Growth and decline percentages are deceiving in the startup universe. Many don’t recognize all of the implications of exponential growth and the associated hiring challenges. This problem manifests most commonly when a startup begins to achieve product/market fit and Initial Traction (~$1M ARR).
When a startup is growing 10-15% m/m on the path from $500K - $1M ARR, the startup is adding $50-$100K in ARR each month, or $4-8K MRR. 10% m/m growth isn’t bad, but it’s not great. Great startups are growing > 15% m/m as they pass $1M ARR, and the Select Few are growing >25% m/m.
But what many fail to recognize is how the math scales. At $1M ARR, growing 15% m/m requires adding $150K in ARR, or $12.5K in MRR each month. Thus, from the time a startup achieves $1M ARR, they should hit $1.5M ARR in 3 months if they want to maintain 15% m/m growth.
At $1.5M ARR, 15% m/m growth means the startup needs to add $225K in MRR each month. So the startup should grow from $1.5M to $2M in just over 2 months, or 33% faster than the prior $500K in ARR.
This math isn’t particularly difficult to understand. But many underestimate just how hard it is to accelerate growth as the numbers get bigger. There are tons of startups that get to a point of adding $100K in ARR each month. 10x-ing that - adding $1M in ARR each month - requires real thought and and planning. Jason Cohen of WPEngine describes this problem very well. At a rate of adding $1M ARR each month, it will take 100 months, or more than 8 years, to achieve $100M ARR. Growth has to accelerate.
How does all of this tie to hiring? As startups add multiple customer acquisition channels, hire more than 2 sales people, and generally scale, startups need to invest in infrastructure. All kinds of it. This means marketing automation, sales automation, and customer success automation - collectively customer lifecycle systems and processes - to accelerate growth. There should be minimal innovation around these disciplines: innovate myopically. But startups need to hire the right people so that they don’t have to innovate in these disciplines. Tech/product focused founders rarely have expertise setting up customer lifecycle systems and processes. They should bring in the people who have implemented those processes before, and empower them to do it.
Those people are going to be more expensive than many founders naturally think. I remember the first time I looked at what an amazing VP Customer Success costs after raising a Series A. I couldn’t believe it: $150-$200K and .5%-1.5%. Great VP Sales can go much higher. But the great ones are worth their salary 10x over. Because they will make the startups’ customers happy in a way the founders otherwise never could, and those customers will fuel the best kind of growth: word-of-mouth (WOM). Not only does WOM scale incredibly well, it scales well inexpensively, driving down CAC and ensuring that startups don’t compromise the fundamental law of startup growth (fantastic post). That amazing VP Customer Success will drive down CAC and drive up LTV, ensuring the startup stays venture-fundable as it scales to $100M ARR. The amazing VPs are worth any amount of cash and equity to acquire.
The situation is particularly amplified for companies that are doing $1-2M ARR and are 4+ years old. If the product/market fit is tight and the market opportunity is real, then that means the startup needs serious customer acquisition help across all fronts. If there were any top notch marketing or sales people around, they probably left because they didn’t have the help around them they needed to drive revenue growth. And so now the company is left with B players without strong customer acquisition and customer success leadership. Those companies are the ones that most need to find a spark to rethink the entire customer acquisition process and ignite growth. Those people will be expensive in cash and equity terms, but if they are any good, they will be worth their cost 100x over. As Jason Lemkin of SaaStr loves to say, salary and equity vest (and equity has a cliff), so the cost of being wrong is relatively low given the slow growth rate anyways.
Hiring becomes even more important when thinking about growth given the time cycles involved. Hiring great executives takes months, and onboarding takes 30-60 days, so founders need to have incredible foresight to time VP-level hires right to ensure they maintain an exponential growth curve. That means in many cases it will take 6 months to hire and onboard great VPs. So that means that startups should start looking for their first great VP hires between $500K - $1M ARR. If the startup is growing is 15% m/m and it takes 6 months to find and onboard the VP, then the startup will be at $1M-$2M ARR - or double the revenue of when the search started - before the VP is delivering material value. This is not intuitive to founders who, up until this point, have been able to tweak almost anything overnight other than the product fuel growth. It’s not naturally intuitive to think that a single thing - hiring an executive - will take 6 months. Exponential growth can be deceiving.
The flip side of thinking about growth - which is theoretically unlimited - is thinking about a fixed pie. And this is where percentages are really deceiving. When discussing negative percentages - revenue declines, accelerating burn, etc - it feels like the pie is being eaten… because it is. These are fixed pie scenarios. All of a sudden, 15% of the pie is gone. It feels like crap because psychology dictates that humans strongly prefer loss aversion to gains.
The problem that many entrepreneurs make is applying the same fixed-pie mindset and applying it to growth percentages and thinking about equity value. Positive and negative percentages need to be thought through opposing lenses: negative percentages should be thought of as a fixed pie that’s being eaten, while positive percentages need to be thought through the lens of infinite growth. Companies can become infinitely large - see Apple and Google - so the real dilemma isn’t how to minimize losses, but how to maximize growth. All decisions should be made through the lens of maximizing growth, even if material costs are incurred. Startups can always grow more than they can lose (unless gross margins are negative, in which case the business shouldn’t exist). Invest in that growth, even if it feels expensive through a fixed-pie lens. 6 months later, it will feel like a bargain when looking backwards through an infinite growth lens.