Growth Endurance in SaaS - A New Normal?

This episode explores the concept of growth endurance in SaaS companies, discussing its relevance and evolution in current market conditions.

1. Growth endurance measures a company's ability to sustain its growth rate over time, calculated by comparing this year's growth rate to last year's.
2. The traditional benchmark for growth endurance has shifted from 80% to around 65% due to market changes.
3. Models like "triple, triple, double, double, double" are now seen as overly ambitious for most SaaS companies.
4. The "rule of 56789" provides a more attainable set of growth milestones for SaaS companies, offering a realistic pacing for reaching significant ARR thresholds.
5. Discussions around growth should consider the "law of large numbers," where growing large volumes becomes progressively challenging.

1. Introduction

Hosts introduce the topic of growth endurance and its significance in SaaS. Ray Rike: "Today's focus is on a single SaaS metric: growth endurance."

2. Exploring Growth Models

Discussion of different growth models and benchmarks, including insights from industry experts. Dave Kellogg: "Growth endurance measures the rate at which growth slows down as a company scales."

3. Guest Insights

Janelle Tang and Michael Levener discuss the evolving standards of growth endurance and realistic growth expectations. Janelle Tang: "The landscape of SaaS growth has evolved, necessitating new benchmarks."

4. Practical Implications

The hosts discuss how these metrics apply practically to SaaS businesses, emphasizing realistic goal-setting. Dave Kellogg: "It's crucial for SaaS companies to set attainable growth goals to avoid demotivation."

1. Evaluate your company’s growth endurance annually to adjust strategies in real-time.
2. Aim for growth milestones that are ambitious yet achievable, avoiding outdated, aggressive models.
3. Use the "rule of 56789" as a guideline for setting realistic ARR goals.
4. Regularly compare your growth rates with industry standards to stay competitive.
5. Foster a culture that understands and adapts to the changing dynamics of SaaS growth.

Dave "CAC" Kellogg and Ray "Growth" Rike discuss how a "growth rate" endures for a SaaS company trend over time!

People

Ray Rike, Dave Kellogg, Janelle Tang, Michael Levener

Companies

Bessemer, Baldurton

Books

None

Guest Name(s):

Janelle Tang, Michael Levener

Content Warnings:

None

Dave Kellogg
From Schenectady, New York, it's SaaS talk with the metrics brothers, growth and keck. And I'm growth, better known as Ray Reich, founder and CEO of Benchmarking. And I'm Kak, better known as Dave Kellogg, independent consultant, eir at Balderton Capital and the author of Kell blog. And together we are the Metrics brothers. And we go together like fish and chips.

Ray Reich
Hmm. You've been in jolly old England again, huh, Dave? I have, Ray. I literally just had fish and chips for lunch as wild as Lake. So you're doing this podcast from London?

Dave Kellogg
I am indeed. Yeah. I'm hanging out here because we're doing a live event today at Baldurton on the impact of AI on go to market functions. And I got two portfolio companies up there with me, the CMO of Cognism and the CEO of Hook. So it should be a lot of fun.

Ray Reich
AI go to market? Are we talking about that today? No, actually, no, we're not. If we can find a metrics angle, we certainly should, and there are plenty. But today I'd like to do an old fashioned SAS talk episode focused on a single SAS metric.

Dave, you found the SAS metric we haven't talked about already? Well, no, Ray, we haven't gotten everyone. I'm not even sure we're close. If we start to dig deep, we've really just touched on the mainstream metrics thus far. Today I'd like to do what's literally a derivative metric called growth endurance.

Dave, as you know, anything with the acronym GE, I would love talking about. But before we talk about GE, let's hear a word from our presenting sponsor. SAS Talk is presented by Gainsight, the first digital customer platform, including customer success, management, product experience, customer communities, and customer education. Find out why more than 1500 companies, including SaaS leaders like Zoom, Atlassian and Okta, and hundreds of early stage startups, rely on gainsight to efficiently retain and expand existing clients through an integrated digital first post sales customer journey. Gainsight has affordable packages for younger companies and goes live in two to four weeks or less.

C
Visit www.gainsight.com. Now back to the show. Okay, Dave, well, why don't you give the audience a little bit of background on what this ge is talking about? Sure. So there's kind of three inspirations for the episode today.

