Sunday, March 01, 2015

Why The Growth Rate Of A Startup Matters So Much - BuzzSumo Reflections

One of the best papers on SaaS startups is the 10 Laws of Cloud Computing by Bessemer. I really love this paper for in-depth insights into what makes SaaS companies successful. It pulls no punches, for example, don't develop services revenue as "it is bad for cloud businesses" and investors "hate" such revenue as it is low gross margin and scalability is restricted to headcount growth. One thing I also love is the focus on the importance of growth.

Compound growth numbers are always surprising but the figures used by Bessemer have always stuck with me.

A $1m company that grows at 100% per annum will be a $1bn company in 10 years. If it grows by 10% if will just be a $2.6m company.

As Bessmer say that is the difference between building something life changing and wasting 10 years of your life.

As the owner or investor in a startup or small company I think you have to focus on the growth rate of your committed monthly recurring revenue (CMRR). Bessemer say this is the most important of all the metrics you can measure. I particularly like this measure as it focuses on real revenue rather than other measures such as say growth in freemium subscribers or leads. It also focuses on the growth month by month which gives you an accurate indication of how the business is performing.

Our BuzzSumo paid Pro product was launched last September, below is the growth in our paying users. We finished February with just below 600 paying customers.

The chart shows a slight flattening out over the Xmas period with an uptick from January.

Our CMRR has fallen back as we have grown but we are still at over 30% a month which is strong.

To Invest or Not To Invest?

Our challenge is to keep growing quickly and to maintain a strong CMRR. Currently we spend virtually nothing on sales and marketing other than our time. We have been fortunate to attract traffic organically. This has been in large part through word of mouth and sharing by people that like the product. We have been very grateful to influencers such as Rand Fishkin, Lee Odden, Larry Kim and others that have recommended BuzzSumo. We have also worked on joint webinars with respected companies such as Wordstream and SEMrush. However, given our desire to increase our growth the question is whether now is the time to invest aggressively in sales and marketing.

Bessemer have produced a very helpful ratio which can help you determine if you should invest aggressively, increasing your level of sales and marketing investment. They created a Customer Acquisition Costs Payback period, which is a figure in months of the time it will take to fully pay back the sales and marketing investment.

In essence Bessemer say if your payback period is less than 6 months you should invest more immediately and "step on the gas" as your customers are probably very profitable. We currently have  a period well below 6 months so based on Bessemer's advice we need to get investing in sales and marketing.

Let's see whether we can become that $1bn company or just another $2.6m company.