The New SaaS Mendoza Line - Growth Expectations for a SaaS IPO

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, the founder and CEO of Benchmarkit.

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

And together we are the Metrics Brothers.

And we go together like crayons and lines.

Crayons and lines. Oh, you mean like color within the lines today?

I, I do, Ray. I was going to talk about mirrors and lines or $100 bills and lines, but I thought that would kind of be too '80s.

Yes, it is. It's a little too risqué for me. But now I know why you want to talk about lines today, because we're We're gonna talk about the Mendoza Line.

Yes, the Mendoza Line, which is tied to a baseball player, Mario Mendoza. And I recently learned after blogging about this, not to an episode of How I Met Your Mother. So we'll be talking about the Mendoza Line is inspired by scale based upon the baseball player, Mario Mendoza.

Gotcha, okay. We're gonna talk about the Mendoza Line from scale, but before we do that, and before we cross over to a SaaS metric that I love, Let's hear a word from our sponsor. The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright 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 @kellogg and Ray on LinkedIn @rayreich. Thank you so much for listening to the Metrics Brothers podcast. Okay, Dave, let's get into this Mendoza Line. And can you talk a little bit about the background of it?

Sure. So, so as you know, Ray, I get intrigued by things when I don't know what they are. So I heard of this Mendoza Line thing. So they kind of hooked me if I was a fish. I was like, ooh, I have to go learn what the Mendoza Line is. And it's, it's As it turns out, it's a concept from baseball inspired by a player named Mario Mendoza. And it's kind of an interesting metric in my mind because Mario Mendoza was one of the best defensive shortstops in Major League Baseball, but he couldn't hit. In fact, he struggled to hit above .200 in terms of his batting average. So the Mendoza Line became this question of how low can your batting average be And basically still be employable in Major League Baseball.

Now, I bet you did not know this, Dave, 'cause we never talked about it, but I loved baseball growing up. I collected so many baseball cards, and believe it or not, my favorite thing to do was to turn it over, look at the batting averages, and I would write down all the batting averages, and I would know like 200 players' batting average. So that's how I got my love for metrics, was baseball and batting averages.

Why do I not have trouble believing that, Ray? Okay, we're here in SaaS.

So how does the Mendoza Line, how did it get adapted into SaaS?

Sure, so a venture capitalist at Scale Ventures, a guy named Rory O'Driscoll, that name should sound familiar, Ray. You know why?

Because he also was not one of my sponsors I was supposed to close 6 months ago?

He invented the magic number. I thought you were a SaaS metrics geek. So Rory O'Driscoll from Scale, who invented the SaaS magic number, kind of came back and said, I'm gonna invent another concept. And he's gonna call it the Mendoza Line, or he called it the Mendoza Line. He did this in 2018 and he adapted the concept. He said, well, how low a growth rate can a SaaS company have and still be investible, right? So if the Mendoza Line for baseball is how low a batting average and you'd still be employable, the Oreo Driscoll's Mendoza Line for SaaS, how low a growth rate can you have Okay, but we know in this era of efficient growth that growth is just one factor, right? Certainly. And, and, and I'll say when Rory made this line, he ignored all the other factors. Certainly today, people would look at basically a combination of size, growth, and, uh, profitability, right? Um, that's what people are looking at today. And, you know, Rule of 40 was a combination of size, would address growth and profit, doesn't address size. The Mendoza Line here addresses growth and size indirectly. I mean, Rory does put where the line goes in terms of size. But yeah, there's a few variables people need to consider, and this one is all about growth versus size.

Okay.

And the key underlying concept on the Mendoza Line is one that Rory called back in 2018 growth persistence. Today, that concept is better known as growth endurance, sometimes called growth retention. And I actually like growth retention as the name for this because it's how much of my growth do I retain. I was growing at 100%, then I'm growing at 85%, or I'll make it easy, then I was growing at 80%, then I'm growing at 64%, right? And that means I'm retaining 80% of my growth every year. The problem with growth retention, of course, is it sounds too much like gross retention, and you could end up confusing people, and they both abbreviate to GRR, so that's a nightmare. So, so the industry, I think, probably for those reasons, has standardized on this concept as growth endurance.

Okay, and I know we've covered Janelle Tang, and she wrote an article about 3 months ago about growth endurance. So my question is, what is the standard for growth endurance? I saw, I believe, here in this article about Medusa Line, it was 85%. Janelle says it's 65%. Where are we, Dave?

