Investors and acquirers know there is a huge difference in company value between these two kinds of $5M ARR software companies.
One kind of company will accelerate.
The other kind will decelerate.
What they are worth couldn’t be any more different.
1) $5M ARR the messy way – Deceleration ahead
- High variation in the kinds of customers you have sold to. Big, small, different problems. Don’t say no to any new customers.
- Varied customer base requiring different sales approaches, different marketing channels, different messages.
- Aggressive sales and marketing tactics that create short-term sales boosts but result in high churn and negative reviews.
- Difficulty creating simple messaging with a single strong benefit.
- LTV/CAC ratio of under 3. It’s really expensive to acquire customers.
- NPS score under 20. Some customers are very happy, but most are either disappointed or ambivalent.
- Marketing leads and sales pipeline that is growing but doesn’t have a best-fit customer criteria.
- Decelerating growth with accelerating expenses.
- Lots of competitors in a crowded and stagnant market.
There are lots of these companies, both funded or bootstrapped.
The good news is that it’s an up and running business. Most startups don’t make it this far.
The bad news is this kind of company tends to stall and stop growing. Too expensive and hard to double sales ever again.
It’s more adrenaline, activity, and funding fuel than an efficient, accelerating, and scalable flywheel.
2) $5M SaaS flywheel – Acceleration ahead
- Most existing customers and almost all new customers fit well-defined success criteria or you don’t sell them.
- You scare away and say no to bad-fit customers.
- Accelerating SaaS metrics – raising prices, lower churn, higher LTV, CAC same or decreasing.
- LTV/CAC ratio above 5.
- High NPS above 50, high average product ratings.
- Few competitors in a nascent but growing market.
- Reasonable plan to double revenue efficiently.
- A growing reputation as the best at something important for a specific target market.
- Founder and team agreement on the simple product message and key differentiating benefit for your target.
- Narrow focus for marketing activities and sales channels that reliably attract best-fit customers.
- Financially able to not sell to bad-fit customers to make the numbers.
There is a product-market fit here. And an efficient customer acquisition machine.
Both are powered by happy early customers who want more.
These companies can be lightly funded or bootstrapped. The primary growth funding is revenue from happy customers who pay you.
There are also other operation and internal areas that will help or hurt your growth plans, including your leadership, internal systems, financial controls, company culture, partner relationships, and more.
But those follow the product-customer-revenue virtuous flywheel that is the primary driver of future growth and company value.