hottest thing on the block since KoolAid. Although I am personally not 100% sold on all design choices, the way it handles integrations and plays nice on all platforms is quite impressive. I am sure that word of mouth and referrals are the key traffic drivers for them.

Second, it’s free. At least until you hit 10k messages. And by then it is likely that you are already locked-in. So are you going to become a paid customer? What if you commit to Slack now, but your team slowly drops off and you pay for these users anyway? Fear not as Slack will only charge you for monthly active users! Pretty clever, huh?

In summary:

• A very good, consumerised product with native connectivity 
• ‘Risk-free’ freemium business model

• Bottom up growth dynamics boosted by WOM

• A large bankroll ($180M in financing)


Case 2: Zenefits

How much are you paying for your HR software right now? How about $0, plus you can manage benefits through the platform with a few clicks? Hard to deny that value proposition (although we believe that this is not one-size-fits-all and best of breed solutions like our portfolio company Humanity will win large parts of the market).

So they ‘just’ had to push that value proposition into the market. And with push, I mean push real good, as according to LinkedIn, there are over 100+ people in sales roles at Zenefits. And that’s a company in its second year! Compare that to Atlassian or Zendesk, which didn’t have a proper salesforce until they reached thousands of customers.

In summary:

• Freemium again, yet this time with a different spin

• Aggressive outbound distribution
• A large bankroll ($84M in financing)


Conclusion

So what does this mean? It’s a bit too early to predict how these two specific stories play out, but this much seems to be true:

• It’s possible to scale SaaS companies faster than ever before
 in 2015
• Consumerization of the enterprise is happening on the product and business model level
• Freemium is a valid strategy in enterprise SaaS 

• Nobody, not even suits, like large upfront commitments

• Investors are willing to make large bets early in a company’s lifetime if it adopts consumer growth curves


It’s important to note that both cases here are horizontal SaaS solutions that are attacking broad markets. I haven’t seen a vertically focused cloud company scaling this fast, but who knows what the rest of 2015 holds. I’m curious to see how this new playbook for hyper-growth in SaaS develops.

In God we trust, all others bring references

In the last few weeks I talked to two entrepreneurs who both recently made a hire that didn't work out. In both cases I asked how the reference calls went, and in both cases the answer was that they hadn't done any before hiring the candidate. This made me almost angry, especially because the two entrepreneurs are fantastic founders who could have saved themselves from this costly mistake by following a simple rule: Don't hire people without taking references.

Bad hiring decisions are among the most expensive mistakes that you as a founder can make. According to this CareerBuilder survey, bad hires typically cost companies as much as $25,000-$50,000, but the true costs go much beyond cash. The (harder to calculate) opportunity costs – the fact that you've wasted time getting the wrong person up-to-speed and that your recruitment of the right candidate got delayed – usually weigh much stronger, not to mention the negative impact which a bad hire can have on your team, customers and partners.

Most people read test reports and customer reviews before buying a digital camera or an office printer, so how come they don't use the same level of diligence for a decision that is 100x more important? I can think of a few possible reasons:

"Based on the candidate's CV and my interviews I'm so confident that he/she is the right one, reference calls aren't necessary."

Assessing candidates in an interview is hard. Coming across as a great candidate in an interview process is one thing, being able to do the job is sometimes something different. Talking to people who have closely worked with the candidate for years gives you valuable additional data points for your decision. Even if you're a fantastic interviewer and you're right most of the time – if reference calls help you reduce the number of times you're wrong, they are worth it.

"I won't learn anything new, and the references provided by the candidate will only say great things anyway."

Even if people provided by the candidate will usually (but not always!) give a glowing reference, by asking the right questions you'll often find out, usually between the lines, if the reference-giver wants to be polite or if he really thinks that your candidate is awesome. Even more importantly, you should always try to get backdoor references, too.

"It costs so much time!"

Yes, it does. But think about the difference which the right hire vs. the wrong hire can make.

"It's awkward to ask people for references or to sniff around to get backdoor references."

Don't be afraid to ask even if it makes you feel awkward. Senior candidates expect you to ask for references anyway, and junior candidates will quickly learn that it's a standard practice. People will also understand that you need to take backdoor references. The only really problematic situation is if references from the candidate's current company are crucial for your decision and the candidate didn't give notice to his current employer yet. In that case you obviously can't simply call the candidate's boss and you need to find out carefully how you can get your references without doing harm to the candidate.

If I was able to convince you of the "why", check out this great post by Mark Suster about the "how":  "How to make better reference calls"

How fast is fast enough?

Growth is the single biggest determinant of startup valuations at IPO, as my fellow SaaS investor Tomasz Tunguz concluded based on an analysis of 25 IPOs in 2013. Growth (a.k.a. traction) is also the most important factor that attracts VCs and drives valuations in private financing rounds. Of course your team, product, technology, business model and market matter too, but when you’re past the seed stage the expectation is that these factors will have resulted in excellent growth. At the seed stage you can sell your story and vision. At the Series A and later stages, you have to back it up with numbers.

