Archives for posts with tag: Growth

A while back I wrote a post called Churn or Growth for Startups, and referenced the excellent content from the VC blogger Tom Tunguz. The answer was churn.

What should be the focus for the SaaS company looking to scale its business and grow at a rate that attracts heathy valuations and juicy multiples for an IPO or an exit? It’s grown by bringing on new companies and keeping them, so surely it should keep adding new logos, right?

The beauty of the SaaS model is that on the first of the year you can count on the revenues for all your customers who are renewing their annual commitment. Going from $80m to 100m in one year may seem like a giant jump, but the successful SaaS company has close to the €80 coming in during month 1, so it’s not such a big leap and, indeed, many such companies see themselves growing at phenomenal annual rates, far in excess of the 25% in my example.

The scaling company should focus on keeping and growing its existing customer base.

Have a look at this post from Mr Tunguz, which he said in an email recently was far and away the most popular post he did in 2018, 10 times more popular in fact than the next most popular post. Which is intriguing, since the post he links to is from 2016…

So startups should focus on preventing churn, and more established companies should focus on renewals, which is to say they should focus on preventing churn…

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I subscribe to a lot of newsletters and blogs. A few of them I even get around to reading too. One in particular focuses on start-ups.

If you’re in a start-up, you should read this chap’s stuff. He’s memorably called Tomasz Tunguz and he’s a VC investor in software-as-a-service companies with a firm called Redpoint.

One particular post that sticks in the mind is called: Which To Prioritize – Churn or Growth? The answer, in case you didn’t have time to read his article, depends on your maturity as a business, but for early stage start-ups it’s churn. The one thing you need to establish as a start-up is product-market fit. You want to demonstrate how difficult your early customers think life would be without your product, which is why they’re all staying around. The stickier it is, the better your long-term prospects.

Tom – I don’t know him personally but I suspect he prefers to be addressed as such – offers many more reasons why churn is what you focus on instead of growth. For me it boils down to the business model. If you’re in an annuity-based business, founded on recurring revenues, then the more customers you can retain and renew, the greater your revenue starting-point is at the first of the year, before you’ve even begun to win new bookings.

They say that getting to $10m in revenues is the hardest stage for a B2B company. Why is that?

Well, it’s a combination of factors. In the early days you’re still tinkering with your business model. You’re still figuring out product-market fit. You’re not sure what to concentrate on, to whom, and where. You can’t reap the benefits of scale.

Perhaps most importantly, though, you’re in a real life situation, and subject to the normal pressures of working with other people, both in your company and outside your company. You’re trying to develop something that’s going to have the right appeal to a sufficiently large enough market, yet you probably have a small number of customers who exercise a disproportionately large influence on you, in terms of how they want you to develop your products and services.

You’re torn between giving the paying customers what they want, which is essentially something that’s customised to their requirements, and developing something that does the job for the maximum part of your addressable market, but which doesn’t immediately translate into positive cash-flow. This is especially true in software.

Any company can sell an idea and get funding, possibly running into the millions. Any company that can get from 0 to 10 million – in revenues – and beyond is a different proposition, an animal that has risen above 90% of the other animals and proven itself. It will still have challenges, but it’s done what many have tried and failed to do. It’s a player.

You have this great business idea. You haven’t seen anything like it and you’re convinced you can make a success of your venture. The most pressing question, unless you happened to be prodigiously wealthy – so you already know how to get money and make more of it – is around financing the development and take-off of your idea.

You could bootstrap the business, running it on your own savings until it starts to ‘wash its own face’, but you might need more than you reckon on as these things always take longer than the best laid plans. You could go to friends and family and secure relatively small amounts from a relatively large number of people. At this point you might already need to start giving some of your company away in return for the investment, and by now you’re starting to think about the level of relationships you will have with these investors.

Those who don’t have access to their own funds or the funds of their nearest and dearest need to start playing the dating game with professional lenders, who might be high net worth individuals, institutions, state/semi-state bodies or private investment companies. It’s at this point that you need to develop an understanding of two things, very, very quickly. The first is how investment business and its clandestine terms work: seed this, A round that, mezzanine the other, and so on. The second, arguably even more important, is the type of investment partner you want to work with and who will be good for your business as it grows. Cultural fit is of paramount importance.

If you’re in the third camp, needing to start the dance with someone who lends and makes money for a living, then I can recommend this post for an excellent primer. There are some additional very good links within the post. I don’t know the guy at all, but he writes well and he seems to mean well too. Good luck!