Dave Kellogg
One is a recent post by our friend Janelle Tang at Bessemer entitled, did growth, endurance endure? That's kind of what inspired me to want to do this episode. In addition, I did a post in 2022 called the rule of 56789 with my friend Michael Levener from Baldurton. And there's an older post from 2015, geez, quite old at this point by Niraj Agrawal called triple, triple, double, double double. And as far as I can tell, he's the person who coined the phrase basically t as it's also known.

Ray Reich
Well, I had a chance to read all of these, and I've been a big fan of Janelle's ever since she joined Bessemer. But are they all basically telling us the same thing? And that is, how fast should we be growing our SaaS company? Dave? Yeah, I do believe that's what they have in common, right?

Dave Kellogg
That they're each trying to answer the question, how fast should we be growing? One metric is growth endurance, which looks at this year's growth compared to last year's growth. The other is the rule of 56789, which really says how long should it take to hit certain ARR milestones. And the last, the t is a very specific rule, perhaps from the more growth at all cost times. That is about once you hit 2 million, what should you do?

Answer triple, triple, double, double, double. So it addresses growth at a very specific range from 2 million to big. Range from 2 million to 144 million. Okay, so let's back up and just kind of be really detailed on growth endurance is calculated by taking this year's growth rate and dividing it by last year's growth rate, correct? Yes, it is.

Janelle in her post calls it growth endurance. And to restate the definition, just like you said, it's this year's growth rate divided by last year's. So if last year I was growing at 100% and this year I'm growing in 80, my growth endurance is 80. 80 divided by 100, that is. So the concept in growth endurance is basically what we might call growth decay or the law of large numbers.

Everybody knows that you can grow really fast when you're really small, right. When you go from one to three, you can triple. Now try going from 1 billion to 3 billion, right. It takes a lot longer. So that's sometimes called the law of large numbers.

That is, with respect to growth, that you grow slower the bigger you get. And growth endurance tries to capture that by saying, well, how much slower as you get bigger should you be growing? The same concept, if you want to be kind of a half full sort of person, you might call it growth retention. Right. How much of our growth did we retain?

If last year we grew 100% and this year we grew 80, you could say that we retained 80% of our growth rate. I think I prefer Ge as a metric, not because you worked there back in the day, but because Gr is a little too close to grR. And GRR is a very different concept. Right. GRR is gross retention rate, and it's basically a customer shrinkage metric.

So rather than kind of tempt fate by having one metric called GR, another called GRR, I think are better off, just call this growth endurance. Now, when I first read Janelle's article, which was what, 2021, it kind of penned growth endurance around 80% was median. I think in year 56789, it was closer to 85%. Is that correct, Dave? Yeah, roughly.

I mean, the guys at Baldurton, Michael in particular, says that he thinks it should be 85. Janelle did a nice little. Not a call, it's just a least squared fit line where she put this year's growth versus last year's growth, and did a least squares line through it, and she came up with 80. I'm not sure where Baldachin came up with 85, but let's just say it was roughly the range that for early stage SaaS companies, and to me that'd be probably above a million and up to a couple hundred million. And ARR, you should be trying to retain 80% of your growth rate, which I thought was a good rule of thumb.

And just to make this concrete what it means, if you grew it 100% to hit ten, so you went from five to ten. If you retain 80% of your growth, then the next year you do 18, and if you retain 80% of 80%, that is 64%, then you grow to 32.4. So it's basically powers of the growth endurance rate, right? 0.8 to the 1.8 to the 2.8 to the three. And that tells you basically the growth retention over time, the growth endurance over time.

Ray Reich
Dave, let's see how good we're getting at this podcast stuff with teases. Should we share what the 2023 growth endurance rate looked like, or should we save that for later in the episode? Oh, you can share it now. Look, I'll share it and we can come back to it, but it's around 65%. I mean, if you're just looking for the answer, the metric that used to kind of track out at around 80 in Janelle's post basically says the new answer is 65.

Dave Kellogg
That is growth endurance. To answer Janelle's question has not endured. The rate has dropped. One more introductory comment on growth endurance, because I know we have a lot of math types. If you think about growth endurance, it's effectively the second derivative, meaning, right, when we all learned kind of physics, we had position and then we had velocity, which is change in position per second.

