So you want to scale your company to $100 million dollars in annual recurring revenue? Well Bessemer Venture Partners lays out a great playbook although it's from 2021 and the 2023 metrics that the current capital markets are asking for are a small or giant leap depending on where you are in the growth stage of your cloud or saas company. Some of the great things the playbook describes is:
"Enterprise segments tend to have long lifetimes and therefore high CLTVs and SMB short lifetimes and therefore lower CLTVs, thereby supporting significantly different customer acquisition cost structures."
The other great metric that is often overlooked and not talked about because a focus on growth at all costs and a ton of cash being thrown at getting there no matter the method as long as growth of ARR is achieved is Cash Conversion Score. If you can build a company with a great CCS then thats a company that I would want to invest in. Below is BVP breakdown of cash conversion score:
"The Cash Conversion Score (CCS) is another metric that we often use to evaluate whether or not the capital that cloud companies raise and consume is generating a meaningful return. As the ratio of the ARR to total capital invested into a company minus cash, the Cash Conversion Score is effectively the return-on-investment of each dollar ever invested into a company. For both founders and investors, the Cash Conversion Score is, therefore, a powerful proxy for returns. If a company has a CCS of 1.0x, one dollar of investment into the business yields one dollar of topline recurring revenue. If we assume that the average cloud company gets a 10x revenue multiple (more in-line with historical norms vs. the 23x revenue multiple of ^EMCLOUD today), the one dollar of revenue multiplied by the 10x multiple equals $10 of enterprise value. Every dollar put into the company is getting a 10x return. Similarly, a company with a 0.1x CCS would only return the capital invested. ROI is not driven by Cash Conversion Score directly, but CCS indicates multi-year trends in a couple of incredibly important things, including product-market fit and a scalable sales and marketing organization. It is therefore a core KPI we track in evaluating cloud businesses.
The average Cash Conversion Score for cloud companies tends to increase as it matures, from an average of almost 0.5x from $1-10MM of ARR to almost 1x at $100MM+. For cloud companies, revenue generation tends to lag spending and only the strongest companies will scale to the $100MM+ mark where they are seeing the most leverage from their operating model.
One of the strongest companies on this metric—from the start—has been our portfolio company Zapier, which has raised only $1.3MM in its lifetime and announced in March 2021 that it exceeded $140MM of ARR. While we don’t hold every company to this CCS efficiency, we look for companies with best-in-class CCS of 1x+.
For the full playbook and help scaling your startup to over 100 million in 2023 visit: https://www.bvp.com/atlas/scaling-to-100-million