This isn’t surprising. Past growth tends to correlate with future growth, and since tech markets are winner-takes-all (or "winner-takes-most") markets, investors are obsessed about finding the fastest-growing player that has the biggest chance of dominating the market.

If growth is so crucial, how fast do you have to grow?

The answer depends on the market you’re in and the type of company that you want to build. If you’re in a small niche market – let’s say a business solution for a small vertical, localized to one country – maybe you don’t have aggressive, well-funded competitors. In that case it may be sufficient if you’re the fastest-growing player in that market, even if that means you’re growing only 20% year-over-year. There’s absolutely nothing wrong building a company like this, and you could end up with a highly profitable small business (or Mittelstand company). This is not the type of company VCs look for though, and the rest of this post is written based on the premise that you’re a SaaS startup that wants to grow to $100M in Annual Recurring Revenue (ARR).

So how fast do you have to grow in order to become a $100M company? Again using data compiled by Tomasz “Mr. SaaS Benchmarking” Tunguz we can see that the 18 publicly traded SaaS companies that were founded within the last ten years took five to eight years to reach $50M in revenues, with 14 out of the 18 being in the six to seven years range. ⁽¹⁾ Add another one or two years for getting from $50M to $100M, and we can assume that most of these companies took seven to nine years to get to $100M.

$1M, T2D3, 50%?

If you want to get from 0 to $100M in revenues in seven years, your growth curve will likely look very roughly like this: Get to $1M in ARR by the end of the first year, triple to $3M in the next year, followed by another triple to $9M by the end of year three. Double your revenues in the next three years, so that you’ll reach $18M, $36M and $72M by the end of year four, five and six, respectively. Grow by another 50% in the next year and reach $108M in ARR by the end of year seven:

This is very much in line with the “T2D3” formula described by Battery Ventures in this TechCrunch post. If you want to give yourself nine years to get to $100M, your numbers will probably look roughly like this:

Could you also take the slow track?

The big question is now if this strong pattern is merely the result of investment bankers’ and public market investors’ preference for fast-growing companies or if something more fundamental is going on here. If there was a “law” which said that if you haven’t reached something close to $5M after three years, $10M after four years, and so on, you’ll likely never get to $100M, this would obviously have important implications for founders as well as investors.

My opinion is that there’s no hard law – in business you’ll find exceptions for every rule, and I think it’s definitely possible that software companies that grow slowly and eventually reach $100M exist. But I do think that the probability of ever getting to $100M does go down very significantly if you’re growing much slower than pictured above. This is because:

• As companies get bigger, growth rates tend to go down, not up. So if your growth rate in year three is only, say, 50%, it’s unlikely that it will be 200% in the following year. It can happen and does happen, of course, but only if there’s a dramatic improvement in the business - a new product, a new distribution channel, a new business model or the like.
• It’s hard for a slow-growing company to attract the best people. It’s not only about being “hot” as an employer (although that’s part of it, too). If you’re not growing fast, you’ll also have a hard time making compensation packages competitive with those of fast-growing companies. The positive feedback loop that is taking place here is very powerful: Momentum attracts talent and money, which you can turn into more momentum, and so on.
• Not so many founders have the stamina and patience to stick to their company for 10, 12, 15 years - after so many years, many people understandably need a change. And while a company can of course survive its founders, it’s still a loss that doesn’t make things easier in the future.
• Lastly, but maybe most importantly, if you can’t figure out a way to grow fast and you’re in a large market, chances are that someone else will. It also increases the chance of a new, innovative, fast-growing startup entering and possibly disrupting the market before you’ve reached significant scale.

Coming back to the original question, how fast is fast enough? If your goal is to eventually get to $100M in ARR, I think you should try to get there as fast as possible, and getting there by the end of year seven after public launch feels about right to me. This may seem like a very ambitious goal, but it would be boring if it was easy, wouldn’t it?

___________________

(1) Note that there’s somewhat of an outcome bias in these results, as companies that were founded in the last ten years but take more than ten years to go public haven’t been included. So it’s possible that a few companies with slower growth will be added in the future, but that’s unlikely to change the picture significantly, especially if you keep in mind the trend which Tomasz has described in his post: SaaS startups are growing faster than ever before, and it’s taking them less and less time to get to $50M.

Why (most) SaaS startups should aim for negative MRR churn

If you've followed my blog for a while, you know that I have a bit of an obsession with churn. Having significant account churn doesn't necessarily have to be a big problem and can't be avoided completely anyway. MRR churn sucks the blood out of your business though. That's why I think that SaaS companies should work very hard to get MRR churn down, as close to zero as possible, or even better achieve negative MRR churn.

Before I continue, here's a quick refresher on the terms that I'm using. If you're a SaaS metrics pro you can skip the next two paragraphs.

Your account churn rate, also called "customer churn rate" or "logo churn rate", measures the rate at which your customers are canceling their subscriptions. If you have, say, 1,000 customers on February 1st and by the end of the month 30 of them have canceled, your account churn rate is 3% p.m. in Feburary. Note that this assumes that all 1,000 customers are on monthly plans and can cancel that month – if some of your customers are on annual plans, you need to calculate the churn rate of that customer segment separately.

