There Are 3 Ways to Build a $100M Revenue Startup
The goal in any venture-funded startup is to get to at least $100M in annual revenue. That’s what you need to be valued at $1B or more by public markets, which is the kind of outcome that will generate sufficient returns for a venture fund. As a startup founder, you’ll ask yourself: How can my company get to the $100M revenue mark?
All startups with $100M or more in revenue fall into 3 buckets: Their products are either viral, marketed, or sold. The company’s user growth mechanism determines most of the business, and will determine the path to $100M.
Here is a breakdown of these 3 categories and user growth strategies:
Let’s talk in more detail about what each of these categories looks like.
Products in this category need a high viral coefficient that lets you acquire a huge number of users cheaply. This plethora of users is most often monetized by putting ads inside the product, which generally results in about $10 in annual revenue per user.
In order to get 10M active users for your product, you’ll need to have lots of people try it. But how do you do that? There are usually three templates:
- Social or messaging product: Users directly invite their friends to use the product, gaining a network effect — e.g. WhatsApp
- UGC social: The product generates a new type of user generated content (UGC), and generates social artifacts that users then share to friends on social networks. The social artifact leads users back to the site — e.g. Twitter or Instagram.
- UGC SEO: Users contribute information to a UGC platform. The information contributed is commonly searched for, and is surfaced in search engines through search engine optimization (SEO), thus leading users to the site — e.g. Yelp
If your startup falls into the Viral bucket, the key thing to prioritize is a high retention rate, which requires that you have a recurring use case. Products where users don’t have a need to use them at least weekly will not be habit-forming and will be quickly forgotten.
Make sure to avoid getting crushed by incumbents. It’s a well-worn joke that Evan Spiegel (CEO of Snapchat) is the VP Product of Facebook. Remember how quickly Snapchat Stories got copied into the Facebook app? Facebook, with its larger user base, can easily clone successful features and generate more value out of each feature idea than smaller players can.
A successful viral product can achieve tremendous growth, and it’s the products in this category that can become household names.
In the middle category, you’ll find products that are marketed to get scale. Startups in this category buy ads, try content marketing, or attempt other scaled ways to get users. The customer acquisition cost (CAC) is anywhere from $10–1000 per new customer, which allows for marketing, but doesn’t allow for in-person high-touch sales.
Customers are usually asked to pay for a subscription, or to perform a transaction where the startup gets a cut. Since these are paid products, it’s hard to make a viral growth strategy work: users are unlikely to casually try new products that cost money, or to quickly refer their friends.
These are companies like Mailchimp, Shopify, Mindbody, Square, and AirBnb. They charge anywhere from $100 to $1k per account per year, and cater primarily to small businesses or prosumers. If your product fits in this category, to make $100M in revenue per year, you’ll need anywhere between 100k-1M users.
If you have an average revenue per account (ARPA) of $100-$1000, the general guidance is that you want to spend between 25%-50% of your ARPA on CAC, so that means you’ll have to work with $25-$500 to acquire a customer. While this is a wide range, it doesn’t support the costs of an outbound sales force, so you’re not going to have a bunch of salespeople flying across the globe to sell your product. You have to make lower-cost channels work:
- Search Engine Marketing (SEM)
- Social Media Marketing: On Facebook, Twitter, or Instagram, etc.
- Content Marketing: Blogs, webinars, etc.
- Inbound sales: A form on your website to collect customer information, where the lead is then contacted by a salesperson to try to close a sale.
The need for scaled acquisition results in content marketing efforts like Shopify has done with its blog with “Free Business Lessons”. It’s also why Mindbody’s business-facing website is a mixture of webinar links and a giant inside sales leads form.
This category also includes transactional and marketplace businesses like AirBnb. In a marketplace, you need to acquire both supply and demand, and your revenue per user dictates that you do it cheaply. On the supply side, AirBnb in its early days mass-emailed vacation rental owners on Craigslist. On the guest side, AirBnb was heavily reliant on SEM to catch you at the point when you intended to book your hotel.
The very best businesses in this category also have a viral effect, though often it’s weaker than what you find in consumer products. Two examples:
- Emails sent through MailChimp say “Powered by MailChimp” at the bottom, creating awareness for the product if you happen to be in the target market.
- Square’s payment terminal is a viral hardware product: If you’re a restaurant owner and you walk into a shop that has Square terminals, you’ll experience the product and consider using it in your business as well. In a recent earnings call, Square mentioned that 80% of new customers find them at no cost to Square, due to their viral effect.
