SaaS Interviews with CEOs, Startups, Founders
108 ways of getting to a million dollars in ARR
10 Jul 2023
Chapter 1: What is the main topic discussed in this episode?
I'm very excited to share this recording with you guys, which happened at our conference, sasopen.com, with over 100 speakers, all founders of B2B SaaS companies. We have a very high bar for what speakers share on stage, so you're going to enjoy this episode where we dive deep into revenue graphs, real tactics, and real growth metrics.
You are listening to Conversations with Nathan Latka, where I sit down and interview the top SaaS founders, like Eric Wan from Zoom. If you'd like to subscribe, go to getlatka.com.
We've published thousands of these interviews, and if you want to sort through them quickly by revenue or churn, CAC, valuation, or other metrics, the easiest way to do that is to go to getlatka.com and use our filtering tool. It's like a big Excel sheet for all of these podcast interviews. Check it out right now at getlatka.com.
So what if I told you that 85% of the SaaS startups that start out do not cross a million dollar in ARR? This is statistics from Nathan's database that he puts together where he tracks the entire SaaS universe. There are about 32,499 startups as of yesterday. And out of them, about 4,766 startups are beyond a million dollar in ARR. That's roughly about 15 out of 100.
Now, out of those 4,766 startups, 2,700 odd startups are above 10 million in ARR. 2,687 startups are above 10 million ARR, which means one out of two that have crossed a million also crosses 10. Now, anybody in the SaaS industry knows that if you cross about 10 million in ARR, then you are almost immortal. It's very, very hard to kill that particular startup.
Unless, of course, you do something very stupid. Maybe you got caught in a rave party or you invested in Silicon Valley Bank just before March 10. I know two founder friends who did that. So other than that, you are pretty much immortal. Now, some of you who are very data-centric, you're like, no, you're just taking a snapshot of the stats here. You should look at the time series. Fair enough.
I looked at this data at Crunchbase. Crunchbase says that as of yesterday, 24,700 startups are there in the world. Now, Nathan tracks bootstrap startups as well. That's why you see the numbers are different. But out of that, 3,000 startups are the ones that have crossed about $1 million in ARR.
Five years ago, I looked at the statistics because I was writing a blog post for comparing the number of startups between India, Israel, US, UK, and Australia. And at that time, there were 17,700 SaaS startups. out of which, again, about 2,700 odd startups were above $1 million in ARR. And I work very closely with Indian SaaS startups.
And in 2018, the number was there were 783 SaaS startups, out of which 72 had crossed a million. So you can slice and dice them differently. You take snapshots in different years. And you could even go back to 2011 when Jason Lemkin was tracking. The number ranges between 10% to 15%. Zero to one stage of the startup is where the highest amount of mortality rate is.
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Chapter 2: What percentage of SaaS startups reach a million dollars in ARR?
It doesn't help in making progress in an actionable way for founders. So I run a SaaS accelerator called Upeka. And I work with about 108 startups as of our last cohort, which is the 11th cohort. And in our first cohort in 2017, we had 10 startups that joined us. Eight out of the 10 have crossed about a million dollars in ARR. Ninth took a small exit.
And then the 10th one is the one that did not cross the million dollar ARR mark. They are roughly at about 40K of MRR. Now, through these trials and iterations, there is some method to this madness of going from 0 to 1 where the odds are more than 15% that we've seen. And in that experience, what we've come to frame this as we call it as building a SaaS flywheel.
Now when you're building a SaaS product, you are of course going to do engineering, you're going to do building, you're going to create your product, you're going to do some marketing, you're going to do some sales, and you're going to set up your customer success. All of this is going to happen. But underneath that, you're going to actually do fundamental choices, fundamental blocks.
And that we call as the inner flywheel. And this inner flywheel is nothing but a set of six choices that you make. And the reason we call this a flywheel is all these choices are interrelated with each other. You change one of the choices, you have to come back and look at all the choices and re-evaluate them and maybe change them if you change one of these choices.
Now, when Nathan reached out to Prasanna, he said, hey, look, no, you need to give a talk. And then we were like, yeah, sure. But then I told Prasanna, look, we spent six months working with founders on working on these six choices. How is it that I'm going to be able to do this in 20 minutes? And he said, no, go figure. And then Nathan connected us to Mandy.
And Mandy was like, look, if you don't finish this in 20 minutes, we are going to yank the speaker out of the stage. Well, fair enough. But then I love when a conference is so tightly well produced. So good job, Mandy and Nathan, on making sure that the conference is running really, really tightly. But then what I'm going to do is I'm not going to cover 108 slides.
I'm only going to talk about four of these six choices and very limited aspects of those four of the six choices. All right. So let me start with the first one. And this is my favorite one. How many of you in the audience are developer? Raise hands. OK. I expected a little bit more. I mean, about 15% to 20%. I hated to break it to you guys that I was a developer myself.
Most of us think that pushing code is equal to product. I'm sorry. Pushing code is not equal to product. A product is a problem that you're solving for a group of people. Often the group is called, a fancy name is given to it, called as the ideal customer persona. Just, you know, you group them in a certain way. And then you refer to that using a shorthand name.
