Understanding the Mendoza Line for SaaS growth

TechCrunch | 2/9/2018 | Rory O’Driscoll
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Rory O’Driscoll is a partner at Scale Venture Partners.

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Venture - Investor

“How fast do I need to be growing to be interesting to a venture investor?”

This is a question we get asked all the time by CEOs, and we realize “it depends” is not the most actionable answer to give. Instead, we have come up with a simple model that allows us to give a clear numerical answer to this question.

Model - Stage - Life - SaaS - Company

The model allows us to identify, at every stage in the life of a SaaS company, a growth rate, below which that company is not on a clear, venture-backable trajectory. We call the graph of those growth rates the Mendoza Line for Growth. For non-baseball fans, the Mendoza Line is a baseball term for the batting average below which a hitter is not worth hiring for Major League Baseball.

We admit to the massive simplifications of this Mendoza Line model, and recognize several ways to poke holes in the analysis, but we believe that, as for all decision heuristics, the gain in simplification is worth the sacrifice in precision.

Mendoza - Line - Assertions

The Mendoza line is based on just two assertions.

The first is that most venture investors prefer to invest in companies that have at least the chance to become standalone public companies (which is not to say most achieve this objective). Looking at the realistic low bar of what it takes to be a public company, this implies being at run rate revenue (ARR) of $100 million at the time of IPO, while still growing at 25 percent or greater in the following year.

Time - Growth - Rates - Way - Best-in-class

The second is that most of the time, growth rates only decline, but do so in a way that is on average fairly predictable. For a best-in-class SaaS company, the growth rate for any given year is between 80 percent...
(Excerpt) Read more at: TechCrunch
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