The Journey From $1m MRR to $2m MRR

There’s a long-standing cliche concerning SaaS companies that once you get to $10m in ARR you are unkillable. As Jason Lemkin says in his post from early 2013:

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 $10m ARR to $100M 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. And actually, as we’ll get to, $10m in ARR — this is when it really gets fun.

I’ve struggled with this concept and how to translate it into action in my world. While the phrase “you cannot be killed by anything” is evocative, your actual value can be killed, as there are many problems getting from this stage (whatever we are going to call it) to the next level.

I don’t like to think in ARR when I’m working with SaaS companies. I’ve always found MRR easier to process, especially when thinking about derivative measures, like growth rate and churn, that are so important to pay attention to on a monthly basis. And, instead of ARR thresholds ($10m ARR, $25m ARR, $50m ARR, $100m ARR), I like to use MRR thresholds, which I talked about extensively in a post from 2015 titled The Illusion of Product/Market Fit for SaaS Companies. The MRR thresholds I focus on are $1, $10k, $100k, $500k, and $1m. And $1m MRR is the particular moment that is analogous to the $10m ARR inevitability.

If you can blast through the $500k MRR mark and march to $1m MRR, you’ve found product/market fit. You are now at the magical point some people call “Initial Scale.” Cool – you’ve got a business.

If you believe the cliche, you are now unkillable. I’d suggest that instead, you are now in an entirely different zone as a company, where you will be evaluated on a different set of characteristics and will face different struggles. If you want a hint, read Fred Wilson’s recent post titled Team and Strategy.

If you are a CEO, the real work of scaling a company begins about now. The question you’ll be facing will have a lot less to do with product (and the product strategy), and a lot more to do with – well – strategy!

You can start exploring questions like: Are you the market leader? Who are your competitors? What are you doing to build a moat around your business? If this sounds like Competitive Strategy, instead of Strategy, it is, but it’s a critical starting point. If you don’t want to read Porter’s classic book (or read it again if you read it a long time ago), try a Wikipedia shortcut on Competitive Advantage.

You can shift to more specific questions around a category like sales such as: Are you making progress on lowering churn? Have you moved from monthly to annual deals? Are you trying to get three-year deals done? What is the composition and health of your channel?

These are all things that you likely ignored, or didn’t even think of when you were in the $100k to $500k MRR zone. Well – maybe you thought about churn, especially if it spiked up to a point as to undermine your growth rate and cause another cliche – the leaky bucket – to appear in all of your board discussions. But did you shift from monthly to annual deals so that you could lower your long-term capital needs significantly? If you did – great job!

We have many companies in our portfolio in the $1m MRR to $2m MRR zone. It’s fun, but challenging in a different way than the up to $1m MRR zone is. And, once you blast through $2m MRR, all the things you focus on as a CEO change again.

Also published on Medium.

  • Competitive Strategy by Porter was one of the best books I ever read for business. It still holds true today. (I read it in 1980).

    • Agree. It’s in the “kind of amazing” category.

    • Note to self to read Porter’s book. I learned something today!

  • I would add that in a bootstrapped company, product market fit can be established at a lower revenue level because the sales in the beginning are growing at a slower rate. Bootstrapped companies sales do not grow at the same rate until later >$500K mrr.

  • I couldn’t live without a competitor advantage in my small masonry business. Particularly in the last seven years, the market has tightened up, and the competition has become cut throat. It seems everyone is working for a coffee and a donut, as if money became scarce as of late. Without overcharging, my price is *at least* twice as much as the rest of the pack, and it is revolving around the differentiation I’ve established. I’ve personally picked up the concept put forth by Rosser Reeves in the 1950’s, called the Unique Selling Proposition, and built the business around that. I’ll start consuming Porter’s books.

  • Unkillable? That’s a view only humans can develop …

  • Great article and spot on – interesting that here in China, everything is monthly – so MRR, expenses, salaries, taxes, etc. so our entire thinking is monthly, and thus much faster, more iterations – Chinese move fast, but MRR/monthly-thinking and time-horizons help that, I think.

  • Gopi A.

    A bit ironic that Porter’s Monitor Group went bankrupt in ’12

    • Yup. My understanding is that Porter wasn’t involved in management in a meaningful way. Monitor was a large client of my first company (Feld Technologies) so I got to know them well during their rapid growth and ascendancy in the strategy consulting business. They had some brilliant and amazing people, but there was always a mildly out of control feel to their growth. The list of notable and former employees on Wikipedia is pretty amazing.

  • donald1x

    Any advice for those in the 100K growing to 500K MRR? Especially how to look at “negative churn” on a monthly basis.

    • Negative churn (where you have upsell / expansion in existing customers) is awesome. However, make sure you are measuring the derivatives of everything and focusing on net vs. gross.

      • donald1x

        Sadly, and obviously, the net is still negative. The latest presentation from Bessemer Venture Partners seems to suggest that they consider it an efficient ratio to burn $1M to increase $1M in ARR. Do you agree? Do you consider (in general) a 4x valuation to ARR (or 12x MRR) for a SaaS company with < 500K MRR and still achieving 10% Month on Month growth?

        • Your numbers need to have time qualifiers on them. For a burn of $1m to generate $1m of ARR, do you mean monthly? E.g. Monthly EBITDA loss of $1m to generate $80m of MRR? If you have the funding, that’s good, but you better be able to do it month after month. And, it’s a lot better if you can generate it with less loss. And, where the loss comes from is important (e.g. is it sales, marketing, or something else.) I’m assuming we are talking about pure SaaS – so at least 75% margins.

          Re: valuations – 4x ARR and 12x MRR don’t seem to link up in any logical way. I might be missing something but are you sure that’s what you are asking? For private companies, the multiple of ARR varies a lot and is based on growth rate.

          • donald1x

            To clarify, I meant is it considered efficient to burn $1M annually, for an incremental growth of ARR of $1M. So if last year, we fund the company $1M, and after a 12 month period, the company have increased its MRR from $100K to $180K, and burn through that $1M, do we consider the company “efficient”. and yes, this particular company is a pure SaaS (email marketing management) with at least 70%-80% margin.

            Regarding the valuation, I meant, we’re using 4x Annualized RR, calculated by multiply MRR by 12. So a valuation of 48x current MRR. I realize that the multiple should be based on i) the growth rate of the company, 10% monthly growth on average, ii) the current “size” of the company, about $400K MRR, and iii) how hot is the market, as company in Silicon Valley and China can fetch double the valuation everywhere else (specifically, south east asia).

            Thank you for your answers by the way. as well as your mentoring the Venture Deal class.