Question: what do you call a 10-year old startup with $10M in ARR?
Answer: a small business [1].
When you make a list of key SaaS metrics, you’ll rarely find age listed among them. That’s correct in the sense that age by itself tells you little, but when size is measured against age, you get a rough measure of velocity.
It’s a lot like people. Tell me you can play Mozart’s Piano Concerto No. 23 and I’ll be impressed [2]. Tell me you can play it at age 12, and I’ll think you’re an absolute prodigy. Tell me you have $10M in ARR after 10 years and I’ll be impressed [3]. Tell me you have it 3 and I’ll run for my checkbook.
All this begs the question of growth velocity: at what age is a given size impressive? Towards that end, and working with my friends at Balderton Capital, I’ve come up with what I’m calling the Rule of 56789.
- 5 years to break $10M
- 6 years to break $20M
- 7 years to break $50M
- 8 years to break $75M
- 9 years to break $100M
Concretely put, if you walk through the doors to Balderton’s London offices with $54M in ARR after 7 years, you’ll be in the top quartile of those who have walked before you.
Commentary
- I’m effectively defining “impressive” as top quartile in the Balderton universe of companies [4].
- Remembering 56789 is easy, but remembering the milestones is harder. Once you commit the series {10, 20, 50, 75, 100} to memory, it seems to stick [5].
- Remember that these are milestones to pass, not ending ARR targets, so this is not equivalent to saying grow 100% from $10M to $20M, 150% from $20 to $50M, and so on. See note [6] before concluding {100%, 150%, 50%, 33%} is an odd growth trajectory.
- For example, this is a 56789-compliant growth trajectory that has no whipsawing in growth rates.
Three Situtions That Break The Rule
Rules are made to be broken, so let’s talk about three common situations which confound the Rule of 56789.
- Bootstraps, which are capital constrained and grow more slowly. Bootstraps should largely ignore the rule (unless they plan on changing their financing strategy) because they are definitionally not trying to impress venture capitalists [7].
- Platforms, that require years of time and millions of dollars before they can go to market, effectively resetting the starting clock from company inception to beta product release [8].
- Pivots, where a company pursues strategy A for a few years, abandons it, and takes some salvage value over to a new strategy B. This effectively resets the starting clock from inception to pivot [9].
Alternative Growth Velocity Rules
Let’s compare the trajectory we showed above to similar one generated using a slightly different rule, which I’ll call the 85% Growth Retention Rule, which says to be “impressive” (as defined above), you should:
- Pass $1M in ARR at a high growth rate (e.g., above ~180%)
- Subsequently retain 85% of that growth rate every year
I view these as roughly equivalent rules, or more precisely, alternate expressions of nearly the same underlying rule. I prefer 56789 because it’s more concrete (i.e., do X by Y), but I think 85% growth retention is somewhat more general because it says no matter where you are and how you got there, try to retain 85% (or more) of your growth rate every year. That said, I think it stops working at 8-10 years because the asymptote on great company growth is somewhere around 40% [10] and some would argue 60% [11]. It also fails in situations where you need to reaccelerate growth.
There’s one well-known growth velocity rule to which we should also compare. The triple/triple/double/double/double (T2D3) rule, which says that once you hit $2M in ARR, you should triple to $6M, triple again to $18M, then double three times to $36M, $72M, and $144M.
Let’s compare the 56789 and the 85% Growth Retention rules to the T2D3 rule:
Clearly T2D3 is more aggressive and sets a higher bar. My beef is that it fails to recognize the law of large numbers (by failing to back off on the growth rates as a function of size across considerable scale), so as an operator I’m more intuitively drawn to the 85% Growth Retention rule. That said, if you want to be top 5% to 10% (vs. top 25%), then go for T2D3 if you can do it [12]. You’ll clearly be creating a lot more value.
I like all of these rules because they help give you a sense for how quickly you should be getting to a certain size. Growth conversations (e.g., trying to get a CRO to sign up for a number) are never easy. Rules like these help by providing you with data not about what the average companies are doing, but what the great ones are. The ones you presumably aspire to be like.
The limitation, of course, is that none of these rules consider the cost of growth. There’s a big difference between a company that gets to $100M in 9 years on $100M in capital vs. one that does so on $400M in capital. But that’s why we have other metrics like cash conversion score. Different metrics measure different things and these ones are focused solely on size/growth vs. age.
A big tip of the hat to Michael Lavner at Balderton Capital for working with me on this post.
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Notes
[1] See the definition of small business, which is somewhat broader than I’d have guessed.
[2] Even though it’s only classified as “less difficult” on this rather amazing scale from less difficult to difficult, very difficult, extremely difficult, ridiculously difficult, and extraordinarily difficult. (Perhaps CEO’s can use that scale to classify board members.)
[3] It’s not as if just anybody can do either. Founding a company and building it to $10M is impressive, regardless of the timeframe.
[4] Balderton universe = European SaaS startups who wanted to raise venture capital, who were sufficiently confident to speak with (what’s generally seen as) a top-tier European firm, and who got far enough into the process to submit performance data.
[5] I remember it by thinking that since it’s still pretty early days, jumping from $10M+ to $20M+ seems more reasonable than from $10M to $25M+.
[6] Don’t equate this rule with a growth vector of {100%, 150%, 50%, 33%} in years 5 through 9. For example, years in which companies break $10M often don’t conclude with $10.1M in ARR, but more like $15M, after having doubled from a prior year of $7 to $8M.
[7] The rule would probably be more useful in projecting the future of VC-backed competitor. (I think sometimes bootstrapped companies tend to underestimate the aggressiveness of their VC-backed competition.) This could help you say, “Well, in N years, BadCo is likely to be a $50M business, and is almost certainly trying to be. How should that affect our strategy?”
[8] That said, be sure you’re really building a mininum viable product and not overengineering either because it’s fun or it allows you to delay the scary of moment of truth when you try to sell it.
[9] Financings after a pivot sometimes require a recapitalization, in which case the company’s entire lifeclock, from strategy to product to cap table, are all effectively reset.
[10] Current median growth in Meritech Public Comps is 32% at median scale $657M in ARR.
[11] 0.85^10 = 0.2 meaning you’ll cut the starting growth rate by 80% after ten years. So if you start at 200% growth, you’ll be down to 40% after 10 years with 85% growth retention.
[12] I’ll need to take a homework assignment to figure out where in the distribution T2D3 puts you in my data set.
While this chart doesn’t speak to valuations over time, it does speak to the relationship between a company’s 
