Last week I was talking to an entrepreneur about his latest progress and growth plans. After a few minutes into the conversation it was clear the main issue to be discussed was the dilemma between selling future investors on a grand vision of becoming a unicorn vs the personal desire to build a solid business and have the optionality to sell for high eight figures and set up his family financially for life. With the news stories over the last few years, it’s easy to get sucked into the hype that the only path forward is a billion or bust. In reality, most tech entrepreneurs want to work on cool things, make an impact, and get fairly compensated for the value created.
My advice to this entrepreneur based on his personal goals: think of it as a calculated marathon to $10M ARR. To have financial optionality for a full or partial sale, the SaaS startup typically needs to get to $10M in annual recurring revenue growing >30% per year to be valued in the $50M – $100M range based on gross margins, net dollar retention, addressable market, capital efficiency, etc. Now, working back from this $10M ARR target, we know the yearly milestones:
Year 8 – $10M ARR @ 35% growth
Year 7 – $7M ARR @ 45% growth
Year 6 – $4.5M ARR @ 55% growth
Year 5 – $2.8M ARR @ 65% growth
Year 4 – $1.6M ARR @ 75% growth
Year 3 – $900k ARR @ 85% growth
Year 2 – $500k ARR @ 95% growth
Year 1 – $250k ARR @ 100% growth
The huge assumption here is that growth slows down ~10% per year and the company can be capitalized in a way where everyone is aligned around this strategy. On paper, this isn’t a venture-backed business. In reality, there are so many seed funds and angel investors that it’d get funded with the hope (yes, hope!) that’s there’s an opportunity to grow faster and build a bigger business should the opportunity reveal itself.
Entrepreneurs would do well to think through how their personal goals align with their current strategy and consider a calculated marathon to $10M ARR, when appropriate.
2 thoughts on “The Calculated Marathon to $10M ARR”
Big picture—you are spot on. Great advice to entrepreneurs and 10 year perspective is accurate. With little funding-<$2m early year growth strikes me as ambitious, while later years 10% disappointing
Great insight. It’s a journey.