Building any VC firm is hard

Comments on Christoph Janz’s post “Building any business is hard”

After reading Christoph Janz’s posts (part 1 and part 2) which in essence state that:

“Building a SaaS business with $1–2 million in ARR is not that hard and not that valuable. Let me rephrase that. Starting a new company is always hard and most SaaS startups never get to $1–2 million in ARR. Every founder who accomplishes this deserves a huge amount of respect. The point is that getting to $1–2 million in ARR probably has less predictive value concerning a company’s ability to get to true scale than most people think — or at least thought some years ago.”

I felt a SaaS entrepreneur’s perspective could help complete his analysis.

I completely agree with Christoph’s 3 arguments to assert it’s easier to build a 1–2M$ ARR SaaS startup today (it’s been a walk in the park to take Aircall to that level :-)

  • Web applications are easier to build
  • There’s plenty of available knowledge to learn from
  • The SaaS “market” (or adoption) is bigger

Where I disagree with Christoph, is that he derives from this analysis that it’s more difficult to reach “true scale”, i.e. $100m ARR.

In fact, 2 of the 3 arguments above (available knowledge and SaaS adoption) imply that it’s increasingly easier to reach $100m ARR.

There’s plenty of knowledge on how to do right the early steps of a SaaS startup, but as there are more and more $100 ARR SaaS startups, the knowledge on later stages is currently being built. In 5 years from now, we can expect to have lots of benchmarks to learn from, from 0 to $100m ARR.

That applies as well on the market expansion. 5 years ago, you had to be on a large application to reach $100m ARR, because only a fraction of businesses were willing to go for the SaaS option. Today, your addressable market has expanded dramatically, so the scope of potential SaaS application has been amplified, and deepened.

The 3rd argument (easier web applications) could imply that SaaS becomes more competitive and that players in a given SaaS space “share” the value and the market cake, making it more difficult to grow to a large scale. It may be true on the most mature SaaS segments, but again, SaaS adoption is expanding to new applications and SaaS remains a tiny chunk of all possible software applications for business needs. So my guess is that this argument is a 2nd order argument compared to SaaS adoption.

In the end, I feel the weakness in Christoph’s logic lies in the $100m ARR = unicorn mantra. As SaaS matures, unfortunately, it provides lower returns for investors. So it’s increasingly hard for a VC to get a $1Bn valuation because the perspectives of growth of SaaS follow a decreasing trend. So may be I’d re-phrase the conclusion saying that it’s as hard as before to get to a $1Bn valuation, because you’ll need to reach more than $100m ARR to get there.

As we all know, building any VC firm is hard…

PS: to make the picture fully complete, I’d love to have a LP perspective on this, but if you’re up to it, please do me a favor an give it this title: “That’s a nice little $100M SaaS fund you have here. Call me to discuss if it will scale!” ;-)