When talking to entrepreneurs about revenue growth, I look to emphasize the value of compounding revenue now and how it plays out over an extended period of time. It’s easy to think that it’s no big deal that we missed our sales number for the quarter or had a lower renewal rate than expected. Only, when you really dig in, a lost dollar today translates into many lost dollars of revenue and enterprise value over the long run. Similarly, an extra dollar of revenue sold today translates into much more revenue and enterprise value over time.
Let’s look at an example. Say you were able to beat the sales plan and the net dollar retention plan adding an additional $1 million in new recurring revenue in a calendar year. With an extra $1 million in recurring revenue:
- Year 1 after exceeding goals
- Extra ~$800,000 to grow the business (assume 80% gross margin)
- Hire two additional sales reps and increase marketing spend (assume 50% of the extra $800,000 goes to sales and marketing)
- Add $1M of new annual recurring revenue from the new reps (assume the two reps each have a $500,000 quota and hit it)
- Year 2
- Extra $1,600,000 to grow the business (year 1 gross margin plus the gross margin added by the new reps assuming 100% net dollar retention)
- Hire four additional sales reps and increase marketing spend
- Add $2M of new annual recurring revenue from the new reps
- Year 3
- Extra $3,200,000 to grow the business (it keeps layering on the previous year!)
- Hire eight additional sales reps and increase marketing spend
- Add $4M of new annual recurring revenue from the new reps
In this example, by the end of the third year after the year of an extra $1M in annual recurring revenue, the business has added $8M of new annual recurring revenue. $8M of annual recurring revenue pays for dozens of employees and adds $40M – $80M of enterprise value in today’s market (assumes 5-10x run rate multiples).
The next time someone questions the importance of renewing an existing customer, or signing a new customer, remind them that $10,000 of recurring revenue today is worth up to $800,000 of enterprise value after three years. Every dollar counts.