Growth Endurance in SaaS - A New Normal?

From Schenectady, New York, it's SAS Talk with the Metrix Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich. Founder and CEO of Benchmarket.

And I'm KaK, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and the author of Kelblog.

And together we are the Metrics Brothers.

And we go together like fish and chips.

Hmm, you've been in jolly old England again, huh, Dave?

I have, Ray. I literally just had fish and chips for lunch. It's why I was late.

Ah, so you're doing this podcast from London.

I am indeed. Yeah, I'm hanging out here because we're doing a live event today at Balderton on the impact of AI on go-to-market functions. And I got 2 portfolio companies up there with me, the CMO of Cognism and the CEO of Hook. So it should be a lot of fun.

Ooh, AI and go-to-market. Are we talking about that today?

No, actually, no, we're not. If we can find a metrics angle, we certainly should. And there are plenty. So, but today I'd like to do an old-fashioned SAS Talk episode focused on a single SAS metric.

Dave, you found a SAS metric we haven't talked about already?

Well, no, Ray, we haven't gotten everyone. I'm not even sure we're close if we start to dig deep. We've really just touched on the kind of mainstream metrics thus far. Today, I'd like to do what's literally a derivative metric called growth endurance.

Dave, as you know, anything with the acronym GE, I would love talking about. But before we talk about GE, let's hear a word from our presenting sponsor. The Metrix Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grothright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast. Okay, Dave, well, why don't you give the audience a little bit of background on what this GE's talking about?

Sure. So there's kind of 3 inspirations for the episode today. One is a recent post by our friend Janelle Tang at Bessemer entitled Did Growth Endurance Endure? That's kind of what inspired me to want to do this episode. In addition, I did a post in 2022 called The Rule of 5, 6, 7, 8, 9 with my friend Michael Levner from Balderton. And there's an older post from 2015. So, Geez, quite old at this point, by Niraj Agrawal called Triple Triple Double Double Double. And as far as I can tell, he's the person who coined the phrase, basically T2D3, as it's also known.

Well, I had a chance to read all of these, and I've been a big fan of Janelle's ever since she joined Bessemer. But aren't they all basically telling us the same thing? And that is, how fast should we be growing our SaaS company, Dave?

Yeah, I do believe that's what they have in common, right? That they're each trying to answer the question, how fast should we be growing? One metric is growth endurance, which looks at this year's growth compared to last year's growth. The other is the rule of 5, 6, 7, 8, 9, which really says how long should it take to hit certain ARR milestones. And the last, the T2D3, is a very specific rule, perhaps from the more growth at all costs times, That is about once you hit $2 million, what should you do? Answer: triple, triple, double, double, double. So it addresses growth at a very specific range from $2 million to— it's a big range— from $2 million to $144 million.

Okay, so let's back up and just kind of be really detailed on growth endurance. It's calculated by taking this year's growth rate and dividing it by last year's growth rate, correct?

Yes. And it is, Janelle in her post calls it growth endurance. And to restate the definition, just like you said, it's this year's growth rate divided by last year's. So, if last year I was growing at 100% and this year I'm growing at 80%, my growth endurance is 80, 80 divided by 100, that is. So, the concept in growth endurance is basically what we might call growth decay or the law of large numbers. Everybody knows that you can grow really fast when you're really small, right? When you go from 1 to 3, You could triple. Now try going from $1 billion to $3 billion, right? It takes a lot longer. So that's sometimes called the law of large numbers, i.e., with respect to growth, that you grow slower the bigger you get. And growth endurance tries to capture that by saying, well, how much slower as you get bigger should you be growing? The same concept, if you want to be kind of a half-full sort of person, you might call it growth retention, right? How much of our growth did we retain? If last year we grew 100%, And this year we grew 80, you could say that we retained 80% of our growth rate. I think I prefer GE as a metric, not because you worked there back in the day, but because GR is a little too close to GRR. And GRR is a very different concept, right? GRR is gross retention rate, and it's basically a customer shrinkage metric. So rather than kind of tempt fate by having one metric called GR and another called GRR, I think we're better off just to call this growth endurance.

Now, when I first read Janelle's article, which was what, 2021, it kind of pinned growth endurance around 80% was median. And I think in your 5, 6, 7, 8, 9, it was closer to 85%. Is that correct, Dave?

