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Building a product vs. an organization

And why it's okay if the latter doesn't work out

“Lol. Why would someone sell their SaaS business at $2M ARR?”

A comment under one of my recent posts.

The argument: You can assume product-market fit, so you will easily make it to $5M+ ARR.

As most of you know, it's not nearly that simple.

Let’s leave aside the fact that there are many reasons why someone might want to exit regardless of size.

This leaves two main groups of founders looking to sell in lower ARR ranges:

  1. Founders who never wanted to build a large company.

  2. Founders who wanted to build a large company – and failed.

Not a question of ambition, but of constant self-reflection.

Level 1: Building a strong product

Mandatory for both groups. The journey to $1-3M ARR often stems from strong product-market fit.

Revenue growth is proof of the product’s strength and understanding of customers' needs.

You will be surprised how few resources are required to get there. I know quite a few founders who made it to $2M+ ARR almost single-handedly.

Check out the stories of two of our portcos: Todd (Prerender) and Dan (Scraper API).

For average figures, see SaaS Capital benchmarks for revenue/employee:

Source: SaaS Capital

You can get to $1M with ~10-15 employees. And to 5M ARR with a team size of ~30-40.

In my view, this applies to both VC-backed and bootstrapped SaaS (also with regard to my polarizing post on org structure).

The only difference here may be speed due to higher R&D and S&M budgets.

This is supported by SaaS Capital data. I consider the higher G&A costs to be of little value.

Source: SaaS Capital

Whether you try or not, most SaaS startups will never get past Level 1.

And that's okay!

These businesses will be primarily defined by their strong product, less by their organization. Until exit, they can continue to serve happy clients and exist/grow sustainably.

Level 2: Building a robust organization

Surpassing a certain mark typically requires a shift in focus. From pure product development to building a robust organization.

Not every founder is comfortable or interested in making this shift. However, it lays the foundation for future growth.

I've rarely seen a SaaS company make it to $5M+ ARR without going through this transition.

It usually includes expanding the team, establishing processes, introducing strategic planning, cultivating company culture, and often, diluting founder's control and vision for the company.

You have to want it, otherwise you will probably never be able to enjoy the ride. Harry Stebbings put it well:

Source: LinkedIn

While scaling a company is a complex challenge to master, it also requires a lot of perseverance.

As you can see in the chart from Baremetrics, the few that make it to $10M ARR take 9+ years.

Source: Baremetrics

There is another one from ChartMogul. 39% reach $3M ARR after 10 years, but only 13% make it to $10M.

Source: ChartMogul SaaS Growth Report (2023)

If you don’t succeed, you still have the chance to return to level 1. In most cases, however, only with drastic cuts. Taking Pitch.com as the latest example.

Nevertheless, I encourage founders to consider this tough step at each stage depending on the traction.

Better "only" a strong product than no business at all.