Then we had acceleration, which was change in velocity, right. This is the same thing, size, growth rate, growth acceleration, or growth endurance. So in some ways, a growth rate is the first derivative of size. Growth acceleration is the second derivative of size. So it's the rate of change in the growth rate.

Ray Reich
For those math people out there, we're going to talk about a potential third degree revenue, but we definitely got to save that until the end of the podcast. Okay, so let's dig into this whole triple, triple, double, double double that you talked about, battery ventures kind of, we think may have coined it in 2015. Well, that post was the first post I could find on a quick search for a reference to it. And it appeared to me it had that feel of a definitive post. It certainly look, the way these things work, Ray, is people start talking about them, you hear about them, and then somebody blogs it.

Dave Kellogg
So it wouldn't surprise me if the concept existed. But in a quick search, I couldn't find an older post on t. In that battery post, they're talking about what it takes to build a billion dollar SaaS business. One of the other funny things about that post, and because of the way he capitalized it, I missed it the first time. But he coined the phrase adventure capitalist as well, because sometimes VC's call it, you know, we're not venture capitalists.

My kid thinks we're an adventure capitalist, which is pretty funny. But. And they cited seven companies, I think, that had followed t pretty much. Marketo, Netsuite, Omnichare, Salesforce, Servicenow, workday, and Zendesk. Now, those are all kind of not just tier a, but kind of tier a plus companies.

So I can tell you right now that hitting t is going to be real hard. Yeah. I mean, because if you really look at those numbers, they say, hey, it may take a year or two, maybe even three, to get to 2 million, but at that point in time, your first triple is to six, your next triple is to 18. Then your first double gets you to 36 million, your next double gets you to 72, and the third double gets you 144 million. That just seems like top decile type growth rates.

Ray Reich
All the anecdotal research I have in my head, Dave. Yeah, look, I was at business objects, which was tier a back in the day, and I think our growth curve was 1618, 30, 50, 80, right? And we went public with most successful IPO of 1995 or 94 maybe it was. So it's very very hard. I personally have worked with only, well, this is objects.

Dave Kellogg
I worked at a company that did this. I guess I worked at Salesforce that did this, but I was there much later. But in terms of the companies I work with today, I've only got one or two that have hit this kind of curve. This in my mind is a best in class curve. Okay, so the market knows about t.

Ray Reich
But you mentioned yun Bolton kind of worked on this rule of 5678 and you have a blog on it. Can you tell us a little bit more about that? Yeah, so the reason Michael and I did the rule of 56789 was because the prevailing rule at the time was really two d three. If somebody said how fast should I be growing? And if they're anywhere between 10 million and 100 million in ARR, they'd refer to t for reasons mentioned.

Dave Kellogg
I think it's just a little too aggressive and almost useless demotivational for many SaaS companies, particularly bootstrapped one or pe owned ones, it's just not realistic. At the time, growth endurance was not really very popular. Today. I think growth endurance is probably the best way to hit this because it kind of scales really well. But it still doesn't answer the question right.

Even growth endurance is just relative to what you were growing the year before. So if you pivot or you reaccelerate, it doesn't work. Or if you're growing too slowly to begin with, it doesn't work. So what I like about the rule of 56789 is it offers kind of hard advice. It doesn't just say, well, how fast are you growing?

And grow 80% of that every year, which can work, but it cannot work. And it doesn't say do this unbelievable trajectory of t. It says and says, look, try to remember these five milestones. 10 million, 20 million, 50 million, 75 million, 100 million. Burn those milestones in your head.

And then five years to 10,000,006 years, to 20,000,007 years, to 50,000,008 years, to 75,000,009 years to 100 million. And if you want to know, by the way, at the time when we did the analysis, if you walked in and you taken seven years to 50 million, you would be in the top quartile of companies that walk through Baldurton's doors because we were driving this off their data set. Note one clarification rate. This is not the same thing as saying grow 100% from ten to 20, because you say, wait a minute, Dave, you see five years to 10,000,006 years to 20 million, and the answer is yes. That's the way the data worked out.

