Things Fall Apart at 5m ARR
At last week’s SaaS CXO Summit we heard Vista Equity talk about how “Things Fall Apart at 5m ARR” (that gripping title got us). The keynote was over an hour, so summarizing the presentation in 5-6 sentences is nearly impossible. But this one was too good not to include, so we’re doing a deeper dive here than our standard. Let us know what you think!
🗝️ Vista categorizes companies into four stages of ARR: 0-5m (startup), 5-10m (inflection point), 10-25m (scale), and 25m+ (mature). At that 5m ARR inflection point, scaling strategies which once worked no longer cut it, and founders will see lots of change—especially in these areas.
Sales Efficiency: 3x spend ≠ 3x in growth anymore, and grabbing those first customers is easier than this next set will be. This is because the first group was made up of early adopters and visionaries, and the new crew will be less patient with your flaws. At this point, the CEO also needs to pass the baton to a new sales leader, which is likely to cause a dip in new business. Lastly, ramping up the sales team gets tricky because sourcing quality candidates is difficult, and natural attrition occurs in the process.
Retention: It’s easy to lean on net retention numbers because unless you’re in trouble, they should always look nicer than your gross churn. But it’s important to focus on gross as well because at 5m+ ARR, net churn will no longer be a sustainable growth lever. This is due to the law of large numbers—adding 15% net churn in revenue a year is much more obtainable at 1m ARR than at 5m, and will become even more difficult as you scale.
Market: A lot of founders think that the bigger the TAM they show, the better perception investors will have. Or they create their own market quadrants, and convince themselves they don't have competitors in a massive market. Really, founders should be looking for their ICP (ideal customer profile), which falls far below TAM. 80% of efforts should be spent on the ICP at this stage, and significantly less on reaching aspirational customers.
Leadership: You’re always going to want employees who will be there for you and that you trust, but at the inflection point your headcount starts to rise and faces become less familiar. Your job as a leader will ultimately be to make the leap from being a great founder to being a great professional CEO. If you can prioritize the ultimate success of your company above your own personal goals, you’re well on your way.
📘 When the sales team is humming and quotas are being hit, people rarely stop to see if there are any issues lurking in the background. But the second goals are missed, it becomes priority numero uno to see what went wrong. To avoid the panic you’ll face in this situation, these are a few helpful questions to ask yourself. Having a sales playbook for rep onboarding, training, and development is one of the most important, along with looking at what percentage of your reps are hitting quota (they say 80%, we’d say a bit below there is alright).
🤖 As prospecting tools and sales AI continue to improve, sales reps have begun to wonder if their jobs will eventually be replaced. It’s a fair concern—automated sales tools like Drift are tailor-made to replace an SDR’s functionality. The big question remains: can these tools really do as good of a job as a human? We don’t think so. Establishing a human-to-human connection is essential in B2B sales. Even if you provide a knowledge base to answer all of the questions a potential customer might ask, it’s just not as appealing as being spoon-fed the answer by someone dedicated to helping you.
🎙️ We’re giving Drift a double feature this week—this time, it’s from their appearance on the SaaS Revolution Show (from the SaaStock crew). On the pod, Drift’s Cofounder and CTO Elias Torres shares tips for how to build company culture and finding and hiring top talent. Here’s your tl;dl (too long; didn’t listen):
Drift grew from 18 to 300 employees (~17x) in 4 years.
Culture always changes as you add employees, but one thing you can keep consistent is your leadership principles.
Leadership distilled company culture into 8 principles that they share with employees during onboarding—this gives insight into how they make decisions across the company at all levels.
Elias’s first hire was a recruiter, he believes most companies fail because they can’t attract talent.
Drift makes hiring decisions within 7 days. To make sure there aren’t too many cooks in the kitchen, only 6 of the 300 Drift employees have a say in the decisions.
Drift’s philosophy is to “fire fast,” but promise employees at least 90 days to improve if performance is lacking.
Elias’s advice: remember that no success is overnight, solve for the customer, and have the courage to have ambitious goals.
