Point Nine Land
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Point Nine Land

Persistence and predictability of SaaS growth

Tell me your current ARR and your ARR one year ago, and I’ll tell you when you’ll hit $100M in ARR…?

For each ARR level, the green line shows you the y/y growth rate required for “escape velocity”. If you’re above the green line, you’re on a path to go public. If you’re one of the dots below the line, you’re not good enough for Major League Baseball. ;-)

It’s not a law of physics

“This is a heuristic, not a law of physics.”

1) Public SaaS companies

  • I used ARR data from Public Comps (an excellent resource for SaaS metrics!) on 75 publicly listed SaaS companies. For the (many) SaaS companies that don’t report ARR, ARR is approximated based on the reported revenue numbers.
  • In total, I extracted 218 data pairs (of the “ARR growth of company XYZ in year n / ARR growth of company XYZ in year n+1” type).
  • Since companies rarely provide revenue data for more than one or two years leading up to the IPO, ARR data below $50–100M or so is usually not available. Most of the data pairs correspond to hundreds of millions in ARR.
  • The oldest data pair is from 2012/2013 (ServiceNow, in case you’re curious), but the vast majority of data pairs are from 2014–2019. The analysis is based on year-end ARR data, so it doesn’t include any 2020 numbers.

2) P9 Family SaaS companies

  • The analysis is based on 96 data pairs from 29 companies.
  • I’ve excluded data points below $100k ARR. The majority of data pairs correspond to $1–20M ARR, but there’s a significant number in the $20–100M range.
  • The analysis is based on September ARR. Most data pairs are from 2014–2020.

How predictable is growth in SaaS?

It happens to the best of us

I haven’t found a way to round or change the number format of the bar labels in histograms Google Sheets. Hints are welcome.

Predictability at $1–20M ARR

The glass is one-third full

  • There’s a moderate-to-high correlation between a company’s growth in any given year and the following year.
  • For investors looking at SaaS companies with $10M+ ARR, and even more so for public markets investors, it’s a useful heuristic to assume a) that growth rates decrease over time and b) that growth rates will decrease by something in the order of 10–40% per year. This assumes that you don’t have insider knowledge or other strong reasons to believe that the company is on a different trajectory.
  • The moderate-to-high correlation mentioned above holds for earlier stage SaaS companies as well, but there are so many exceptions that founders shouldn’t be discouraged by a slow year. It’s all about trying to understand why growth went down and what can be done to reignite it.

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Christoph Janz

Christoph Janz

13.1K Followers

Internet entrepreneur turned angel investor turned micro VC. Managing Partner at http://t.co/5WJ3Pepbcv.