When you know your next milestone, you can focus on it. But between product market fit and profitability most startups will only hear the mantra: “grow! grow! grow!” Yes, of course. But for venture capital funded companies, product market fit and profitability are often separated by 5–7 years, 100x team growth, and multiple funding rounds. What are the milestones in between?
Beyond our advisors and investors at Segment, I’ve only found one great resource on how to scale a SaaS business: SaaStr. He offers some poetic elegance on three major milestones:
“Getting from $0–1m is impossible. Getting from $1–10m is unlikely. And getting from $10–100m is inevitable.” — Jason Lemkin, ex-CEO of Echosign
Each of those revenue milestones is definitely an achievement. But in our experience at Segment we think about six major milestones, and they’re not exactly based on revenue numbers. Each milestone below is a key turning point in the business and indicates a moment to re-evaluate our priorities.
1. Product Market Fit
How you know: people will stick around and share your product. You’ll see high month-over-month retention (95%+), and word of mouth growth (the majority of signups are direct traffic).
You’ve solved a #notimaginary problem for people. Huzzah! But honestly this is a pretty squishy milestone. We built stuff for 1.5 years before finding product market fit, and then it was pretty dang obvious. But be careful, because you can lose product market fit even after you find it!
2. Paying Customers
How you know: 10 paying customers who aren’t your friends.
Woot! You’ve created value for people in a way you can capture. Free-to-1¢ is a big gap. Luckily, your marketing reach definitely sucks at this point so your market penetration has to be tiny. You can definitely find another 100 customers out there somewhere. YC always told us that once you have 10 customers, you can find 100, and if you can find 100, you can definitely find 1000…. keep rollin’.
3. Statistical Significance
How you know: hundreds of paying customers.
You can finally estimate unit economics for marketing, sales, support and servers. You have enough data about price and market segments to build a reasonable, bottoms-up estimate of market size. This is probably around $1m ARR, aka “the impossible” according Saastr.
4. Capital-Efficient Growth
How you know: for every $1 burnt you add $1 in ARR.
This means that if your bank cash balance falls $2m in Q1, you need to be adding $2m in ARR. It’s a measure of capital efficiency. As you become more capital efficient on the path to Cash Flow Positive, you’ll add more and more ARR for every $1 you burn.
Yessss! You’re able to efficiently invest money to grow the business, which is appealing to investors, because when they invest $5m you can generate a $5m recurring revenue stream. You can’t really celebrate though: you’re still dependent on outside capital to grow.
This milestone is probably around $3–6m ARR, pushing towards “unlikely” in SaaStr’s words. However, some companies may choose to stay at this stage for a long time, especially in a competitive market where they believe winner takes all. It’s not uncommon to continue selling equity for cash, and spend it to grow aggressively through $100m ARR or more.
5. Cash Flow Positive
How you know: your cash balance is rising, but net income is still negative.
This is the first, fleeting feeling of freedom from outside capital. When a customer commits to annual prepay you get a surge in cash balance, but then nothing for the next 11 months. As long as you keep closing new deals, your deposits each month can exceed your spending. Glorious. But keep selling. And keep some cash buffer in case growth takes a hit.
How you know: your cash balance is rising, and net income is positive.
Freedom from outside capital. Cash balance is growing, even without new business.
The promised land.
Originally published at rein.pk.