Success in this category is all about making your unit economics work: Acquiring and retaining users cheaply while charging them more than what they cost to acquire. Some businesses in this segment become prominent if they have a user-facing component like AirBnb and Square.
In the “Sold” category you’ll find Salesforce, Veeva, Workdays, and Palantirs of the world. Here, your annual contract size allows you to have an outbound salesforce of real people, and the price points allow you to do custom engineering in adapting your product to the customer.
There’s an easy way to tell whether a company falls into this category. If you look at the company’s website, and you can find the price of the product, they’re in the “Marketed” category. If you look at their site and you can’t find prices, they’re in “Sold” — they want you to have a sales conversation first before disclosing pricing.
This category spans a pretty wide band. The last number I could find for Salesforce was about a $20k ARPA (average revenue per account), a price point which allows for outbound sales. On the higher end are Workday with about $670k ARPA, and Veeva at around $1.3M ARPA. The latter two have a very small customer base: Workday has around 4000 customers, while Veeva has just 650.
In this segment, you’ll be selling to enterprise customers and devoting individual attention to each one. The general public will likely be unaware of your multibillion dollar company, unless you build a giant tower in downtown San Francisco.
Charting this out
In the blog post The Five Ways to Build a $100M Business, Christoph Janz mapped out the relationship between revenue per user and number of users in a handy-dandy chart with cute animals. Multiplying your average revenue per user with the size of your user base will answer the question of whether you’ll be able to break the $100M revenue mark. Here’s how the three categories map on that chart.
If you’re below the diagonal in the chart, you’ll have a tough time raising venture capital. If you’re above, you’ll be on your way to IPO.
Beyond $100M in Annual Revenue
Usually startups get to $100M in revenue off of their first product, with their first growth channel. Once they move beyond that number, this categorization no longer applies. As products mature, they expand the addressable market, and companies start to experiment with adjacent customer segments.
Almost always, the right direction is to move upmarket, specifically from the Marketed to the Sold category. As you add features to a lightweight product for small businesses, it becomes relevant to larger businesses, allowing you to move upmarket:
- Shopify is moving from the Marketed bucket to the Sold bucket with Shopify Plus, trying to acquire larger customers from Magento, a competing enterprise-grade eCommerce platform. The price point for Shopify Plus is a lot higher than the current Shopify product, which allows them to offer services like migration support that you wouldn’t be able to throw in at a lower ARPU.
- Square has been expanding to vertical offerings for restaurants, appointment bookings, and retail which allowed them to capture larger sellers — almost a quarter of their revenue now comes from businesses processing >$500k a year.
On the other hand, it’s incredibly hard to move downmarket from the “Sold” category: If your company has a cost structure that features salespeople wining and dining customers, building a cheaper product with lower-cost marketing is going to be painful.
While going from Sold to Marketed is hard, going from Marketed to Viral is basically impossible: if your product is designed around customers paying for it, the friction of payment will be too high for customers to adopt it through a viral loop — see this example from HubSpot which was trying to move downmarket with a new lower-end product.
Your startup will need to reach $100M in annual revenue to produce the type of return needed to justify venture capital investment. Here are a few tips for startup founders considering new product ideas:
- Think about what average annual revenue per user your product will likely have. That will help you understand if you fit in the Viral, Marketed, or Sold categories.
- If you’ll be monetizing with ads inside your product, you’ll be making $10/month/user and that will place you in the Viral category. You have to make your product viral through referrals or user generated content. Invest in figuring out how you’ll do that. Don’t even think about buying ads to get people to your product, or hiring a sales force — you will not be able to afford those channels.
- If you think you can make >$100 per account per year, you’ll be in the Marketed category. Having a higher revenue per user will unlock a number of pricier promotion options. Don’t even think about outbound sales, or a large salesforce traveling to customers to sell the product — you won’t be able to afford it. As you build your product, run small tests on each channel. It’ll be hard to get VCs to invest in your Series A without indications that you can make scaled marketing work.
- If you think you can make $10,000 or more per account per year, you’re in the Sold category. You’re likely selling to large businesses with specialized needs, requiring you to build a more complex product. Those same customers will expect you to be on call for questions, and you’ll need to hire a sales force to cater to that need.
Your startup’s primary growth channel determines everything else about your business. Don’t naively build your startup around expensive growth mechanisms. Build it around your growth channel, and what target customers are likely to pay. Start thinking about this from Day 1.