Yeah, roughly. I mean, the guys at Balderton, Michael in particular, says that he thinks it should be 85%. Janelle did a nice little Not a call, it's just a least squared fit line where she put this year's growth versus last year's growth and did a least squares line through it. And she came up with 80. I'm not sure where Balderson came up with 85, but let's just say it was roughly the range that for early-stage SaaS companies, and to me, that'd be probably above $1 million and up to a couple hundred million in ARR, you should be trying to retain 80% of your growth rate, which I thought was a good rule of thumb. And just to make this concrete, what it means if you grew at 100% to hit 10, So, you went from 5 to 10. If you retain 80% of your growth, then the next year you do 18. And if you retain 80% of 80%, i.e., 64%, then you grow to 32.4. So, it's basically powers of the growth endurance rate, right? 0.8 to the 1, 0.8 to the 2, 0.8 to the 3. And that tells you basically the growth retention over time, the growth endurance over time.

Hey, Dave, let's see how good we're getting at this podcast stuff with teases. Should we share what the 2023 growth endurance rate looked like, or should we save that for later in the episode?

Oh, well, you can share it now. Look, I'll share it and we can come back to it, but it's around 65%. I mean, if you're just looking for the answer, the metric that used to kind of track out at around 80 in Janelle's post basically says the new answer is 65, i.e., growth endurance, to answer Janelle's question, has not endured. The rate has dropped. One more introductory comment on growth endurance because I know we have a lot of math types. If you think about growth endurance, it's effectively the second derivative. Meaning, when we all learned kind of physics, we had position and then we had velocity, which is change in position per second, then we had acceleration, which was change in velocity. This is the same thing: size, growth rate, growth acceleration, or growth endurance. So, in some ways, the growth rate is the first derivative of size, Growth acceleration is the second derivative of size, so it's the rate of change in the growth rate.

For those math people out there, we're going to talk about a potential third derivative, but we definitely got to save that until the end of the podcast. Okay, hey, so let's dig into this whole triple triple double double double that you talked about. Battery Ventures kind of, we think, may have coined it in 2015.

Well, that post was the first post I could find on a quick search. for a reference to it. And it appeared to me it had that feel of a definitive post. It certainly— look, the way these things work, Ray, is people start talking about them, you hear about them, and then somebody blogs it. So it wouldn't surprise me if the concept existed, but in a quick search, I couldn't find an older post on T2D3. And in that Battery post, they're talking about what it takes to build a billion-dollar SaaS business. One of the other funny things about that post, and because of the way he capitalized it, I missed it the first time, But he coined the phrase adventure capitalist as well, because sometimes VCs call it, you know, we're not venture capitalists. You know, my kid thinks we're an adventure capitalist, which is pretty funny. But, and they cited 7 companies, I think, that had followed T2D3 pretty much: Marketo, NetSuite, Omnichannel, Salesforce, ServiceNow, Workday, and Zendesk. Now, those are all kind of not just tier A, but kind of tier A+ companies. So I can tell you right now that hitting T2D3 is going to be real hard.

Yeah, I mean, because if you really look at those numbers, they say, hey, it may take a year or 2, maybe even 3 to get to $2 million. But at that point in time, your first triple is to $6 million, your next triple is to $18 million, then your first double gets you to $36 million, your next double gets you to $72 million, and the third double gets you $144 million. That just seems like top decile type growth rates from all the anecdotal research I have in my head, Dave.

Yeah, look, I was at Business Objects, which was Tier A+ back in the day, and I think our growth curve was 1, 6, 18, 30, 50, 80, right? And we went public with the most successful IPO of 1995 or '94, maybe it was. So, it's very, very hard. I personally have worked with only— well, Business Objects, I've worked at a company that did this. I guess I worked at Salesforce that did this, but I was there much later. But in terms of the companies I work with today, I've only got 1 or 2 that have hit this kind of curve. This, in my mind, is a best-in-class curve.

Okay. So the market knows about T2D3, but you mentioned you and Bolderton kind of worked on this rule of 5, 6, 7, 8, and you have a blog on it. Can you tell us a little bit more about that?