Yeah, so always the star student rushing to the end of the class, um, but, but we'll talk on it. So growth endurance is basically the, the— it's a decay curve at how fast your growth rate decays. And Ray is correct that it is the underlying concept behind the Mendoza Line from Scale. And Janelle Tang at Bessemer writes about it a lot. And Janelle recently did a piece that said, hey, we used to think 85% was kind of the number that people should shoot for. But the reality in today's difficult times is that most people are doing 65%. So, my answer to you, Ray, you're not going to love it, but I think in normal times, people should shoot for 85%. And I think we need to recognize that right now, we're kind of in the high seas. But the short answer to all of this stuff is whether you call it growth endurance, growth persistence, the Mendoza Line, You should decay your growth at 85% a year, um, no faster than that if you want to be investable by a VC.

Gotcha. Okay, so we got this growth endurance which is at 85%, but doesn't there have to be something else beyond the growth rate, like a starting point?

Yeah, a slope gives us a line, we don't know where to put it, right? So we have this line and it's like, okay, well, I've got a line and its growth rate is decaying at 85%. But where do I put it? And back in '28, we kind of, if we have slope, we need a point, right? We need a slope and a point to make a line or a slope and an intercept, which is a special kind of point to make a line. So what's the intercept basically? What's the point? And in 2018, Rory said it should be IPO-able. And the idea behind the Mendoza Line, I think is important, which is Rory said you need to kind of be above the line if you want to be VC-backable. VC investible. Well, what does a VC look for? A company that has a chance at going public, right? Certainly most companies don't go public, but VCs kind of need to believe you have a shot at going public, most VCs, if they're going to invest. So Rory decided in 2018 that that meant you needed to be $100 million in ARR growing at 25%. Any reaction to those numbers, Ray?

Yeah, but you know how I always like to jump to the end? So I hear $100 million and that was 6 years ago. And I'm like, no way, 'cause we've covered a lot of the most recent IPOs and it looks like it's closer to $500 million and even maybe 30% growth, Dave.

Yeah. So, so look, basically Rory in 2018 said the endpoint on this line is you need to be $100 million in ARR growing at 25%. And if you know that, you can actually go build backwards the Mendoza Line. And I did a blog post on this concept recently, and I did that. In the revised version of this post, which was the inspiration for this episode, right? You know, why are we here talking about this? Because a few weeks ago, SCaLE put out the revised 2024 Mendoza Line. And Ray is correct. I think you said that SCaLE said, well, the new endpoint is 250 million growing at 25%.

Yeah.

And I think both of us looked at that and said, what? That's not how you go public today.

Right.

Brad gave you his number. My number, and I'm a little bit on the optimistic side, was, oh, I think you might be able to do it at $400 growing 40%, right? But $250 growing 25%, I think the bankers tell you to wait a year and accelerate your growth.

Yeah. And you always get— I don't have a crystal ball, but— and I know that we have a more cautious capital environment today, but I don't think it's going to decrease dramatically over the next 2 to 3 years. I don't think we're gonna see a lot of $250, $300 million AR companies going public, Dave.

I just don't. People are probably tired of me saying this, but back at Business Objects in the day, we went public at $30 million. So literally in my life, the bar has done nothing but monotonically go up, right? It was $30, then it was $50, then it was $100, then it was $200, then it was $300. And to your point, it may have jumped directly to $500, but yeah, the IPO bar, and I don't think this is a good thing, Ray. Maybe we could do an episode on the kind of the consequences to Silicon Valley of the ever-increasing IPO bar, but it is what it is. For the purposes of our episode, I would argue, Ray, that Scale took a good concept, which is 85% growth endurance, and both times they published about it, they picked the wrong line. Right? In 2018, I don't think $100 million growing at 25 got you public. In 2024, I'm sure that $250 growing 25% doesn't get you public.

Totally agree. But we've already talked about that endpoint, right? We can debate $250, $400, $500, but it's also really important at what the starting point is of this Mendoza Line. Where is it, Dave?

