For early-stage SaaS founders, revenue growth rate is an important metric that decides the future of their company. The most-asked questions in the category are: How much revenue should I earn in the first year? How much should I grow month-on-month? If I want to go to investors, what's the revenue milestone I should have crossed?
Here is a compilation of the top seven questions that early-stage SaaS founders ask online, answered by Upekkha Partner Prasanna Krishnamoorthy.
#1. What is a good month-on-month (MoM) growth rate for a SaaS company?
It depends on your stage, churn, and what is fuel for your growth.
Bootstrapped? Then you’re naturally constrained for growth vs product investment. If you’re growing 5% MoM with earnings being reinvested to maintain that rate, and you’re able to do it consistently that’s great! You will double every year. You need “enough growth” to get to cash-flow breakeven quickly. Don’t worry about the specific rate per month.
If you’re VC funded, then you “need” to spend the money you raised in 18–24 months, and grow 3–5X in that time, which means a base rate of 10+% MoM.
Pre PMF(product market fit), if your growth is coming with low churn (<5% MoM for SMB, <3% QoQ for enterprise), then that’s good growth. If your fast growth is coming with high churn, then growth-at-all-costs is not good!!
In enterprise, (right) pipeline growth has to be the measure, since revenue growth is a lagging metric.
If you have an upsell model, then existing accounts should be growing month-on-month, or quarter-on-quarter. That will prove you have a sticky high-value proposition. This will reduce your net churn, and
Either way, pre PMF, you want to find a segment of customers that can grow 10% MoM. Why 10%? Because you’ll become 3X bigger in 12 months. But Pre-PMF, if that segment is only 25% of your revenue, and it’s growing 10% MoM, that’s still better than over all growth of 5% MoM. Finding PMF will probably need you to become more focused on a value prop that a specific segment loves. This would be on a small base - say $10K MRR or so.
So don’t worry about your rate of growth. Alone. Ensure that you have the right rate of growth for your stage, and the right churn, for the model of financing you’ve picked.
#2. Is it possible to generate a $2,000 MRR SaaS business in 2 months or less?
Yes. It really depends on your starting point, especially how much domain understanding you have.
Let’s take a consumer SaaS example, and a mid-market SaaS example.
For consumer SaaS, your pricing is likely to be $10/m or so, ie $100/yr. To achieve $2K MRR, you need 200 customers. To get 200 paying customers, at a 25% conversion rate, you need 800–1000 highly qualified leads, signing up for your free trial. This requires 3,200–4,000 qualified visitors. Assuming a click on SEM costs $5 in your niche segment, you’ll spend up to $20K to get those visitors (organic channels will take 4–6m to mature and give you traffic). All this assumes you know exactly what folks will value, what they’ll search for, and how to position and sell to them.
For mid-market SaaS, ACV $20K, or $2K/m is par for the course. At this level, you will need to deliver a 5X-10X RoI to get your first sale. So your product should have $10K/m or higher value for the customer. The easier they’re able to see the value and the RoI, the more ready they will be to pay you even without any other reference customers. This them means you need to have a huge amount of domain expertise to pull off.
So in short, from no idea to $2K MRR in two months? Very unlikely.
From product soft launch to $2K MRR in two months? Very possible in mid-market. In fact you should have paying beta pilots before you launch.
From soft launch to $2K MRR in 2m in consumer SaaS? Doable if you’ve got a ton of money, deep understanding of the space, exact marketing playbook, massive existing audience. Otherwise it’s a tough game of numbers.
Best to keep realistic goals, and get the flywheel going.
#3. How much can a great SaaS product earn in the first year?
Really depends on your sales cycle length.
In mid-market, as you defined, your sales cycle is going to be 45–60 days from first contact to sale.
For one experiment on positioning, marketing, sales process, to be completed, you therefore need 60 days. Assume that you can do 6 sales cycles a year. Assume that you improve your lead-gen to get 20% more leads in each cycle, and do so consistently. Assume that you start with 5 warm leads for the first cycle, and get strong referrals after 2 quarters from each customer.