But if you use this model correctly, you may go 16, 13, 21. Right. Like, you don't land on the money on these boundaries or you may land at 15. And that was the pattern we were trying to make buckets and saying, in general, you should take five years to be above 10,000,006 years to be above 20 million. We're not saying hit on the money, because if you do that, the growth rates between the benchmarks actually look kind of silly.

They kind of accelerate and decelerate. But if you actually look at kind of a rule of 56789 compliant company, you could build one that has a very sensible growth retention and a very sensible kind of growth curve. So that's what we were trying to do. Just say, hey, how good am I if I took six years to get to 20 million? Or if you're only at 5 million, how many years should I kind of plan?

If I want to be good, if I want to be top quartile, how many years, when I build my plan, should I have it take to get to 20 million? I'm glad you clarified that, because being one of those math nerds in the audience, when I looked at six years to seven years, it's like, oh, that's really high growth. So what you just said makes a lot of sense. That's the problem with the rule of 56789. If you don't embrace it a little bit and understand what it's saying, if you just look at the growth rates on the demarcations.

Yeah, you get. Wait a minute. You got to grow 100%, then you got to grow over 100%, right? It's 150%, and then you go 25%. It looks kind of crazy, but that's not what it's saying, because in real life, you're landing in these very large buckets.

Ray Reich
So, Dave, as we were preparing for this episode now, we wanted to get into Janelle's question a little bit about the growth endurance endure. And one of the things we looked at was Jameen Ball's cloud of judgment, and he kind of showed a graph from q one of 21 through q four of 23 about net new ARR growth median growth. Why does it look like growth endurance has endured very much over the last couple of years, Dave? Yeah, it hasn't. So first is it actually Jameen or Jemin.

Dave Kellogg
I've never actually talked to him live. I follow his work. I always thought it was like the Marley song. Jammin I'm Jammin. I don't know.

Ray Reich
I did speak to him and he didn't correct me, but, you know, some people are just nice. All right, so we should go find that out because he produces great stuff over at altimeter. Name of his blog is called Cloud of Judgment. If you don't follow it, you absolutely should. And Mister Ball's work, I'll call him that for the time being.

Dave Kellogg
He has a nice chart that shows the software universe. Median net new ARR growth. So it was looking@the.net new, which is net news. It's not really measuring just sales, right? It's measuring sales and churn.

So it's kind of ending our ending ARR focused. But that growth rate, just make sure you understand what you're looking at because it's going to go negative here. At some point during the heyday in two Q 21, it was 73%. So the median company was growing on a net new basis, which is harder than new ARR at 73%. And that has been in like a monotonic drop since then.

It goes 735-34-5229 then in Q 322, it goes negative. It goes negative nine. So while we may be adding new ARR, we're burning off churn faster. So ending ARR shrunk. Net new ARR shrunk and then down 14%, then down 27% in Q 2123.

And we were showing signs of a bounce back. It bounced up to only shrinking 10% in q 223 and then only shrinking, well, actually growing 2% in Q 323, but only to have the kind of the green shoots broken off with a shrinkage in Q 423. I haven't seen Q one numbers yet on this metric, but certainly growth. There's two things going on. One, growth endurance has not endured.

The growth rates are coming down. And two, growth itself has not endured in these cases, net new AR is actually going down, not up. I found it interesting that Mister Ball did this with ARR because as we know, ARR is not a required public company reporting. They do GAAP revenue. And the other thing I really want to highlight is GAAP revenue.

Ray Reich
Yeah, the growth decreased, but we still are seeing 15% to 23% average gap revenue growth rate in the cloud. So I just wanted to make sure we didn't confuse gap revenue with AR. Does that resonate with you, Dave? Look, I think I'm going to guess here, Ray. But most of the people who study public company SaaS and do metrics, they do what I would call implied ARR, which is just four times subscription revenue.

Dave Kellogg
That's what Maritech does. I don't know how else you would do it, because to your point, not enough companies, public companies, report ARR to go run numbers like this. So I'm guessing, Ray, he's getting implied ARR, which is a reasonable proxy, but nevertheless a proxy for ARR. One of the things I would love to talk about, and hopefully it's okay. And that is kind of what's happened to when you bucket these growth rates since January 23 to February 24.