Your MRR churn rate, sometimes also referred to as "dollar churn rate", is the rate at which you are losing MRR through downgrades and cancelations. If you have, for example, $100,000 in MRR on February 1st, and by February 28 you've lost $4,000 of these $100,000 due to downgrades and cancelations, your gross MRR churn rate is 4% in February. Assuming you have $6,000 in expansion MRR in the same month – i.e. an increase in MRR of existing customers, e.g. due to upgrades to more expensive plans or additions of seats – your net MRR churn is minus $2,000 and your net MRR churn rate is minus 2% in that month. For more details on these and other SaaS metrics, check out ChartMogul's SaaS Metrics Cheat Sheet.

Thanks for your attention, SaaS metrics newbies, and welcome back pros. The following two charts show the disastrous effect of MRR churn, using an imaginary SaaS startup (let's call it Zombie.com) with $100,000 in MRR that has a net MRR churn rate of 3% p.m. and is adding $10,000 in MRR from new customers each month:

MRR development of Zombie.com - click for a larger version

MRR development of Zombie.com - click for a larger version

The first chart shows how much new MRR from new customers Zombie.com is adding (light green), how much MRR it's losing due to churn (red) and what the net change is (dark green). The second chart shows the resulting MRR (blue) and the ratio between new and lost MRR (orange), inspired by Mamoon Hamid's great "Quick ratio" of (Added MRR / Lost MRR), which I recently learned about.

As you can see in these two charts, not only does the net new MRR of Zombie.com go down every month. It actually asymptotes to zero, which means that the company is hitting a wall at around $350,000, at which it stops growing.

The math behind this is of course trivial, since the assumption was that the company is adding a constant dollar amount of MRR every month, while churn MRR, being a constant percentage of total MRR, is growing. So what happens if instead of acquiring new customers linearly, you manage to add new MRR from new customers at an ever increasing rate?

Here's another imaginary SaaS startup, let's call this one Treadmill.io. Like Zombie.com, Treadmill.io has $100,000 in MRR in the beginning of the timeframe that I'm looking at and has a net MRR churn rate of 3% p.m. Unlike Zombie.com, Treadmill.io is adding new MRR from customers at an accelerating rate, though: In the first year it's adding $10,000 per month, in the second year $15,000 per month, then $20,000 per month, and so on. Let's look at the charts for Treadmill.io:

MRR development of Treadmill.io - click for a larger version

MRR development of Treadmill.io - click for a larger version

The MRR development of this company looks much less depressing, and after ten years it reaches close to $1.5M in MRR. However, as you can see in the first chart, as well as in the declining orange line in the second chart, churn is eating up an ever increasing part of the new MRR coming in from new customers. If Treadmill.io doesn't manage to decrease churn, it will have to acquire more and more new customers just to offset churn, and keeping net new MRR growth up might become increasingly difficult.

OK, but what if you're acquiring new customers at an exponential growth rate? Let's look at a third imaginary company called Weed, Inc. Like Zombie.com and Treadmill.io, Weed starts with $100,000 in MRR and has a net MRR churn rate of 3% p.m. The big difference is that Weed is adding new MRR from new customers at an exponential rate. Starting with $10,000 in the first month, the company is growing new MRR from new customers 10% m/m in the first year; 8% m/m in the second year; 6% m/m in year three; 4%, 3% and 2% in year four, five and six, respectively; and 1.5% from year seven onwards. 

Here are the charts for Weed, Inc:

MRR development of Weed, Inc. – click for a larger version

MRR development of Weed, Inc. - click for a larger version

Not much to complain about: After ten years, Weed, Inc. has more than $19M in MRR. The big question, though, is if a development like this is realistic. In order to offset ever increasing churn amounts, Weed needs to acquire new MRR from new customers at an extremely ambitious pace. In the last month of the ten year model that I'm looking at, Weed adds about $870,000 in new MRR from new customers, almost 5% of the company's total MRR at the beginning of that month. To acquire so many new customers, Weed needs either a viral product (very rare in B2B SaaS) or extremely scalable lead acquisition channels.

I'm not saying that it's impossible, but I believe the much more likely path to a SaaS unicorn is by getting MRR churn to zero or below – which means you have to make your product more and more valuable for your customers and acquire larger and larger customers over time.

Update / September 17, 2019: Bonus tip, we recently invested in a company called Brightback that helps you reduce churn by making it easy to implement sophisticated, personalized "churn deflection" pages and workflows. Have a look! :)

Announcing our investment in ChartMogul

The big guy who's lifting Nick is Michael Hansen,
Zendesk's first employee and a co-investor in ChartMogul

As reported by TechCrunch, we’ve led a seed round in ChartMogul. We’re thrilled about the investment. The decision to invest in ChartMogul, which has developed an analytics solution for subscription businesses, was a very easy one. Here’s why:

1) ChartMogul was founded by Nick Franklin, an early Zendesk employee. As employee #6, Nick has headed Zendesk’s activities in the EMEA region for two years before leading the company’s expansion into Asia for another (almost) three years. I knew that Nick has done a fantastic job at Zendesk and knew that he was an extremely entrepreneurial, hard-working, well-rounded, smart and nice guy. So when Nick told me a few months ago that he’s leaving Zendesk to start his own startup, I was sad for Zendesk but also very keen on learning more about his new gig.