Yeah. So look, so the Mendoza Line is basically a chart of growth rate versus ARR size. It has a slope of -0.85%. The endpoint, as we've talked about in the 2024 version, is $250 million growing at 25%. And just knowing that, you can reverse engineer the whole curve. Again, you can see it on my blog. But the other thing SCaLE says, because they didn't specify a starting point, so some people might start at $10K or $200K, right? They might start off a very low number where you have a ridiculous growth rate of like 10,000%, right? So they said, hey, wait a minute. In order to make all the math work, you need to start at $10 million. And you need to start at $10 million growing at around 100%. And if you do that, you can then have your growth decay with a growth endurance of 85%, and you will— it's around 10 or 11 years— get to $100 million growing at 25%.

Okay, so the Mendoza Line kind of starts at $10 million, but there's a couple other rules of thumb from that $1 to $10 million, right, Dave?

Yeah, there are other— look, I think the Mendoza Line— and we're going to cut to the conclusion very quickly— I think it's an interesting concept. I think they— I'm glad they updated it, but I still think they picked the wrong goal. And I think the big takeaway from the Mendoza Line is 2 things. One, there is a concept of VC backability, and to be VC backable, they need to think you have a shot at going public. This is not true for all VCs. There are regional VCs, maybe tier 2, tier 3 VCs. But if you want to raise from a name that people know, they do have to believe you have a shot at going public, which then begs the question, What does it take to go public? I think between us together, we'd say somewhere between $400 to $500 billion in revenue, growing at around 35% plus, just to kind of average out our 2 opinions. So knowing that, it should affect basically in my mind how you spend your time. Like when an associate at a big VC firm calls you and wants to talk about your numbers, if you know you're not near this trajectory, maybe you just help someone populate a database, right? And maybe it's useful to you to build a personal relationship, But, but don't confuse them being interested in how you're doing, which to me reflects an interest of the space and, and their desire to build a relationship in case you growth inflect, right? They never know. You might hit something that causes your growth rate to accelerate rapidly. But, but in general, I think it, it, it should change how you view raising money, right? Like, if you're below the Mendoza Line, I think PE is actually a reasonably good choice to go look for money. But to come back to your point, Ray, There are some other growth trajectory tools out there. Do you want to talk about them? I'll let you do the first one if you want. T2D3, or I could do it if you want, but you want to talk about T2D3 and I can talk about 5, 6, 7, 8, 9.

Yeah, because I like T2D3, but I'm not sure it always holds true most of the times today, but it's triple, triple, double, double, double, which means, and it started at $1 million. It was created by Battery Ventures. So that, if I'm not mistaken, that T2D3 at 1 million, it takes about 4 or so years to get to 10 million.

That's how it starts at 2, right? It starts at 2. It goes 2, 6, 18, 36, 72. Yeah, it goes triple, triple, triple, 2 to 6, triple again, 6 to 18, double to 36, double to 72, double to 144. That's what they're saying. Very aggressive curve, by the way.

Got you. But you have another one that I think even you might have co-created.

Right. And by the way, let's be clear, T2D3 was invented during ZIRP. So it's the zero interest rate phenomenon. So it's a very aggressive rule. It doesn't, as we talked about earlier, it doesn't talk about cash at all because no one cared about cash during ZIRP. It was just like, hit these growth targets, grow like a weed, who cares about profitability? And there you have T2D3, which in my opinion now is kind of dated. given the new environment. My rule that I made with Michael Laffner at Balderton is one I blogged about called the Rule of 5, 6, 7, 8, 9. And I think in some ways it's held up better than the other rules because it was 5 years to $10 million, 6 years to $20 million, 7 years to $50 million, 8 years to $75 million, and 9 years to $100 million. And just in terms of memorization, the 5, 6, 7, 8, 9 is really the easy part to remember. It's the thresholds that are a little tricky, but once you learn the thresholds, it's pretty easy to remember this rule. And the other thing to know about these is these are thresholds. So, it's not saying grow 100% from 10 to 20, grow 150% from 20 to 50, grow 20— grow 50% from 50. It's not saying that. It's trying to pick memorable thresholds that your growth line should exceed. For example, a compliant trajectory might be $0.4 million, $1.2 million, $3.1 million, $7.2 million, $15 million. So it took me 5 years to break 10, and I didn't break 10 at 10.1, I broke it at 15, right? And then I go to 30, so 6 years to break 20. And then I go to 54, 7 years to break 50, right? And then 89, 8 years to break 75. And then, then finally 143. So I'm trying to show the idea that you're trying to cut a trajectory, a line through a set of points. And that's the nice thing about the rule of 5, 6, 7, 8, 9. And the other nice thing about it, well, I like it because it's driven by Balderton top quartile data. So if you're a European startup that does SaaS and you walk into Balderton, you know, if you're at $53 million after 7 years, you're in the top quartile of people they've talked to.

