Growing a SaaS Company from $0 to $100M
Neeraj Agrawal is an investor and a general partner at Battery Ventures. In 2015, he wrote an article on TechCrunch about how a SaaS company can grow its revenue from $1-2 million to $100 million within five to six years.
He first came up with the idea from an unlikely source: his mother.
The story goes that Neeraj’s mom once proudly told her friends that her son works at Boston Adventures, rather than Boston Ventures. This led him to connect his job, a venture capitalist, to that of an adventurer travel guide.
Neeraj intimately knows the path towards the summit. He’s familiar with the route and the best way to scale it. As such, he’s in a position to guide those who are willing to brave the mountain.
That’s where the T2D3 originated.
But you might ask:
- But what exactly is the T2D3 framework?
- Is it achievable?
- And most importantly, how can you leverage the T2D3 framework for your growing SaaS company?
Let’s begin with its definition.
What is T2D3
T2D3 means “triple, triple, double, double, double.” Expanded, it follows the growth of a company where it triples its annual revenue for the next two years, then doubling it in the next three.
It’s important to note that T2D3 isn’t the first step a SaaS company should focus on. Instead, it’s more ideal if your business has accumulated a loyal customer base and has reached $2 million in annual recurring revenue (ARR).
You achieve that by first developing a product-market fit. That’s where our adventure begins.
Product-Market Fit: Where to Begin
Obviously, getting a $2 million ARR isn’t a walk in the park. But it’s not impossible either.
The problem is that most SaaS startups approach product-market fit the wrong way. They first build the product then find a market to sell the solution.
They’re prioritizing the solution first rather than the problem. This is a poor strategy as the product you developed might not be needed by the market you’re targeting.
Then you’ll have to pivot your strategy based on consumer demand. In short, you’re essentially adding unnecessary steps to the process.
Now try reversing that approach. You first identify the problem, then build a solution for it.
Do you see the difference?
The problem already exists, which means people are looking for a solution to address it. They’re more than willing to pay for such a service if it means it can help their growth rate. Not to mention streamline their operation., which can increase employee engagement, among other things.
Getting to $2 Million ARR
Once you’ve identified and developed your product-market fit, you’re going to start building your ARR to $2 million. This milestone involves perfecting your sales pitch and sales pipeline
T2D3 Year One: Road to $6 million
As mentioned earlier, once you’ve reached $2 million, you’re going to have to triple that revenue. There are two ways you can do that. Agrawal called them the “hero” approach and the “sales machine approach.”
The Hero Approach
In the hero approach, the company tries to close every lead they could get their hands on. While this would certainly bring you to the $6 million milestones, it isn’t scalable.
That’s because you’re onboarding customers that might be the wrong fit. This could lead to a lot of problems including a high churn rate.
To give you a better understanding of churn, this blog will expand on that topic. It discusses how to calculate churn, the ideal rate in the industry, and strategies for mitigating it.
The Sales Machine Approach
The sales machine approach is much more difficult as you’re only onboarding clients that truly benefit from your service. By doing so, you’re ensuring they would stick with you for years.
That means you’re protecting yourself from future churn spikes, while simultaneously securing your ARR.
You’re also going to need to hire a sales vice president along with 10 reps to cover a lot of ground. Again, instruct your sales team to onboard clients that are the right fit.
Visit this blog here to identify these valuable employees.
T2D3 Year Two: Road to $18 million
In year two, your annual growth rate target is $18 million. Your renewal rate in this phase could either increase or decrease.
In other words, the year-two cycle will truly tell you whether or not you’ve gotten the right clients. And if you did, you’re not just going to see a steady stream of revenue from your renewals.
You’ll also experience a high referral rate as your customers recommend your product to their colleagues. This is why the sales machine approach is far more preferable than the hero approach.
It helps you get more customers that are the right fit for your service – all without needing to allocate resources on it. Or at least minimizing the budget for the endeavor.
Additionally, you’re going to need to add a second layer of sales management on top of your first. Agrawal said that this is one of the most challenging phases for a SaaS company but it’s also quite rewarding.
That’s because your influence in finding leads and closing deals is no longer needed. Those are handled by your employees.
As a result, it frees you up to oversee other operations.
For instance, you can groom sales development representatives to become account executives. This gives you a greater chance of pursuing high-value leads that will bring further increase your ARR.
As you can see, the company is now slowly running by itself without heavy oversight on your end. You can now focus on international growth.
T2D3 Year Three: Road to $36 million
This cycle will have your team growing to around 30 sales development representatives and five front-line managers. You’re now several levels removed from your sales pipeline as other matters will be requiring your attention.
The most pressing of which is establishing an international presence. But be warned.
Do not try to get in multiple regions at once. This is a mistake as you’re spreading yourself too thin without establishing a solid foothold first.
