Last week I was talking to an entrepreneur with a stalled startup. After being in business for several years, getting to millions in recurring revenue, and having a great run, the business plateaued. What to do next? Of course, there are a number of areas that can be improved in the business, as is always the case regardless of growth, so I asked the bigger question: What do you want to do with the company?
After much back and forth, it became clear that the desire was to keep running the business and to get it back on a high growth trajectory. We talked about a number of different strategies and decided to focus on three areas: retention, customer acquisition, and the rule of 40.
Retention represents the core health of the business. Customers that are happy, successful, and finding value renew their contracts. The old adage that it’s more cost-effective to keep an existing customer than to find a new one still rings true. With a mature, no-growth business there’s even more time to focus on the existing customers and ensure they have a great experience and renew (see SaaS Enemy #1).
Customer acquisition represents all aspects of acquiring new customers. Often, when a business slows, the customer acquisition channels haven’t scaled with the company and the law of large numbers kick in such that growth on an overall percentage goes down as the number of churned customers goes up (see Leaky Bucket). Now’s the time to analyze the customer acquisition channels deeper and look for opportunities to make improvements.
Rule of 40
The Rule of 40 states that the profitability, as a percentage, and the overall growth, as a percentage, when combined, should be 40 or higher. A business with 10% margins growing 30% annually meets the Rule of 40 while a business that’s breakeven and growing 10% annually is significantly below. Put another way: grow fast without making money or generate healthy cash flow with little-to-no growth. For a plateaued business, if it’s clear it can’t grow more, it’s time to meet the Rule of 40 by making it more profitable and focusing on operational efficiency.
Stalling startups is all too common and part of the normal course of business. By its very definition, a startup is a growth focused business, so if growth isn’t currently possible, it’s likely time to sell, look for new product ideas, or no longer be a startup.
2 thoughts on “When the Startup Stalls”
Nice article! I’m glad you mentioned how the rule of 40 (and by extension Peter Theils Zero to One) guide SaaS organizations growth strategy. I am curious what your thoughts would be in the consulting/service vertical? Keep up the great content!
I think one of the other things that are never talked about enough is the mental health side of when startups start tanking. It’s a downward spiral… most people don’t realize how tough startup life can be. Especially when you’re a founder.
I covered this one not long ago