6 Tips for Navigating the Most Difficult Stage in SaaS Growth

Jason M. Lemkin, CEO and co-founder of EchoSign, shares his advice for overcoming the challenges your company will face during the most difficult stage of SaaS growth — going from initial traction to achieving scale.

The Hardest SaaS Growth Phase: From Initial Traction to Initial Scale

The hardest phase of SaaS, at least for the founders, is the phase from initial traction ($1 – $2 million in annual recurring revenue, plus 100% year over year growth, plus 50% of new customers from zero-cost marketing) to the next phase — initial scale.

Inevitability in SaaS comes around $10m in ARR, plus or minus. Once you hit this point, you have a brand, you have a fully baked team, you have a robust product, and you have a self-generating stream of new leads and new business. Will you get from $10 million annual recurring revenue (ARR) to $100 million ARR? I don’t know. Is an IPO in your future? Not sure. But once you hit $10m in ARR or so, you cannot be killed by anything. That’s the power of compounding SaaS revenue. At $10m in ARR — this is when it really gets fun.

The real challenge is getting from $1 million to $10 million in ARR.

Challenges Getting from Initial Traction to Initial Scale

Getting those first 10 unaffiliated customers is hard. In fact, for most MVP’s, it doesn’t happen. In the end, getting these first 10 customers — it’s magic. It’s chutzpah.

Next, getting from 10 customers to $1 million in ARR — that’s basically impossible. So, if you’ve done that — a big congratulations, but also, some bad news: magic and impossible sound hard, but as it turns out, the hardest part of the journey is this next phase: the “Possible, but Painful.”

That’s where you’ll be after $1 – $2 million in ARR. Seeing the early signs of success, but in pain. Why? Because you have too many things you absolutely have to do to make it — with too few resources:

  • You’ll have real customers — plenty of them by number, if not yet by revenue — but not enough resources to serve them. You’ll almost be overwhelmed with their needs and in-bound requests.
  • You’ll have a real sales team — at least the core of one — but not a large enough one to experiment or add redundancy or management layers. Sales ops? SDRs? Lead qualification reps? You want it all, but it doesn’t seem like you can afford them here. The math doesn’t pencil out yet.
  • You’ll have a strong product, but it won’t be anywhere near feature complete. You’ll constantly be struggling to meet just the bare minimum requirements of your real customers, and in some ways, given all the new customer demands, it will feel like your product is further behind than Day 1.
  • You can’t take a hit. If your VPE, head of marketing, or someone key quits — you’re almost dead. There’s no fat on the system. You lose one key resource and all that hard work, all that momentum you are building can almost disappear overnight.
  • The next phase is loooooong. Yes, you can see $10 million in ARR if you squint. But it seems so far away, so hard.

This is the Phase When Exhaustion and “Overwhelmedness” Sets In

Especially as founders, you’re now doing just too much with too few people. You can’t hack it anymore. You can’t do it all yourself. But you’re not big enough (50+ employees) to get all the real help you need to fill all the necessary key roles, unless you are extremely well funded.

The thing is, you have to fight through. Because it will get so much better once you are at scale — say $8 – 10 million in ARR, 50+ employees. You’ll get all the help you need then, or at least enough help.  It will be easier — I guarantee it — when you get to the next level, and are able to add the next level to your team.

And also, you need to fight through it because you can now see success, true success. In fact, as soon as you are at Initial Traction, you can build a simple model, like below. Take your MRR/ARR, add your trailing compounding rate, and just see when it gets easier. When you hit $8 – 10 million in ARR. When you hit Initial Scale:

Screen Shot 2013-01-28 at 6.02.12 PM

In this model, the cavalry is coming. Help is on its way. It’s just probably 18 months out or so.

So first, buck up. Second, take some steps to make it easier. Because as long as you continue to invest, hire the right people, and make the right decisions — if this initial success doesn’t kill you — you will make it to scale as long as your growth rate is sufficient. And then, your life will be easier.

On that note, here are a few things to do on the journey from $1 million+ (Initial Traction) to $10 million+ (Initial Scale) ARR:

1) Raise a Few Extra Bucks

If you are raising money, raise a few more dollars. Say 15% more than you were planning. This will take some stress off. And/or raise some debt. You can easily pay it back later at Scale.

