So recently I caught up with a great founder and a beloved product. They rocketed to $20m ARR, and then … growth radically slowed. To 15% a year.
From 100% growth at $10m ARR, to 15% at $20m ARR.
That’s rough. But rapidly slowing growth has happened to many the past 24 months. The tough part? The burn and the churn.
The burn was at a stunning $2m a month, and the churn had spiked. True NRR had probably fallen to 80% or so.
Look, this is tough. It’s sort of a death spiral:
- High churn, but no burn = struggle, but the engine self-perpetuates to an extent.
- High NRR, but high burn = tough, but your 140%+ NRR ultimately often pulls you through.
Those two are tough but founders find a way. What’s really hard to solve is The 3H’s: High Growth for a while — but High Churn. And High Burn.
VCs often enable these models. The bigger funds are wired to fund hyper growth and high burn together. Blitz scaling. But you have to make 1000% sure this playbook actually works for you.
The big D2C failures are prime examples. Selling meal boxes to customers that never come back and purchase again can look great at first, but these models can collapse with 5%+ churn a month. But the initial glow of hypergrowth blinds folks to the perils of high churn + high burn.
So what’s the point here? It’s not to be a critic. No the point is this isn’t D2C, it’s B2B. That means you can probably fix this situation — if you act soon enough:
- Relentlessly attack churn. Don’t disguise it in growth and/or venture capital. Yes, HubSpot didn’t get to 100% NRR until well past $30m ARR. But we aren’t all HubSpot. And even there — they were still very disciplined in the burn. They weren’t a 3H startup.
- You gotta stick to a burn rate budget in general, but especially in a higher churn environment. You have to be relentless to make sure you don’t burn more than planned. You don’t have 140% NRR to bail you out the next year. You can be a bit looser in general with 140%+ NRR and 80% gross margins. If that’s not you, be super cautious about missing the burn rate budget.
- Be even more careful if your gross margins are <70% or so. SaaS + hardware, SaaS + payments, etc. can be great. But they often have much lower gross margins than pure software. So be extra careful here — you have to be even more efficient than pure SaaS.
Don’t just take it from me. Listen to the co-founders of HubSpot. You just gotta get to 100%+ NRR with sustainable unit economics. Even from SMBs:
Too many founders just ignore the issues when growth is High. But while you can put off some of the issues like HubSpot did, you have to eventually deal with them. At least don’t spend all the money.
Rag & Bone is selling to Guess $GES for $56m on ~$250m of revenue.
A brand that previously held a premium aesthetic raised a growth round in 2013 from Irving Capital (7 For All Mankind, Aeropostale, Stuart Weitzman), but ultimately wasn’t able to sustain its growth. pic.twitter.com/3K7wUTiyul
— Fan Bi (buying $5-30M DTC brands) (@lifeofbi) February 20, 2024
The post The Riskiest Venture-Backed Startups Are 3H’s: High Growth, High Churn and High Burn appeared first on SaaStr.
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Jason Lemkin, Khareem Sudlow