2) ChartMogul is solving a problem which we at Point Nine know very well. We talk to SaaS startups on a daily basis, and almost all of them either have significant trouble getting comprehensive, accurate and consistent metrics or they had to make huge investments (especially into developer man-months) to get reasonably solid data.

When I put together my SaaS metrics dashboard almost two years ago, I drastically underestimated how difficult it is for companies to retrieve all of the relevant data. It sounds very easy in theory, but as we (and many SaaS founders) have painfully learned over the last years, in practice it’s very hard. I’ve heard from several SaaS founders that when they’ve found my SaaS dashboard template, they loved me for creating and open-sourcing the dashboard. But that love turned into hate when they found out, often over months, how hard it is to fill the template with real data. :-) The difficulties include getting and consistently matching data from multiple sources, dealing with complicated billing scenarios, addressing all kinds of exceptions and many more – I’ll let Nick follow-up with an in-depth post on that topic.

ChartMogul is solving that pain. You connect ChartMogul with your billing system (Stripe, Braintree, Chargify or Recurly) and at the click of a button, the product will show you almost any SaaS metric that you want to see, including the SaaS KPIs from my dashboard. But ChartMogul is not only a productized version my dashboard template. Since you can slice and dice all the data that you see on the screen, ChartMogul allows you to get many more insights. If you’re a SaaS company, go check it out!

3) We’re convinced that SaaS will continue to grow very fast throughout the decade and beyond, so the company is addressing a large and growing market. What’s more, while ChartMogul is initially focused on B2B SaaS companies, the solution is equally relevant for any kind of business with subscription revenue, which expands the company’s TAM even further.

So if you happen to provide a subscription service for “authentic T-shirts from the best bars”, curated items for nerds, emergency supplies or, well, dope, ChartMogul’s got you covered. ;-) (seriously - these services all exist, and many more)

What's table stakes in SaaS, anno 2015

Yesterday I shot off a Tweetstorm about some important developments that I'm observing in the SaaS world as we're entering 2015. While a Tweetstorm is a nice way of gently breaking the 140 character limit, I thought it would make sense to follow-up with a blog post.

The point that I made was that most of the tactics which smart SaaS entrepreneurs developed around 2007-2009 – inbound marketing, conversion optimization, lifecycle marketing, etc. – and which gave them a competitive edge at that time can no longer be used to gain a competitive advantage. This doesn't mean that you should ignore these strategies. It's exactly the contrary – you have to do all of this, and you have to do it excellently. But it doesn't mean you'll win, it's necessary just for having a seat at the table.

The whole concept of the "consumerization of the enterprise" and everything that comes with it was very new a couple of years ago. As I've written before, when Mikkel told me how Zendesk was doing sales and marketing in 2008, I was intrigued but also slightly confused. Most of the terms like content marketing, inbound marketing or growth hacking didn't even exist yet or weren't widely used.

Today, an incredible amount of knowledge on how to build a SaaS company is available online. Jason M. Lemkin alone has answered more than 1100 (!) mostly SaaS-related questions on Quora, drawing from his experience in founding EchoSign and scaling it to $100M in ARR. Between his website and the blogs of David Skok, Tomasz Tunguz, Joel York and others you'll find great answers to almost every SaaS question that you can think of. In addition, there's a large number of excellent blogs and resources to learn about more specialized topics such as inbound marketing, landing page optimization, customer success, marketing, growth hacking, more growth hacking, product strategy and every other imaginable topic. Processing all of that information and prioritizing and applying the learnings is of course difficult, but at least the information is there.

Besides that, companies like Totango, Gainsight and Intercom have taken some of the ideas of the first generation of consumerized SaaS entrepreneurs and turned them into great products which make it easy to analyze, segment and communicate with your users. Customer success is not the only area which saw the emergence of "SaaS for SaaS" solutions – there are now dedicated products for subscription billing and subscription analytics, too. And then there are of course great solutions for everything from multi-touch attribution to A/B testing to lead scoring.

What that means is that in 2015 there's no excuse for not understanding your metrics, for not doing great content marketing, for not being focused on customer success, for being clueless about sales and marketing or other rookie mistakes. I don't intend to sound harsh. It's the market which is harsh. All that knowledge, all those tools, it's all available to your competitors as well, and that's what's raising the table stakes.

So how can SaaS entrepreneurs get ahead of the pack in 2015? I'll leave that for another post (and I'm happy to hear about your ideas!).

The #P9Family is hiring

At the beginning of December we had the idea that it would be cool to put together a "recruiting advent calendar" with job openings from within the Point Nine Family. Each day until the 24th of December, we'd showcase one job opportunity from a portfolio company, along with a referral bonus or prize for successful referrals.