2) Hire Someone to Share the Load, maybe an Ex-Post Facto Founder

You’re going to have to hire a bunch of great people in this phase. Try to hire at least one who goes even further, who can take some of the founder load off your shoulders. It could be a COO. It could be a VPS or VP Product. It doesn’t even matter. What matters is they go above and beyond the job, above and beyond excelling, and take on some of the load of being responsible for the whole company. That will help. A lot.

3) Spend a Few Extra Bucks

I know you’ve probably been scrappy to get to $1 – $2 million in ARR, but now you need to open the coffers — at least a little. Of course, don’t be stupid about it (that can wait until you are at $10m in ARR). But if you are on the fence on an expense — a marketing program, a hire — that you think will pay off, but you just aren’t sure, go for it. Don’t screw around any more at this phase. Don’t think small.

4) Get Admin Help

Some of you may be against an executive admin. That’s fine, but seriously, get one or two inexpensive resources to help — everyone. Do you really want your best engineer waiting at home for the cable guy? Of course not. That’s terrible, negative ROI at this phase. Get someone to help everyone. It’s time to stop taking out the garbage yourself, my friend. You just don’t have the spare cycles anymore.

5) Get More Advisors

This is the phase when sometimes, you are so busy, so tactical, and now know so much about your nascent but real business, you stop seeking out new mentors and advisors. That’s wrong. In fact, a little help here — perhaps more tactical than strategic — can help more than ever. Get help from folks who have been here and done it.

6) Don’t Make a Bad Key Hire

This is perhaps the most important one, by far. A bad senior hire (VP level) can kill you here. It can set you back so far on this journey to $10m in ARR that even though you could still make it in theory, the goal line gets moved out another 6 – 9 months. You simply cannot afford this.

Whatever it takes, don’t make a bad senior hire now. Get help. Have your advisors review your picks. When in doubt — don’t do the hire. Find someone better, no matter how hard it is. Because this is the phase when a huge setback will kill you. There’s no fat on the model from Initial Traction to Initial Scale.

Just Get to Scale

Whatever you do, build the model above, and stay true to it. This is the gritty phase, when you fight it out to get to scale.

Scale has its own issues. Politics begin to creep in, and you can’t be as loose and fluid as you were back in the day. Releases take longer, and things can seem less nimble, post-scale. But it’s much, much easier as founders when you’ve got 50+ strong folks working with you to make it happen, on top of a engine that’s humming.

Just get there. And your success will be inevitable.

Editor’s note: This guest post from Jason M. Lemkin originally appeared on his blog, SaaStr.

Do you agree getting from $1 million to $10 million in ARR the most difficult stage in growing a SaaS company? What other specific challenges do they face on the path to growth and scale?

photo by: Tristan Higbee

Share Your Thoughts

  • Allison Wood

    This is an awesome post, Jason – and just what our small-but-getting-big-traction team needs to hear right now. Thanks for sharing your wisdom with the rest of us!

    • jlemkin

      Great to hear!

  • http://www.facebook.com/rajiv.chopra.12914 Rajiv Chopra

    excellent could not agree more. only other piece i would add is finds ways to protect your IP and have solid contracts written up by you legal team.

  • http://twitter.com/demonte Michael De Monte

    Fantastic work. This describes exactly what I am going through right now.

  • Doug Villhard

    I’d add “stay humble”. I see entrepreneurs start to get a bit cocky at this stage. If you ask me that is the kiss of death. You are still learning until the day you die. Stay humble and never take anything for granted.

    • http://twitter.com/maloymarc Marc Maloy

      Agree

  • http://twitter.com/DaveKey0 Dave Key

    Yea Verily, you got this nailed.

    I see a lot of startups that get to $1-$2M, but then don’t have the resources or team to get to the minimum $10M ARR threshold need to invest money into marketing, management, and product development to really take off.

    There are also likely to require some sort of pivot to invest in a new area where they now see a new opportunity, but don’t have the cash (or energy of the current team) to execute the pivot (or market extension).

    This is where if they can show investors their potential based on their trajectory that an incremental funding can get them to the “escape velocity” of a minimum of $10M ARR.

    http://www.cloudstrategies.biz/blog

  • Jeff Leventhal

    Very well put. We re-engineered how we do everything at 1.5 in ARR. Org chart changed, billing, sales team. We learned a ton through 1.5….thought about it and the doubled down on the positives. We are now ready for the marketing leap. Great post – thank you.