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Unicorns, Walking Dead and the Dishonorables
November 22, 2018 at 6:15 PM
by Joe Apprendi

What Does it Take to Build a Billion Dollar SaaS Business?

Founding or finding the next billion dollar SaaS company is easier said than done. Only 1% of SaaS companies successfully IPO with $1B or more in enterprise value. While roughly 50% remain active and/or privately held, 16% will fall into a category called “the walking dead”, meaning, they flat-line on growth and can’t raise funds to change their situation The remaining 33% generally find some sort of soft landing through M&A, with about half of those having a kind of “dishonorable exit” where there is barely, if any, return for investors and entrepreneurs.

While the picture painted by all this data can seem daunting (i.e., it’s incredibly hard to grow quickly and exit successfully), it is also illuminating for founders and investors on how to improve these odds for the companies they bet on.

Full house in attendance to hear how to build the next SaaS unicorn

Revel partnered with Greycroft and Fuel x McKinsey earlier this month to produce our first ‘How to Build a SaaS Unicorn’ event. It was attended by some 150 early-stage SaaS businesses (like Konduit and Fero Labs) alongside dozens of venture capitalists. We were privileged to get both the quantitative data from McKinsey along with real-world, qualitative insight from Jonah Goodhart, Co-Founder and CEO of Moat that recently sold to Oracle for a reported $850M+ and estimated 20X multiple on forward ARR.

Here are takeaways from for both VCs and Entrepreneurs that resonated most with me. First the facts (all courtesy of Fuel x McKinsey based on 2010 Series A class of companies):

  • Of 467 companies raising, only 55 remain private/active today
  • 168 companies never raised another round past the Series A
  • 153 were acquired/merged (many categorized as ‘dishonorable exits’)
  • 73 unfortunately failed or are inactive
  • 237 still are private/active (many classified as ‘the walking dead’)

Mckinsey shared a lot of stats worth noting and monitoring if you’re building a SaaS business, as well:

  • Don’t be surprised if your Sales Efficiency (CAC Ratio) drops as you go from
  • No more than 25% of your sales headcount should be focused on farming existing accounts vs. acquiring new ones. Sales Efficiency is 60% better than companies investing over 50% of their sales team in farming roles
  • Rapid CAC payback is key. If you’re selling to large enterprises, should be under 1 Year. For SMBs,

While these final findings are very interesting, most SaaS business would be thankful to build a business that eclipsed the $50M+ ARR milestone, but those delivering this at 50% YoY growth also outperform all others in future growth and exit outcomes.

  • Deliver a 4–5X greater equity return to shareholders and founders
  • >50% of these companies will eclipse $1B in revenue and are 10X more likely to do so

Beyond keeping some of these quantitative metrics in mind, Jonah Goodhart, Co-Founder/CEO of Moat, did a great job sharing some recommendations for founders trying to raise capital, scale quickly and exit optimally. Here are some of his insights:

  • While obvious, talk to the market/customers. Jonah talked to over 500 customers to really get a sense of market landscape, competition before he settled on his product strategy/MVP
  • Pivot quickly. Jonah went through 2 pivots within 18 months to finally settle on Moat’s core product, target market and value proposition
  • You need to build a business that is sticky and has a sustainable long-term value that can withstand market volatility and, even, collapse
  • Don’t spend time with VCs if it feels like it’s going to be a pass. Keep your pitch simple: 1. Here’s the problem, 2. This is the market opportunity, 3. Here’s what we are doing about it, 4. Here’s some proof points on why it’s working, and 5. Here’s what we’re raising and what we’re going to do with it
  • All about more customer logos. Don’t get caught up on maximizing revenue early on. Get customers on board soonest. Better to have $5K/month in recurring revenue and look to right size the deal to $20K MRR on renewal (preferably include auto-renewal in your MSA)
  • The metrics we cared about was first and foremost customer churn, but also achieving a believable SaaS gross margin of 70%+
  • Standardize your sales pitch right down to what you say and how you say it. Important to prove you can get to a repeatable sales strateg