Our portfolio companies surprised us with some amazing referral prizes. Please take a look at the list below, and if you know any awesome people who might be interested in a career change in 2015, let me know!

Without further ado (and apologies for the brag), here are some of the greatest opportunities in tech in 2015:

riskmethods is hiring a Ruby on Rails Developer
Referral bonus: A trip to Oktoberfest! (everything but flight included)
Tweet it!

Kreditech is looking for a Head of Group & German Taxes
Referral bonus: One monthly salary of the new employee!
Tweet it!

Contentful needs a Technical Product Manager
Referral bonus: A weekend trip to Berlin!
Tweet it!

15Five wants a Front-End Developer
Referral bonus: A round trip flight to anywhere (up to $2,000)!
Tweet it!

Contentful has an open position for a Sales Manager
Referral bonus: A weekend trip to Berlin!
Tweet it!

15Five wants a Business Development Rep
Referral bonus: A round trip flight to anywhere (up to $2,000)!
Tweet it!

Contactually is on the hunt for a VP of Engineering
Referral bonus: $1,000 to the referrer and $1,000 to a charity of his/her choosing
Tweet it!

Vend is looking for a VP of Global Sales Operations

Referral bonus: Return economy ticket to New Zealand

Tweet it!

Mention needs a Head of Product

Referral bonus: A trip to Paris, flight & accommodation included

Tweet it!

Do you know a VP of Marketing for Gengo?

Referral bonus: A trip to Tokyo for 2!

Tweet it!

Westwing is hiring a Global Head of Product Management and User Experience

Referral bonus: An iPad or iPhone 6+!

Tweet it!

Positionly is looking for an Account Executive

Referral bonus: A trip to Warsaw!

Tweet it!

Gengo needs a VP of Sales

Referral bonus: A trip to Tokyo for 2!

Tweet it!

Mambu is hiring an Account Manager

Referral bonus: Apple iWatch Sports Edition (as soon as it's released!)

Tweet it!

Kreditech wants a Head of Treasury and Debt

Referral bonus: iPad Mini

Tweet it!

Typeform is looking for a CMO

Referral bonus: A weekend in sunny Barcelona!

Tweet it!

Geckoboard wants a Front-end Engineer

Referral bonus: A Parrot AR.Drone 2.0 Quadcopter!

Tweet it!

15Five is searching for a Front End Growth Hacker
Referral bonus: A round trip flight to anywhere (up to $2,000)!

Tweet it!

ServerDensity has an open position for a Technical Account Manager

Referral bonus: One year supply of English-grown Earl Grey Tea!

Tweet it!

DocPlanner is looking for a Product Manager

Referral bonus: A party weekend in Warsaw for 2!

Tweet it!

Westwing needs a Lead Data Scientist

Referral bonus: An iPad or iPhone 6+!

Tweet it!

2014 in the numbers – fun stats from the #P9Family

It's that time of the year again, the blogosphere is full of reviews of the year that is coming to a close and predictions for the coming year. When it comes to predictions, I agree with Niels Bohr (or Mark Twain or various other people who the quote got attributed to): Prediction is difficult, especially about the future. Seriously, as Paul Graham just wrote in his latest essay, change is notoriously (and tautologically) hard to predict.

So let me take the safer path, take a look back at 2014 and show you some stats from the Point Nine family of startups. Some are true KPIs, others are from the fun/vanity metrics department – but I believe all of them are impressive and inspiring. Enormous gratitude goes to all the extremely hard-working and talented people in the #P9Family. You rocked this year (and not only this year)!

(If you're reading this post in an email client or RSS reader, the infographic below might not display correctly. In that case please go to the Web version.)

Introducing: The One-Slide Update Deck

When we start to work with a new portfolio company, one of the things we always suggest is that in addition to (sometimes lots of) ad hoc communication via eMail, Skype, Basecamp, etc. we set up a standing meeting or call, at least during the first 9-12 months following our investment. Typically it's a one-hour monthly call, and the purpose of these calls is to get us updated and to talk through current issues. Our experience is that these calls are a very effective and efficient way to discuss things and to find out how we can help. The last thing we want to do is be a burden on the founders, and so we try to be very respectful of the their time (even if we're not as efficient as Oliver Samwer with his famous "supercalls" - 12 hours, 180 companies, or something like that).

Just like a regular Board Meeting, these monthly calls work best if the investors get an update before the call, so that the call can be spent discussing key challenges rather than spending too much time going through numbers and updates. And that brings me to the topic of this post: The One-Slide Update Deck.

Founders often ask me if I have a preferred format for updates and KPIs. And while I can point them to my SaaS metrics dashboard for KPIs, we've never had something like a template for other updates. So here's my attempt to create a super-simple deck which you can use to update your investors (or me!):

The idea is that in the beginning you create a rough roadmap for the next 12 months, broken down into key areas like Product & Tech, Sales & Marketing and Team/Hiring (see slide 1), plus a financial plan. Better yet, you already have a plan :-) and you discuss that with your investors to get everyone on the same page.