What you want is to focus on one region and dedicate around three to five representatives in the area. This allows you to develop a comprehensive understanding of the market there.
You’ll understand your target customers’ needs, as well as the specific features they require from your product. After that, you can create a strategic sales pipeline and closing playbooks for your team.
Additionally, a leader will be emerging from your people in that region. Identify and cultivate the growth of this employee until they can handle the operations in that area.
Meanwhile, your SaaS company would’ve gotten a few but loyal customers who will refer you to their colleagues. The same cycle will happen where your customer base and ARR are growing without you overseeing the operation.
From there, expand on to another region where you’ll essentially follow the same procedure.
T2D3 Year Four: Road to $72 million
You’re now a couple of steps away from getting a $100 million ARR. But as Thomas Fuller said, “it is the darkest before dawn.”
Here, Agrawal emphasized the prevalence of operational challenges, especially overseas. Specifically, he said the challenge will revolve around deciding who’s going to handle your different divisions.
Three Skills of a Leader
Competence needs to blend with cultural familiarization here. Remember: knowing the temperament of your target audience is one of the foundations of a successful SaaS startup.
But you’ll also need to consider the leadership skills of your chosen candidate. According to the Skills Approach by Robert Katz, a leader needs to embody three key attributes to excel in this role.
- Technical skills
- Human skills
- Conceptual skills
This involves the ability in performing certain tasks that are needed in a particular line of work. For instance, an account executive of a SaaS company should have high project management skills.
This allows them to organize, monitor, and implement tasks efficiently and effectively. They also need to have analytical skills to interpret data to determine how the market will evolve in the next three, five, or 10 years.
Where technical skills deal with things, human skills deal with people. A fine example is an account executive that has strong communication skills.
This allows them to uncover specific pain points of a client and use your product’s features to solve them. By doing so, they’re placing your solution in the limelight that could convince a customer to commit to your company.
Conceptual skills govern a person’s ability to deal with and form ideas. An account executive with high conceptual skills can improve your sales funnel based on the current trend in the industry.
Better still, they’re acting based on data they’ve collected using their technical know-how.
All Three in Concert
According to Katz, it depends on the role of an employee which skills should be prioritized. Thus, in the case of a manager overseeing your overseas operation, all three needs to be working in concert.
This highlights the challenge that Agrawal emphasized. You’ll need to find someone who possesses human, technical, and conceptual skills that could handle your expansion in a particular region.
And this someone could come from your team or a new hire that embodies all three.
A reseller network is exactly as its name suggests. It helps you sell your product and cultivate SaaS growth.
In exchange, they get a portion of the software sale, which depends on your specific agreement. According to Crossbeam, these could be:
- Sales percentage
- Partner page listing
- Product discount
- Account service
- Cash or gifts
The Battery Ventures bigwig advised that you should only get a reseller network once you hit a $50 million run rate. And even if you decide to open this channel, you’d want to restrict that to only one or two partners.
T2D3 Year Four: Road to $144 million
Once you hit the $100 million ARR milestone, it opens up the door to the $1 billion valuation. A potential IPO is right around the corner as well.
That is, of course, other SaaS metrics are performing well.
However, Agrawal remarked that your SaaS growth is on its early stages still.
The $1 billion revenue is on the horizon and you don’t want to rest on your laurels now.
If you do, you might lose the momentum you’ve worked so hard to maintain. Besides, your SaaS growth is going to experience another S-curve.
Which means you’ll need to adjust your strategy again now that you’ve reached a new tier. Speaking of which, the T2D3 rule is now going to be replaced by the Rule of 40.
But considering this blog has been extensive enough already, we’ll need to cover that topic next time.
Just know that the Rule of 40 is measured by adding your growth rate and profit margin. If the sum is above 40 percent, then you’re on the green.
T2D3 Framework: Growth Vs Profit
As mentioned earlier, your next goal will be reaching that $1 billion mark, which will transform your company to unicorn status. This is an elite group of companies and there are only around 800 of them as of September 2021.
While some of these companies have followed the T2D3 rule, others used different routes. It will be up to you to determine what’s the best strategy your SaaS business needs.
For instance, there will come a time where you’ll need to choose between high profit or high growth. That’s a hotly contested debate, especially in the SaaS industry.
But confining our discussion to the T2D3 framework, you’re going to choose growth. Besides, there are advantages to this type of expansion.
One of which is acquiring talents for your sales and marketing team before they’re nabbed by the competition. The more talented your people are, the bigger your customer base is going to become. And the bigger your customer base, the higher revenue you’re going to earn.
But again, there are arguments against this. Just remember to always evaluate your position every time you hit a milestone. Do not lose sight of the bigger picture.