The proverbial hockey stick-like growth curve for startups has been talked about many times, including yesterday. That growth curve is rare, and even more rare over extended periods of time. In reality, startups that experience the hockey stick growth curve often do so for a limited period of time, while the market adoption is at it’s peak, and then the growth abruptly slows down or goes away. So, instead of a hockey stick over a short period of time (< 7 years) it is really an ‘S’ like curve slanted to the right where there’s slow growth, hyper growth, and finally slow/no growth.
Crazy hockey stick-like growth is more often attributed to companies with truly revolutionary products or strong network effects where the value of the system keeps building on itself indefinitely (e.g. Facebook). Software-as-a-Service (SaaS) or cloud-based software products that are successful have growth curves flatter than a hockey stick. Here are a few reasons why:
- SaaS revenue layers on itself year after year which makes it easier to keep growing but harder to keep accelerating growth due to the law of large numbers.
- SaaS contracts are often annual with the payments made quarterly, making payments of the lifetime value of the customer stretch out over several years whereas installed software products get most of the value up-front, and thus installed software products can have a sharper revenue growth curve, everything else being equal.
- Customer churn for SaaS companies (read about the leaky bucket number) eats away at growth and even if the renewal rate stays constant, the number of new customers needed to grow at the same rate continues to increase.
SaaS companies that break out are likely to have a growth curve flatter than a hockey stick but continue to grow as a business for longer periods of time due to the layering of recurring revenue.
What else? What are your thoughts on successful SaaS startups growing slower than a hockey stick curve?