Then, every month you create one slide which shows progress and problems, as well as the original plan, in each of the three key areas, plus key metrics. I've borrowed the "Progress, plans, problems" technique from Seedcamp; the metrics are taken from my own SaaS dashboard template. So just one slide, once a month, with information you should already have anyway, and you should have a great basis for highly productive calls or meetings with your investors.

It obviously doesn't matter if you use Keynote, Google Docs or something else, and depending on the needs of your company you may want to emphasize different key areas or include other KPIs. So this isn't meant to be prescriptive but rather a suggestion or a starting point for founders who are thinking about reporting for the first time – if you are already providing more comprehensive monthly reports, don't change it!

If you want to take a closer look, here is a PDF and here is the original Keynote version.

Thanks to Nicolas, Rodrigo and Michael for providing valuable feedback on the draft of the slides!

A toast to all the great ones that we've missed

Picture taken by "nlmAdestiny"

One of the things that inevitably happens when you're in the angel or VC investing business for a couple of years is that besides a hopefully healthy portfolio, you're also building a growing anti-portfolio. As far as I know, the term "anti-portfolio" has been coined by Bessemer. Its meaning is described very well on Bessemer's website, and because it's so hilarious I want to quote it in its entirety:

"Bessemer Venture Partners is perhaps the nation's oldest venture capital firm, carrying on an unbroken practice of venture capital investing that stretches back to 1911. This long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up.

Over the course of our history, we did invest in a wig company, a french-fry company, and the Lahaina, Ka'anapali & Pacific Railroad. However, we chose to decline these investments, each of which we had the opportunity to invest in, and each of which later blossomed into a tremendously successful company.

Our reasons for passing on these investments varied. In some cases, we were making a conscious act of generosity to another, younger venture firm, down on their luck, who we felt could really use a billion dollars in gains. In other cases, our partners had already run out of spaces on the year's Schedule D and feared that another entry would require them to attach a separate sheet.

Whatever the reason, we would like to honor these companies -- our "anti-portfolio" -- whose phenomenal success inspires us in our ongoing endeavors to build growing businesses. Or, to put it another way: if we had invested in any of these companies, we might not still be working."

What follows is a list of spectacularly successful companies which Bessemer saw and passed on, including Apple, eBay, FedEx, Google, Intel and others. (No need to send CARE packages to the guys at Bessemer though, they have more than 100 (!) IPOs under their belts).

I'm a big fan of dealing with failures openly, and I applaud Bessemer for being so open about their anti-portfolio. In the next version of our (meanwhile pretty outdated) website we should add a section about Point Nine's biggest misses, but let me already give you a sneak preview into my personal anti-portfolio:

The two "passes" which I regret the most are SoundCloud and TransferWise. The reason why these two ones stand out is that I had the opportunity to invest in them (at an early stage and at reasonable terms), spent some time looking at them and decided to pass. Since then, both SoundCloud and TransferWise have become "unicorns" or are on their way getting there. Congrats to the founders and early investors of these fantastic companies – Alexander, Eric, Christophe and Jan (SoundCloud) and Taveet, SeedCamp and Index (TransferWise)!

Another unicorn that we rejected is FanDuel. Congrats team FanDuel, Fabrice, Andrin!

As far as I know, these three are the only $1B-valuation companies that we've missed so far, but there are several other companies that we passed on and which are doing great. Most of these are probably worth well over $100M by now and they include:

• Wanelo
• Intercom
• Lovoo
• EyeEm
• Simply Measured
• OneLogin
• NewsCred (thanks for the pointer and congrats, Shafqat!)

The reasons for passing an all of these great companies varied and included concerns about market size, competition, defensibility, valuation ... all bullshit with the benefit of hindsight. :-) While I am of course trying to learn from all of these mistakes, I also know that it's inevitable that my anti-portfolio will continue to grow over time. And although that can hurt, I know that that is okay – at least as long as we're happy with our non-anti-portfolio.

Reflections on the early days at Zendesk (part 2)

This is part two of my post about the early days at Zendesk. The first part is here.

Small, fragmented and no potential for differentiation

As mentioned in the first part of this post, the seed round was only $500,000 and it was clear that we’d need much more money soon. That’s why Mikkel and I started to work on a pitch deck and a financial plan almost immediately after the closing of the seed round and started to pitch to VCs shortly thereafter.
In my personal experience as a founder, raising money has never been easy, and so I didn’t expect that it would be easy. I was quite optimistic though, since I thought we had a pretty good pitch: a well-rounded team of three complementary and experienced founders, a beautiful product, a proven business model, paying customers and nice (yet early) traction.