Often that shorthand name is called as a category. But of course, you know, if you're designing a chair or you're building a product like a chair, you're not going to say, hey, what problem does a chair solve? You're going to be like, yeah, this is chair. I want ergonomic chair, or I want a chair with a wheel. But imagine the day when chair was getting designed for the first time ever.
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Chapter 3: What is the significance of crossing 10 million in ARR for startups?
Let me illustrate this with an example. iMocha was part of the first cohort at Ubeka, and they were a skill assessment platform company. If you're doing hiring, then iMocha is relevant to you. What they do is they make the entire pre-screening of the hiring process automated. They send out tests to candidates. They get evaluated, and the dashboard of that is presented to the hiring manager.
They're being founders. They were targeting other founders, and they were selling $1,000 ACV in a year. And they had flat revenue for quite some time. They were good at sales. They would complete the sale. But then three months later, the startup founder that had signed up will churn out. They changed their approach a little bit.
Instead of focusing on founders, they went to large companies, which have at least about 10,000 people in their organization, at least 200 people in their HR organization, and then they took the same piece of code and then gave it to them. Now, these folks who are in large organizations, they spend their entire day in sending all these surveys. So, sending all these skill assessment tests.
Now, for a founder, what happens is, he may do hiring once, twice, maybe thrice a week. He is not going to do this use case on a daily basis. But when it is adjusted to another HR manager or a HR person, they have to live in a tool like this.
So when they found a tool like this, the few minutes that they were able to save for each of the time they sent, and when that got added up in the entire day, that was transformational for them. The code did not change. It's just the persona changed. And where they were struggling to sell for $1,000 a year, here it became very, very easy for them to sell it at $6,000 a year.
And that brings me to my next point, which is choose your geography very carefully. Here, I have to tell you my experience of working with Intuit. I was the head of product for QuickBooks outside of the US market, which is India, Malaysia, and Singapore. And we spent a lot of time in these markets. And one thing we realized, it is very, very hard to sell software.
And I was talking to Greg about this during lunch. Very, very hard to sell software in a market like India. And initially I thought, you know, it is maybe because software is an experience product. It is an intangible product. You don't get to touch and feel it.
And I thought, like, you know, in a low trust environment, low trust society, if people can't touch and feel it, then maybe it's very hard to sell a product like this. But then, like, you know, something else happened. And I saw that, you know, people were able to sell religion. were able to sell devotion, devotional songs. All these are intangible. They were selling.
So intangible was not the reason software was not selling. Then it took me a couple of years to figure out that it is rooted in culture. Countries like India, Malaysia and Singapore, they find time to be really, really abundant. Developed markets, they find time to be really, really scarce.
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Chapter 4: Why do most startups fail in the zero to one stage?
So you have to think about differentiation. So associate and differentiate. Now you could say, like, you know, existing blog. So you could say, you know, existing blog with a certain height. Don't do that. Say chair on the x-axis or say CRM. And then on the differentiation, you could say, hey, this is a CRM that is integrated with social and it is 10 times better than any other CRM.
So for those customers who are looking for that, you are the winner. You want to place your x-axis and y-axis in such a way that your product comes out on the right-hand top as the winner there. Let me illustrate this again with another example. Neurotags is a company of ours, and they were initially focusing on making sure the qr code gets placed on all branded items.
Let's say an lg product that is getting sold on amazon. But what happens is that lg doesn't have the end user's data. So they help you put a QR code, which the end user, when he receives it, he registers through it, and then he gets warranty support. Now, using that, they get the data back. For a while, for an entire year, what they did was they just focused on the code aspect of it.
Now, they did this positioning exercise. Then they realized the x-axis that they should be talking about is post-sales experience. And they realized that their differentiation is one-click, one-click post-sales experience. This led them to even change the name from Neurotax to Direct, allowing brands like LG to have direct connection with their end users.
And earlier, they were struggling with $2,000 ACV conversation, and this repositioning helped them close deals at $30,000 ACV. Bonus fifth choice on pricing. I'm going to go really quick on this. This is, even though I said four, but the fifth one is that founders are afraid of raising prices. Right. And this is a big one. Let me quickly talk about another startup called Social Pilot.
I work with two companies like Social Pilot, one which got to 300K, 500 customers, but had to sell off because the founder was afraid of increasing the price, spent four years building that business. But Social Pilot crossed six million ARR last year. And the key thing that I would attribute is that they were not afraid to raise pricing. It was not easy. It was difficult with them.
Prasanna, my co-founder, threatened to throw them out of the cohort if they don't increase the pricing. They went ahead and did that. And then they saw that the revenue did not dip. There was a little bit of a churn. And then they become encouraged by that. So then they continue to increase the pricing and that led them to double the growth every year.
So to summarize, use a SaaS flywheel as the mental model for you to actually charge your path out of the 0 to 1 and within that the three most important and the powerful levers are solve a high value problem, make sure that you are positioning in an existing category and be very deliberate about the pricing, sorry deliberate about the positioning and make sure that you increase pricing.
Thank you guys.
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