September 23, 2023

1-3-7-15-30

By
Gregg Scoresby

*This article originally appeared in Gregg Scoresby's LinkedIn feed.

Everyone loves growth companies. Lots of growth usually means customers are infatuated with your product. And what's not to love about that? But was does "good growth" look like for venture-backed B2B SaaS companies?

I don't have a perfect answer, but there are general patterns I have seen in the winning companies I have been around. All of this is rough and purely illustrative, but this is what a winning company looks like:

Year 0 - $0 ending ARR. Maybe this is more than a year. For CampusLogic, it took 2-3 years to get something that worked. This is about building an MVP and getting it out into the market. This is pre-seed start-up mode.

Year 1 - $300K in ending ARR. The product is in market. Founder-led sales is working. The company closes 10-20 early customers with $15k-$30k Annual Contract Values. There is something potentially repeatable going on here.(Note: Seed-stage investors like PHX Ventures usually want to enter post-revenue but before $1m in ARR.)

Year 2 - $1M in ending ARR. Let's assume we had 100% Net Revenue Retention or NRR. This year, the company roughly doubled new sales from the previous year and closed $700k of new ARR. Add the $300k we retained from Year 1 and that gets to $1m in ARR.

Year 3 -$3M in ending ARR. Again assume NRR was at 100% from Years 2 and 3 because our product is awesome. We almost tripled our new sales from $700k last year to $2M this year because we hired more salespeople. So that's $1M retained + $2M new bookings.(Note: I'm just spitballing here, but there's a pretty good chance you are raising a Series A somewhere between Years 3 and 4 if you are planning on going long.)

Year 4 - $7M ending ARR. Again, assume 100% NRR, so last year's ending ARR of $3m is locked. Let's say we doubled new bookings from $2m last year to $4m this year so that's $3M retained from last year + $4M new.

Year 5 - $15M ending ARR. Still assuming 100% NRR (note: top quartile companies are >110% NRR. Top decile are >120%). The company continues to ramp sales because everyone loves the product. New bookings doubled again to $8M new ARR. So this ending ARR is $7M retained + $8M new.(Note: Maybe a Series B somewhere in here)

Year 6 - $30M in ending ARR. Keeping our same pattern of retaining 100% and almost doubling new bookings from $8M last year to $15M this year, that's $15M retained + $15M new to get to our $30M ending ARR.

I could run this out a couple more years and show the path to $100M ARR but you get the point.This is all super rough and illustrative, but in my experience, this is the general pattern early investors, including me, are looking for. Seed stage VCs are looking for companies that can (a) double new bookings every year in the early years, (b) retain at >100%, and (c) burn less than 1X net new ARR along the way. That's what it takes to meet or exceed the 1-3-7-15-30 pattern.