A couple of years ago I wrote a post titled “How fast is fast enough?”. The subtext of the question was “How fast do you have to grow if your ambition is to get to $100M in ARR and build a very large company”. It’s an important question, as your target growth rate determines your hiring plan, budget, and fundraising strategy.
To be clear, if you can pull off a “T2D3”, that’s fantastic. A SaaS company that gets to $2M in ARR within 1-2 years, triples in each of the next two years and doubles in each of the three following years is headed straight to unicornland. If you can do that without burning hundreds of millions of dollars along the way (or even hitting a wall), go for it. The crux is that this is a pretty big „if“.
Setting yourself up for T2D3-style growth usually comes with a very high burn rate – hundreds of thousands of dollars per month, eventually likely millions, depending on where you’re at in the journey. The main reason is that your customer acquisition costs are highly front-loaded. While this is generally true for most companies, it’s particularly true for SaaS businesses, which invest heavily in product development, sales, and marketing upfront and get payments from customers over a delayed period of time, usually several years. Let’s say you have a CAC payback time of 12 months, i.e. your fully-loaded customer acquisition costs equal 12 months of gross profit. If your customer lifetime is, say, four years, this means that the gross profit from the first year pays back your customer acquisition costs, and the gross profit from the following three years can be used to cover your fixed costs and eventually create profits. Not bad.
What makes things tricky is, first, the uncertainty of how your CACs will develop at increasing scale and of how your churn rate will develop over time. As I wrote here, trying to forecast what happens to your CACs if you 10x your sales and marketing spend is very difficult. The second issue is the timing of some of the major expenses. If you close a mid-market or enterprise customer today, it usually means that a salesperson, let’s call her Maria, has been working on the deal for 6-12 months. Maria probably required at least three months of onboarding and training, and chances are that three months before Maria’s first day at your company you paid a recruiter (or incurred other types of recruiting expenses) to find her. Presumably, you also increased your marketing budget to generate more leads 6-12 months before Maria closed that deal.