So why did all European VCs pass? I’m getting asked this question a lot and I don’t have a perfect answer, but here are a few important factors:

• There just weren’t (and still aren’t) that many VCs in Europe who can write a Series A check. If a couple of them pass for whatever reason, you’ve quickly exhausted your available options.
• Our timing was horrible – it was almost at the height of the global financial crisis which had started in 2007. While we were trying to raise the Series A, Lehman Brothers imploded and a collapse of the entire global financial markets seemed possible.
• We had failed to convince investors that we were going after a large market and that we could build a defensible position. One feedback that we got was that the market for help desk software is “small and fragmented” and that there are concerns about the “potential for differentiation” and several other VCs were concerned about the size of the opportunity and our ability to differentiate, too.

You’ll notice that I haven’t mentioned the “European VCs are risk-averse/dumb/whatever” theme to explain why we haven’t been able to raise money in Europe. While I do think that there are differences between how VCs work in Europe vs. the US, I think it wouldn’t be fair to blame European investors for missing Zendesk: With hindsight Zendesk looks like a clear winner, but back in 2008 it wasn’t that clear. It was still very early.

At a critical juncture

A few months later, after having talked to a number of US investors and and after an almost-deal with a West Coast VC which was pulled back at the last minute, we eventually got an offer from CRV in Boston. We were relieved, but the valuation was much lower than what we had hoped for.

Because of the dilution which the investment round would mean and because the whole fundraising process has been so hard, Morten and Alexander got more and more doubts if going the VC route was the right thing to do at all. They were wondering if we couldn’t go the 37signals way instead – stay a smaller team, grow organically and maybe raise money at a later point in time when we’d be in a stronger position and when the market conditions would be more favorable. That was definitely a viable alternative and worth considering, but Mikkel and I strongly believed that we had to raise money and that we shouldn’t wait. This led to a lot of long emails and Skype discussions between the four of us. It also led to some very heated discussions between Mikkel, Morten and Alexander, which is no surprise, given how much was at stake. We were at a critical juncture.

One relic from those days is this email snippet (Alex in red, me in green):

I still need to buy Alex a T-Shirt with “I’m not confident that Zendesk can grow into a $100 million company” on it.

In the end we decided to take the investment from CRV, but we took a smaller amount than what Devdutt had offered us to reduce the dilution. It was still a significant hit in terms of dilution, but given how many doors the CRV investment has opened for us and how much Devdutt has done for the company it proved to be the right decision.

The rest is history – get Mikkel’s book to read about it!

Reflections on the early days at Zendesk (part 1)

Yesterday I posted a brief review of Mikkel’s excellent book “Startupland”. For me, the book is also a good opportunity for some reflections and to share some thoughts in relation to Zendesk’s journey.

The first date

When I stumbled on Zendesk in 2008 I knew absolutely nothing about enterprise software, B2B or SaaS. I had always been a consumer Internet guy, having founded comparison shopping engine DealPilot.com back in 1997 and personalized homepage Pageflakes in 2005. If Zendesk’s website hadn’t been so beautiful and if the product hadn’t been so easy to try and use, Zendesk would never have caught my attention (and I wouldn’t be writing this post now). The nice little buddha, the logo/brand and the tone of voice of the site also helped, massively.

Interestingly, if I had been an enterprise software investor, Zendesk probably wouldn’t have caught my attention either, since the website didn’t look like a typical enterprise software website at all. Today the “consumerization of the enterprise” has become mainstream, but in 2008 it wasn’t. Apparently you had to be a consumer Internet entrepreneur looking for the next big thing on the Web in order to stumble on and be attracted by Zendesk. This characteristic – not being a consumer Internet startup but not being a classical enterprise software company either – has probably contributed to our difficulty raising a Series A later on, but more on that later.

So when Mikkel and I met for the first time, I knew nothing about SaaS and probably asked a lot of dumb questions. At that I also knew nothing about inbound marketing and customer success – topics which are now near and dear to my heart for some years – and I was somewhat puzzled when Mikkel explained to me how they’ve been getting customers. I was worried that the inbound marketing plus customer success (at that time, called “customer advocacy”) approach wouldn’t scale and thought that they’d have to do outbound sales soon to keep growing. That turned out to be epically wrong: Zendesk grew to 10,000 paying customers before starting to build a real sales team, and up until this day, the vast majority of customers come from organic sources.

Having been an entrepreneur since the age of 17 I did know a few things about starting and building companies though, and since both DealPilot.com and Pageflakes were VC-funded I also had some experience with venture capital. So Mikkel and I were very complementary, or, as Mikkel puts it in the book:

There was a good vibe between us, even though we were extremely different. […] Ultimately, I think we recognized that we were a good balance for one another.

I remember that a couple of years later, at the first PNC SaaS Founder Meetup in San Francisco in 2012, Mikkel ended his speech saying something along the lines of: “Kudos to Christoph for investing in us back in 2008 – I would never have invested in these three guys”, referring to his co-founders Morten, Alexander and himself. My response was: “Kudos to you for taking money from me – I never would have taken money from me”. I think there’s no better way to sum it up. :-)

After the financing is before the financing

Following our first meeting, we very quickly concluded that it would make sense to work together, agreed on the terms, and voilà, a six-figure dollar amount changed hands. I was excited, but it was also a little bit scary because it was my first angel investment (aside from a few small investments that I had made many years earlier). I didn’t have a diversified portfolio, and I didn’t know if I’d ever have one because I had no idea when I’d make my second investment. I didn’t have deal-flow, and I’m not even sure if I knew the term deal-flow.

