Accelerating SaaS Growth

To attract VC funding on favorable terms, SaaS founders must demonstrate exponential growth or show a realistic path to achieving it. So what are the activities that unlock such growth in a startup? Spoiler alert: exponentially scaling the sales team is not one of them.

Accelerating SaaS Growth

The T2D3 formula, “triple triple double double double”, is often used as a benchmark for measuring the performance of a SaaS startup.

A company with $2M in ARR that targets achieving $100M in ARR and a billion-dollar valuation in 5 to 6 years must triple its revenue during the first two years and double it during each of the subsequent three.

To attract VC funding on favorable terms, startup founders must demonstrate T2D3-like growth or show a realistic path to achieving it.

The T2D3-like pattern, where a value triples or doubles over a constant period, implies exponential growth. Therefore, VC-funded startups or startups seeking VC funding must grow exponentially.

It is crucial for startup founders to master activities that unlock exponential growth in their businesses.

Startup growth can be illustrated with a simplified system dynamics rendering of the Bass diffusion model shown below.

The model has two stocks, Potential Customers and Customers, connected with a flow. The founder's goal is to efficiently convert potential customers into customers and deliver exponential growth in the number of customers.

There are two ways for a SaaS business to acquire customers. First, customers can be acquired using outbound sales activities: cold calls, email campaigns, advertising, etc. Second, customers can be acquired by responding to inbound requests from prospects who learned about the company through word of mouth.

To compare the two customer acquisition routes, let’s use a live simulation of the Bass model, implemented in Vensim and hosted on Morebell as a microapp:

First, disable the word-of-mouth loop by moving the Adoption Fraction and the Contact Rate sliders all the way to the left, that is, by making them 0’s. This produces a graph that is almost linear.

Now double Sales Effectiveness by moving the corresponding slider from 0.010 to 0.020. The number of users goes up from 40,000 to 80,000.

Based on this experiment, we can reasonably conclude that working harder does not unlock exponential growth. The effect is linear at best. Doubling the number of sales meetings produces only twice as many customers.

Next, move the Contact Rate slider to 60 and the Adoption Fraction to 0.020. Observe the beautiful exponential growth curve. The number of customers in year 6 is 800,000, which is an order of magnitude higher than we could achieve by doubling sales effectiveness.

The Contact Rate parameter is the number of contacts per year that a customer has with other customers and non-customers. The Adoption Fraction parameter is the fraction of the contacts that convert to new customers.

According to the model, to achieve exponential growth, the company must reach a tipping point that is defined as:

Contact Rate * Adoption Fraction * Customer Lifetime * (PC/(C+PC)) > 1

where PC and C are the numbers of potential customers and customers respectively. The PC/(C+PC) expression is the probability of customer contact with a non-customer.

In the case of T2D3 growth, the value of the tipping point formula must yield 3 during the first two years. That is, every existing customer must help you acquire 2 new ones.

All models are famously wrong, but some are useful. The Bass model is particularly handy. It provides everything that a founder needs to know to go exponential.

One can maximize exponential growth by maximizing the terms in the tipping point formula.

Maximizing PC/(C+PC) implies going after a large and untapped market.

A longer Customer Lifetime can be achieved by developing a sticky product that continuously delivers value. Customers must stick around long enough to “infect” others with their enthusiasm.

One can maximize the Contact Rate by designing a product that enables essential interactions between customers and potential customers.

Market segmentation, positioning, and targeting are key to maximizing the Adoption Fraction. A doctor using a service, for instance, is more likely to share their experience with another doctor.

“Experience” is the secret keyword. People never share sales collateral. However, they do eagerly share knowledge and experiences.

In summary, scaling outbound selling is not enough. To achieve exponential growth, founders must deliver rich product buyer and user experiences that can spread through word of mouth in an untapped homogenous market segment.

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