Yeah. So the reason Michael and I did the rule of 5, 6, 7, 8, 9 was because the prevailing rule at the time was really T2D3. If somebody said, how fast should I be growing? And if they're anywhere between $10 million and $100 million in ARR, they'd refer to T2D3. And for reasons mentioned, I think it's just a little too aggressive and almost useless/demotivational for many SaaS companies, particularly bootstrapped ones or PE-owned ones, right? It's just not realistic. And at the time, growth endurance was not really very popular. Today, I think growth endurance is probably the best way to hit this Because it kind of scales really well, but it still doesn't answer the question, right? Even growth endurance is just relative to what you were growing the year before. So if you pivot or you reaccelerate, it doesn't work. Or if you're growing too slowly to begin with, it doesn't work. So what I like about the rule of 5, 6, 7, 8, 9 is it offers kind of hard advice. It doesn't just say, well, how fast are you growing? And grow 80% of that every year, which can work, but it cannot work. And it doesn't say do this unbelievable trajectory of T2D3, it says, and says, look, try to remember these 5 milestones: 10 million, 20 million, 50 million, 75 million, 100 million. Burn those milestones in your head. And then 5 years to 10 million, 6 years to 20 million, 7 years to 50 million, 8 years to 75 million, 9 years to 100 million. And if you want to know, by the way, at the time when we did the analysis, if you walked in and you'd taken 7 years to 50 million, you would be in the top quartile of companies that walk through Baldridge's doors. So, because we were driving this off their dataset. Note one clarification, Ray. This is not the same thing as saying grow 100% from 10 to 20, right? Because you say, wait a minute, Dave, you see 5 years to $10 million and 6 years to $20 million. And the answer is yes, that's the way the data worked out. But if you use this model correctly, you may go 1, 6, 13, 21, right? You don't land on the money on these boundaries, or you may land at 15. And that was the pattern. We were trying to make buckets and saying, in general, you should take 5 years to be above $10 million, 6 years to be above $20 million. We're not saying hit on the money, because if you do that, the growth rates between the benchmarks actually look kind of silly. They kind of accelerate and decelerate. But if you actually look at kind of a rule of 5, 6, 7, 8, 9 compliant company, you could build one that has a very sensible growth retention and a very sensible kind of growth curve. So that's what we were trying to do, just say, hey, how good am I if I took 6 years to get to $20 million? Or if you're only at $5 million, how many years should I kind of plan if I want to be good, if I want to be top quartile? How many years when I build my plan should I have it take to get to $20 million?

I'm glad you clarified that because being one of those math nerds in the audience, when I looked at 6 years to 7 years, it's like, oh, that's really high growth. So what you just said makes a lot of sense. Well, let's go ahead and move on.

That's the problem with the rule of 5, 6, 7, 8, 9. If you don't embrace it a little bit and understand what it's saying, if you just look at the growth rates on the demarcations, yeah, you get, wait a minute, you got to grow 100%, then you got to grow over 100%, right? It's 150%, and then you grow 25%, right? It looks kind of crazy, but that's not what it's saying because in real life you're landing in these very large buckets.

So Dave, as we were preparing for this episode, We wanted to get into Janelle's question a little bit about did growth endurance endure? And one of the things we looked at was Jamin Ball's Clouded Judgment, and he kind of showed a graph from Q1 of '21 through Q4 of '23 about net new ARR growth, median growth. Boy, it doesn't look like growth endurance has endured very much over the last couple years, Dave.

Yeah, it hasn't. So first, is it actually Jamin or Jamin? I've never actually talked to him live. I follow his work.

I always thought it was like the Bob Marley song, Jammin', I'm jammin'.

I don't know. I did speak to him and he didn't correct me, but, you know, some people are just nice.

All right, so we should go find that out because he produces great stuff over at Altimeter. The name of his blog is called Clouded Judgment. If you don't follow it, you absolutely should. And Mr. Ball's work, I'll call him that for the time being, he has a nice chart that shows the software universe median net new ARR growth. So I was looking at the net new, which is net news. It's not really measuring just sales, right? It's measuring sales and churn. So it's kind of ending ARR focused. But that growth rate, just make sure you understand what you're looking at because it's going to go negative here at some point during the heyday in Q21. It was 73%. So the median company was growing on a net new basis, which is harder than new ARR, at 73%. And that has been in like a monotonic drop since then. It goes 73%, 53, 45, 22, 9. Then in Q3 '22, it goes negative. It goes negative 9. So while we may be adding new ARR, we're burning off churn faster. So ending ARR shrunk, net new ARR shrunk, and then down 14%, then down 27% in Q1 '23. And we were showing signs of a bounce back. It bounced up to only shrinking 10% in Q2 '23, and then only shrinking— well, actually growing. 2% in Q3 '23, but only to have the kind of the green shoots broken off with a shrinkage in Q4 '23. I haven't seen Q1 numbers yet on this metric, but certainly growth— there's 2 things going on. One, growth endurance has not endured. The growth rates are coming down. And 2, growth itself has not endured. In these cases, net new ARR is actually going down, not up.

You know, I found it interesting that Mr. Ball did this with ARR because, as we know, ARR is not a required public company reporting. They do GAAP revenue. And the other thing I really wanna highlight is GAAP revenue. Yeah, the growth decreased, but we still are seeing, you know, 15 to 23% kind of average GAAP revenue growth rate in the cloud. So I just wanted to make sure we didn't confuse GAAP revenue with ARR. Does that resonate with you, Dave?

