Thoughts on non-linear growth in B2B startups
A few months ago, I was reading “Tools of Titans” by Tim Ferriss where I stumbled upon a question that Peter Thiel likes to ask of himself and others: “If you have a 10-year plan of how to get somewhere, you should ask yourself: why can’t you do this in 6 months?”
I found it to be a powerful thought, and it got me thinking on how this question would apply to the companies I invest in. I asked myself: Once a company has product-market fit, how can it grow from $1m to $100m in revenues in one year? Why take 5–10 years? It’s a semi-rhetorical question because I know it will be near impossible to grow that fast from an operational point of view, but I bet someday some company will do it. So beyond the organizational challenges that accompany a hyper-growth situation (eg: scaling culture, managing the chaos of rapid change), what are the true operational constraints that a B2B software company faces to grow that fast post product-market fit?
Here’s what I came up with: Assuming the current product has an addressable market that allows the company to scale all the way to $100m+ in revenues with the current product and pricing itself, the operational constraints for B2B companies boil down to 4 factors:
- Pipeline/Market awareness of the product: If the market is not aware of your product, they can’t buy it.
- Sales capacity: Even if the market is aware of the product and ready to buy, you still need enough sales reps to talk to prospects to make the sale happen. This further boils down to constraints around sales hiring velocity and ramping reps fast enough to scale sales capacity.
- Deployment/implementation/customer success capacity: Even if the market awareness is there and you solve the sales capacity issues, you need to hire enough people to onboard and support the customers successfully. Similar to sales capacity, this comes down to hiring and ramping.
- Capital to deploy against solving the capacity issues above: Let’s say you could hire all the best sales and implementation folks in your region, you’d still need a ton of capital to hire them since the pay off on the sales and marketing investment comes in the months after you start paying those salaries (not to mention recruiting costs).
So if these are the key constraints, how do you reduce/remove them so that you can truly scale in a non-linear way? My current view is that the two ways to scale a B2B company in an explosive growth manner are: (a) Go self-serve; or (b) Have a large enterprise selling motion on day 1. Let’s dig into these:
Go self-serve: Here’s how self-serve models speak to the 4 operational constraints above:
- Market awareness: Being a user-first adoption model, self-serve enables a word-of-mouth based growth in market awareness that sales driven models don’t have. Nobody is going to tweet about how they got pitched Workday today. But people talk about the products they themselves discovered, adopted and love to use all the time. And if there is a multi-player use case to your product, that can further boost growth in market awareness.
- Sales capacity: Self-serve products don’t require sales reps till you layer on an enterprise plan (which you will have to eventually). So in the early days when the growth is purely self-serve, you can scale much faster since growth is free from the constraints of sales capacity, and more constrained by market awareness. And even when you have to layer on an enterprise selling motion, the boost from self-serve on velocity of growth is very impactful.
- Deployment capacity: If the product is simple enough to be truly self-serve, implementation is not required mostly and minimal even for enterprise customers. Again, reduces the dependence on number of hires.
- If the above factors play out in your favor, the faster and/or more cost-effective growth enables access to capital to drive market awareness further (to the extent, you need to grow via paid acquisition) and then layer on an enterprise plan which will require hiring and ramping sales and implementation folks.
Go large enterprise on day 1: I realize that most SaaS companies start off selling to the mid-market segment and go to large enterprises only once they hit ~$10m of ARR. I think that was the right strategy in the early days of SaaS when large enterprise buyers were wary of cloud-based software. It might still be the right strategy for certain product-markets, but wherever it’s possible, my push would be to have a large enterprise strategy as soon as possible. Why? Going back to the 4 constraints identified above:
- Market awareness: When you’re selling to the Fortune 2000, much easier to get desired coverage of accounts given the buyer list is identified vs. the need to invest in boil-the-ocean brand marketing and demand-gen strategies when you need every mid-market company to have heard of you from a pipeline coverage point of view.
- Sales capacity: For companies with strong product-market fit and high growth, the sales capacity issue translates into a sales hiring issue. The unit economics of hiring and ramping sales reps work much better at higher quotas ($1.8–2.0m vs. $600k-$800k). While the quota/OTE ratio for enterprise AEs might be similar/only slightly better than mid-market or SMB AEs, the number of reps you need to add $10m, $25m, $50m of new ARR in a year is 33–50% of what you would need with mid-market. Life becomes easier when you have to hire and train 3 new AEs per quarter vs. 6-9 new AEs for the same ARR targets. Additionally, large enterprise customers allow for a much better land-and-expand motion than mid-market customers. This dynamic can provide a further boost to growth rates, especially once there’s a strong initial base of enterprise customers to upsell to.
- Implementation capacity: This is where typically enterprise selling is a heavier lift than mid-market. But the higher deal sizes more than justify it and often large enterprises are willing to pay for implementation (much more than mid-market companies). Ultimately, this also comes down to a hiring and capacity optimization problem.
- Capital: VCs actually like the enterprise segment over mid-market anyways. So if you can demonstrate product-market fit and momentum amongst enterprise customers, it actually helps with fundraising.
All that being said, it’s not easy selling to large enterprises especially early on. Enterprise deals have long sales cycles and are difficult to forecast, and you need to have the leadership team and investors behind you who can stomach that unpredictability in the early quarters. It’s not for everyone and it can’t be applied blindly to every product-market. Neither is it easy to create the kind of groundswell around your product that is required for a strong self-serve strategy. Again, not every product-market allows for a self-serve strategy. But if you can deploy either of these models, I do think you benefit significantly because of the factors above.
As I’ve thought about this question of operational constraints on hyper-growth, my biggest takeaway has been: pursue distribution models with higher leverage per sales-and-marketing headcount. Ultimately, non-linearity comes from more leverage on the existing resources. Would love to hear other people’s thoughts on this.