I didn’t worry too much about it though, and the mood was good. Quoting Mikkel from the book:

We now had a new direction. The investment from this seed round inspired a new mindset and created a big change in pace. Christoph helped us with a business plan and helped us build out what would be the first attempt at describing the financial model of our business. [...] He helped us think about scale—and about the possibilities.

The seed round, including the friends & family investments and my own investment, was only $500,000 though. It was enough for the founders to take a modest paycheck and to hire a few people, but it was clear that we’d need a much larger round soon. That’s when things started to become worrisome for me, since it quickly became clear that raising a Series A round would be very difficult.

This was the first part. Part two coming soon.
[Update: Here is part two.]

Startupland – How three guys risked everything to turn an idea into a global business

As some of you may know, my friend Mikkel, founder and CEO of Zendesk, wrote a book. It’s called “Startupland: How Three Guys Risked Everything to Turn an Idea into a Global Business” and you can learn more about it here. The hardcover version will be released in about two weeks, but the Kindle version just became available on Amazon and I was lucky enough to get my hands on a draft a few weeks ago.

The book is a well-written and very personal look back at Zendesk’s amazing success story, which began in a loft in Copenhagen and culminated in the company’s Wall Street IPO earlier this year. It’s both autobiography and “tips & tricks" guide: First and foremost it’s a suspenseful chronicle of the journey of Mikkel and his co-founders Alex and Morten that lets you witness some of the many ups and downs which startupland has in store for entrepreneurs, but it also contains a lot of actionable advice for other founders.

It’s an entertaining read, too, and as someone who was fortunate enough to have played a small role in Zendesk’s beginnings, reading about those early days put a smile on my face many times. In some cases, it also made me laugh out loud, e.g. when Mikkel writes about my conversation with Michael Arrington.

One of the reasons why "Startupland" is such a great read is that it’s honest and humble. When other authors write things like “I didn’t know anything about XYZ” it often feels like fishing for compliments. When Mikkel writes it, you know that he really means it that way.

I highly recommend the book to any startup founder, and in particular to all founders from Europe who consider making the move to the US.

When deers morph into elephants, SaaS nirvana is nigh

By now you’re probably sick of my infamous animal analogies. Sorry. But I just love them and want to resort to them one more time. :) Namely, what I want to talk about are deers that can morph into elephants, or more generally, smaller animals that can morph into bigger animals. ⁽¹⁾ In other words, I want to talk about account expansions, which are the result of a successful “land and expand” strategy.

The premise of this strategy is that it’s usually easier to get a minor commitment from a customer first and then work your way up towards a larger ACV, rather than trying to get a large deal from the get-go. There are different ways how SaaS companies have successfully employed land-and-expand strategies:
 

• Yammer is a classic example. Typically a small team in a company starts to use Yammer for internal communication. Then they add more and more people, usage might spills over to other teams or departments, and eventually Yammer’s sales team can come in and upsell the customer to an enterprise account. It’s hard to imagine a hotter, more qualified lead than a company where dozens or hundreds of people are using your product already!
• Dropbox is similar, but the difference is that you can start using Dropbox even as single user. Plus, they have another great growth vector, since people keep adding more and more files to their file storage.
• EchoSign: In this Quora post, EchoSign founder Jason M. Lemkin (one of the top SaaS experts and our co-investor in Algolia and Front) describes how EchoSign grew many departmental deployments into large, six-figure accounts over time (he also gives you the caveats).

Another way to get bigger and bigger accounts over time is of course to target startups and grow with your customers. Zendesk is extremely successful at employing land-and-expand strategies, but the company has also been fortunate enough to acquire customers such as Twitter, Uber and many others when they were still pretty small.

If your land-and-expand strategy works so well that your account expansions offset churn, then your MRR churn rate becomes negative – a state which I’ve previously described as the holy grail of SaaS. It’s hard to overstate how transformative this can be to a SaaS company. Think about it: Negative MRR churn means that even if you’re not growing, you’re still growing. More precisely, even if you stopped acquiring new customers tomorrow your recurring revenue would still continue to grow.

It’s no surprise that SaaS investors start to salivate when they see SaaS companies with negative MRR churn. Just a few days ago, Tomasz Tunguz of Redpoint highlighted that New Relic, which has filed to go public, has a negative MRR churn rate of about 14% per year. Especially for later-stage public SaaS companies, revenue churn is one of the most important metrics to look at. You cannot understand a company like Box, which is spending seemingly crazy amounts of money on customer acquisition, without understanding this metric. ⁽²⁾

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⁽¹⁾ If you have no idea what I'm talking about, please read this post.
⁽²⁾ And yet, I have the impression that this metric hasn’t fully arrived in the world of financial analysts and accountants yet. There doesn’t yet seem to be a standard way of reporting it – every company defines the metric a little different, and some aren’t reporting it at all.

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.