In the first cycle you will get 2 customers (40% conversion).
2nd: 2.5 customers
3rd: 3 customers
4th: 3.5 customers + 1 referral
5th: 4 customers + 2 referrals
6th: 5 customers + 3 referrals
Total: 20 customers. At mid-market ACV of $30K/yr = $600K ARR. As you can see this is heavily back-ended.
How do you improve on this? Get your lead-gen efforts working earlier - hard to do when your value prop and positioning are still being iterated. Reduce your sales cycles - if you can do 30 days instead of 60, you will do 12 cycles instead of 6. Reduce your time-to-referral - instead of 2 quarters, if you can get it in one, you will see massive increase in conversion rate, and faster closures.
If you have value prop, positioning, marketing channels ready, then pouring $ into marketing can yield much larger returns.
If you have upsell built into the model, with value-based pricing, then you can accelerate much faster if you can grow each account quarter-over-quarter (instead of annually).
#4. How do I calculate growth rate for a SaaS company?
A metric should be used to tell a story, and telling a number is a waste, honestly!
So what are you trying to communicate using your growth rate, and to whom? It really depends on that :)
Growth in general is a fickle beast, varying by month, quarter, season, or year.
If you want to calculate your growth for planning purposes, quarterly growth rates in actual revenue received, is probably the most important metric that is actionable.
Figure out what story you want to tell, and work from there to find out which growth metrics to position.
“We just figured out PMF and our first growth channel, so the last quarter has been great”.
“We had to pivot out of a market where we were growing fast to a new one, because we wanted to get into a larger market”
“We were scaling too fast, so we slowed down to improve our processes, and make some key hires”.
All of these are valid stories, find the right way to show your metrics to match.
#5. What is average revenue per employee for software companies?
The stage you’re in matters a lot for this metric. Also public companies which have huge revenues pad this number by having 50–100–150% of their FTEs as contractors, i.e. for each employee, they have upto 1.5 contractors, who don’t count.
Sub $500K ARR you want to be getting to $50K/employee. Greater than $1Mn, you want to approach $100K/employee. Bootstrapped startups have better numbers than funded companies here. If you get to $200K/employee then you’ll have enough to reinvest serious amounts towards future products/growth.
#6. What should a bootstrapped startup focus on during the initial stages of revenue growth, getting more customers or making few customers really happy?
As a bootstrapped startup, one way to slice it is to think about the ACV.
If your ACV is $100, and you can’t increase it, then you need to spend more time getting more customers. Otherwise you’re not going to reach breakeven quickly. A working acquisition channel is absolutely critical to staying afloat. And you want early evidence that you can get customers to buy at some scale.
If your ACV is $100, I’d strongly recommend getting it to $500+, if only to get more breathing space, more budget to build a better product for the customer, and more money to spend on CAC.
If your ACV is $1000+ then you really want to make sure your existing customers are super delighted, and will give you strong testimonials. Even a few of these customers will get you to breakeven. So customers who love you are more important.
Either way, one of the most critical sources of new customers are going to be existing happy customers. Just that at higher ACVs you can’t afford churn in a bootstrapped company, and purchases are driven by testimonials, so you can’t afford any unhappy customers.
#7. How much MRR should a SaaS startup have before reaching out to investors?
For a friends-family round there is no minimum bar.
For angels they may want to see 1–10 customers, perhaps $1000 in MRR.
For a seed round, $5K-$25K MRR.
For a VC round, $50+K.
All of this assumes no past SaaS expertise, first-time founders. Ideally with domain expertise. For the seed/VC rounds, you’d need to be growing fast, say 8–12% month-on-month, and able to show large TAM (Total Addressable Market), and significant domain expertise.
If you’re not sure of a super-large TAM (ie $1B+), you may want to go for Indie.vc TinySeed, Earnest Capital at an early stage, or Lighter-Capital once you cross $15K MRR.
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