Ray Reich
And I think Janelle did this, but she looked at those companies have grown more than 30% or over the next twelve months, 20% to 30%, ten to 20 in zero to ten. Think it makes sense to go into details here, Dave? Yeah, just a little bit. I mean, the short answer, Ray, is if those are four growth buckets, and this is only slightly exaggerated, everybody take a step left. If you're in the 30% plus bucket, move over to the 20 to 30 bucket.

Dave Kellogg
If you're in the 2030, move over to the ten to 20. It's not quite that dramatic. And then move over to the zero to ten. I mean, look, if you look at this data, 79% are 20% or less growers, which is pretty amazing given how fast SaaS was growing before. I think the median from a different survey was around eleven or twelve.

For public SaaS right now, it was certainly no more than 20. So you're finding that growth has really slowed down. And probably the biggest change here would be the 30% plus growth bucket went from 7% of companies down to 1%. So there's almost nobody growing above 30% right now. And it's not that aggressive growth rate.

So the continuing message is kind of, baby, it's cold out. Yeah, and I did under that. Some people are saying there's green shoots. And this was in Janelle's article. Also in Q one of 24, the median gap growth rate was 11.4%.

So. Right, at 11%, like you said. But Evercore has come out and they're projecting growth rates to return to growing faster again by Q 424. In fact, they're predicting that Q 424 will see about 12.8% growth rate over the 11.4% we saw in Q one. Well, that's nice.

Yeah, I mean, we're all hoping, Ray, as I'm sure you are and I am, that we get some SaaS growth restoring here. So it's good to see that data from Evercore, which you slipped in the script. Thank you. I hadn't seen that before. The other thing I wanted to say, ray, was it is a big deal.

Right? I don't want to be mister negative here, but people are like, hey, it's okay. We're still retaining 65% of our growth rate instead of 80, but this stuff's all compounded. So I'm just going to do quick math. If you take a $10 million SaaS company and it got there growing at 100, like my prior example, so it went from five to ten.

So it was growing 100% when it landed at ten. If you have a 80% growth endurance after five years, you're 189 million. With 65%, you're 122 million. So it almost puts you a full year behind, maybe more on the growth curve. So it is a big deal.

And I do think SaaS companies, as they do their planning, if they have any rational reason to assume they can try to retain 80% of their growth rate, they should. Because once you start dropping, it's going to take you years longer to get to the same array kind of boundaries. Almost like every week. I can't believe how fast 20 minutes goes. So we're going to have to wrap up.

Ray Reich
So why don't we do that with a very simple question I'd like you to answer. Did growth endurance endure? Well, look, the metric did. I think it more than endured. I think it's actually breaking through as a first class SAS metric and one that we should look at.

Dave Kellogg
Did the mean value endure? No, it decayed a few years ago. It used to be 80% was kind of the norm, and now it's down to 65. In which case, by the way, we could start to look at the third derivative, which is the rate of change and the rate of change of growth rate. That is growth endurance retention.

But we could do that on another episode or maybe never. Wait a minute, we've got gr with this growth retention, which we're calling growth endurance. We got GRR, which is gross retention rate. And now you want to introduce GER, the growth endurance retention rate. I was joking, Ray.

I was joking. It would be the third derivative, but yeah, I was joking. Okay. Hey, Dave, thank you so much for calling into SAS talk with the metrics brothers from London. Really appreciate it.

Tally ho, Ray. Tally ho. Thanks. Okay, everyone, enjoy. Listen to the audience.

Ray Reich
Thank you so much for joining Dave and I on this episode of SAS Talk with the Metrics. Brothers. Bye everyone. SAS Talk is a production of the Mettrics Brothers growth in CAC and a member of the Benchmarket podcast Network. By accessing this podcast, you acknowledge that the metrics brothers make no warranty, guarantee or representation as the accuracy or sufficiency of the information presented or the humor content of the jokes provided.

D
Ray, the information, opinions and recommendations presented are, according to our spouses, probably wrong and provided for general information only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, undirect, misdirect, incident, special, ordinary, consequential, inconsequential or other damages arising. Out of any use of or God. Help you reliance upon the information presented here.

Ray Growthreich is based in New York City and available on Twitter x rayreich. Dave Kakkellog is based in Silicon Valley and available at kelblog. Schedecti, which is French for unspellable, is not our actual production location. You can reach us@sastalkpodcastmail.com thanks for listening. Bye.