The Mendoza Line For SaaS Growth

THE MENDOZA LINE FOR SAAS GROWTH IS YOUR COMPANY GROWING FAST ENOUGH TO IPO? RORY O’DRISCOLL Partner Scale Venture Partners @rodriscoll

The Mendoza Line for SaaS Growth - Is your company growing fast enough to IPO? Rory O’Driscoll Partner Scale Venture Partners @rodriscoll

Every founder asks: The • How fast do we need to grow Question to eventually IPO? • Can I raise venture dollars along the way?

The Mendoza Line for SaaS growth: • Answers those questions at The any revenue stage Answer • Uses just 3 assumptions backed by data from successful SaaS exits

The Disclaimer “It’s me. Not you.”

The Mendoza Line for SaaS Growth Assumption One VC’s are upside junkies

Assumption One: Pretty Well Understood What this means for you: The main value to a VC of a $1MM Venture investing to $10MM ARR company is its • Ultimately the great deals drive the fund return potential to scale to $100MM+ • We cannot know beforehand which investments will be great There is no value investing in venture • So we have to only do deals that have a chance to “return the fund”

The Mendoza Line for SaaS Growth Assumption Two The low-endthreshold for a successful IPO is: • Reaching $100MM+ ARR • With next year’s ARR growth of >25%

Assumption Two: Pretty Clear from the Data 2016-2018 SaaS IPOs 120% 100% 80% IPOat te60% a R h wtro40% G 20% 0% 0 100 200 300 400 500 600 ARR at IPO

The Mendoza Line for SaaS Growth Assumption Three Growth rates decline as revenue increases but in a somewhat surprising way

Assumption Three: Not as Obvious Revenue growth rates decline And that rate is At a fairly predictable rate… Y/Y as revenue increases… independent of the growth rate* Obvious Not so obvious Not obvious at all We call this “Growth Persistence” It implies that the future growth of a SaaS company can be estimated from its past growth rate times Growth Persistence *Within a range of between 20% and 100%

Turns Out to Be True: Growth Persistence Is a Thing SaaS Comps –2011 to 2016 100% 80% et 60% a R hwt 40% roG y = 0.82x 2 r 20% R² = 0.77 Yea 0% -40% -20% 0% 20% 40% 60% 80% 100% 120% -20% Year 1 Growth Rate

Growth Persistence Allows Us to Estimate Future Growth 1 Company A Company B 100% 80% Option Year 1 Growth Rate Year 1 Growth Rate 0.82 0.82 Growth Persistence Factor Growth Persistence Factor 82% 65% Year 2 Estimated Growth Rate Year 2 Estimated Growth Rate

Predicting Long-Term IPO Trajectory Using Growth Persistence Core assumption: IPO threshold is $100MM+ ARR with forward growth >25% Example: Starting at $10MM ARR Yr-1 Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Company A ARR ($ MM) $5.0 $10.0 $18.2 $30.4 $47.2 $68.6 $94.0 $122.6 $153.1 Trailing Y/Y 100% 82% 67% 55% 45% 37% 30% 25% Growth (%) Yr-1 Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Company B ARR ($ MM) $5.6 $10.0 $16.5 $25.4 $36.6 $49.9 $64.6 $80.3 $96.3 Actual Y/Y 80% 65% 54% 44% 36% 30% 24% 20% Growth (%)

Mendoza Line for SaaS Growth The Definition At any given revenue run rate there is an associated minimum forward growth rate required to be attractive to VC investors We call this the Mendoza Line

The Mendoza Line for SaaS Next Year’s ARR Growth Rate % Current ARR ($ MM) $1 $5 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Mendoza Line Growth Rate 140% 94% 77% 62% 51% 46% 40% 36% 33% 30% 28% 25% Years to $100MM ARR 8.5 7.0 6.0 4.5 4.0 3.0 2.5 2.0 1.5 1.0 0.5

Keeping Above the Mendoza Line Is the Surest Track to IPO This plot of top SaaS IPOs gives us confidence that the Mendoza Line is a reliable rule of thumb… but there are exceptions

Consistent with other VC concepts It’s possible to raise VC $ below like “Triple, Triple, Double, Double, the Mendoza Line, just a lot harder Double” but more realistic A Useful Heuristic. Growth re-acceleration Not a Law Diagnosis is not death… doesn’t happen all that often but change is hard (Growth Persistence >1.0) of Physics. Public SaaS Comps Only 30%re-accelerated for 1 year Only 10%re-accelerated for 2 years

Diagnosis Is Not Death: Change Is Possible with Concentrated Effort Potential levers: 2012 Improving churn 2010 2010 Hiring/replacing execs 2009 Retooling the GTM model Product execution Diagnosis is not death…but insanity is repeating the past and expecting the outcome to be different

The Mendoza Line answers the question: At any stage, how fast should a SaaS company be growing to raise VC money? Summary It’s a prediction not a law but it has a R2 of 77% You can You can But you have beat the odds ignore it entirely to assumeit is how with improved execution if you generate cash most VC’s will think (e.g., Atlassian) Your $10MM, cash burning, 50% growth SaaS company could struggle to raise VC $

THANK YOU