Look, I think I'm going to guess here, Ray, but most of the people who study public company SaaS and do metrics, they do what I would call implied ARR, which is just 4 times subscription revenue. That's what Maritech does. I don't know how else you would do it because to your point, not enough companies, public companies, report ARR to go run numbers like this. So I'm guessing, Ray, he's He's getting implied ARR, which is a reasonable proxy, but nevertheless a proxy for ARR.

Yeah. Now, one of the things I would love to talk about, and hopefully it's okay, and that is kind of what's happened to when you bucket these growth rates over since January '23 to February '24. And I think Janelle did this, but she looked at, you know, those companies have grown more than 30% or over the next 12 months, 20 to 30%, 10 to 20%, and 0 to 10%. Think it makes sense to go into details here, Dave?

Yeah, just a little bit. I mean, the short answer, Ray, is if those are 4 growth buckets, and this is only slightly exaggerated, everybody take a step left. If you're in the 30% plus bucket, move over to the 20 to 30 bucket. If you're in the 20 to 30, move over to the 10 to 20. It's not quite that dramatic. And then move over to the 0 to 10. I mean, look, If you look at this data, 79% are 20% or less growers, which is pretty amazing given how fast SaaS was growing before. I think the median from a different survey was around 11 or 12 for public SaaS right now. It was certainly no more than 20. So you're finding that growth has really slowed down. And probably the biggest change here would be the 30% plus growth bucket went from 7% of companies down to 1%. So there's almost nobody growing above 30% right now, and it's not that aggressive growth rate. So, so, you know, the continuing message is kind of, baby, it's cold out.

Yeah. And I did, under that, some people are saying there's green shoots, and this was in Janelle's article also. In Q1 of '24, the median GAAP growth rate was 11.4%. So right at 11%, like you said, but Evercore has come out And they're projecting growth rates to return to growing faster again by Q4 '24. In fact, they're predicting that Q4 '24 will see about 12.8% growth rate over the 11.4% we saw in Q1.

Well, that's nice. Yeah, I mean, we're all hoping, Ray, as I'm sure you are and I am, that we get some SaaS growth restoring here. So it's good to see that data from Evercore, which you slipped in the script. Thank you. I hadn't seen that before. The other thing I wanted to say, Ray, was it is a big deal, right? I don't want to be Mr. Negative here, but people are like, hey, it's okay. We're still retaining 65% of our growth rate instead of 80%. But this stuff's all compounded. So I'm just going to do quick math. If you take a $10 million SaaS company and it got there growing at 100%, like my prior example, so it went from 5 to 10, so it was growing 100% when it landed at 10. If you have an 80% growth endurance, after 5 years, you're $189 million. With 65%, you're $122 million. So it almost puts you a full year behind, maybe more, on the growth curve. So it is a big deal. And I do think SaaS companies, as they do their planning, if they have any rational reason to assume they can try to retain 80% of their growth rate, they should. Because once you start dropping, it's going to take you years longer to get to the same ARR kind of boundaries.

Almost like every week, I can't believe how fast 20 minutes goes. So we're going to have to wrap up. So why don't we do that with a very simple question I'd like you to answer? Did growth endurance endure?

Well, look, the metric did. I think it more than endured. I think it's actually breaking through as a first-class SaaS metric and one that we should look at. Did the mean value endure? No, it decayed. A few years ago, it used to be 80% was kind of the norm, and now it's down to 65%. In which case, by the way, we could start to look at the 3rd derivative, which is the rate of change in the rate of change in growth rate, i.e., growth endurance retention. But, we could do that on another episode or maybe never.

Wait a minute. We've got GR, which is growth retention, which we're calling growth endurance. We got GRR, which is gross retention rate, and now you want to introduce GER, the growth endurance retention rate?

I was joking, Ray. I was joking. I mean, it would be the third derivative, but yeah, I was joking.

Okay. Hey, Dave, thank you so much for calling into SAS Talk with the Metrics Brothers from London. Really appreciate it.

Tally ho, Ray. Tally ho. Thanks.

Okay, everyone, enjoy the rest of the audience. Thank you so much for joining Dave and I on this episode of SAS Talk With the Metrics Brothers. Bye, everyone.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Bench Market Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray? Information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or for that matter unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of or God help you reliance upon the information presented here. Ray Grothreich is based in New York City and available on X at Ray Reich. Dave Kellogg is based in Silicon Valley and available on X at Kellogg. Schadecity, which is French for unspellable, is not our actual production location. Thanks for listening.

Bye-bye.