Interesting. Now you mentioned those 2 things and this is timely and we should do an episode on this too, but Bessemer just put out their Cloud 100 report, Dave. I think it just came out yesterday. And it actually said for their Cloud 100, now this is just their Cloud 100, it was around 8 years for those 100 companies to get to $100 million. But for the AI companies like OpenAI, Anthropic, et cetera, that's 6.3 years. So.

Yeah, I'm surprised it's so long for the AI guys. Yeah, look, I gotta say that that new report, which I did not know about, Ray, thanks for sharing, is consistent with mine. The 5, 6, 7, 8, 9 rule says it should take 9 years. They're taking 8. So, but I do think these things are important because if you're a startup and you're 10 years old and you're only $10 million in ARR, you're not going to get a very warm reception from venture capitalists unless you have some new thing in your story, right? Unless you have some big pivot that argues, no, we're not actually 10 years old. We're actually 2 years old because 2 years ago we pivoted to a new strategy using AI or whatever. But I do think these growth trajectory rules are important. Because ultimately, if you're the founder of a startup, you're trying to figure out how fast to grow and how much to burn to do it. I mean, those are kind of the 2 big jobs of a startup CEO.

Yeah, and I think it's really good because it uses that growth endurance. So, hey, I'm in year 7, I can see exactly what that line looks like, and is it in line with expectations of the VCs who— they're only going to invest in a Series C or D if they think you truly have a path to Yeah, and if your growth has been decaying faster and/or your growth is low, say you're $20 million and already only growing 25%, then the 85% growth endurance isn't gonna help you, right?

You will need to reaccelerate if you wanna attract VC money. You need to plan for a gangbuster year where you grow from $20 to $30 and now you're growing 50% or $20 to $40, whatever, now you're growing 100%. And then you can start the decay curve. Otherwise, it's not to say you're deep trouble, you don't have a business. I'm not saying any of that. I'm just saying you're not gonna attract top-tier VCs. So there is a question of how much of your time should you spend with them and who you should be talking to instead.

Yeah, and that's a really good point. I don't wanna take us down a rabbit hole here, but with private equity as another liquidity option, right, that growth endurance may not have the same premium. They may say, hey, we put a little bit more weight on your EBITDA and your profitability.

Correct. I mean, certainly rule of 40 is very important. And I think it's gotten enough press on our podcast. These are growth trajectory rules, right? And obviously there's 3 factors, size, growth, and profitability. And all 3 matters. Profitability matters more than it historically has. I'd say T2D3 was coined when growth didn't— when profitability didn't matter at all. But, and I do believe, well, as Ray pointed out, companies are struggling to retain 85% of their growth in this current market. I do think it's the right goal to shoot for. Which in some ways is why I'll kind of sign off on the Mendoza Line by just saying, look, the underlying rule is simpler. It's try to retain 85% of your growth rate. And obviously if your growth rate is really low already, then it doesn't really apply. You're not gonna get investors interested if you went from 10% to 8.5% growth. That's not gonna interest people 'cause the absolute growth is too small. But provided you're at an appropriate size growth combination, if you can try to retain 85% of your growth or better, by the way, every year, I think that's a good place to be. So personally, Ray, I probably won't talk a lot more. I mean, my journey into exploring the Mendoza Line said, oh, it's kind of lipstick and a wig on the 85% growth retention rule. So I'd rather just talk about the 85% growth retention rule.

Got you. Well, I think it was a really good episode. I actually learned a lot from not only doing the research but reading your blog. Do we wanna summarize or you think we've covered it well enough here, Dave?

I'll try to summarize. Look, the general topic we're talking about is growth trajectory curves. I think there's 3 or 4 ones out there that tell you what your growth trajectory should look like. One is T2D3, which I think is too hype. Basically, it comes from a different time and it's extremely aggressive in my opinion. 2, 6, 18, 36, 72, 144. That's fast growth. I, I've maybe worked with like 1 or 2 companies in SaaS that have done that growth curve. Um, so maybe we don't hang out with all the high flyers, Ray, but I think we do. We see some good ones. So I just think it's a very aggressive curve from another time. So there's T2D3. Uh, there's the rule of 85% growth retention, which we've talked about, which is just in general, no matter how fast you're growing, try to retain 85% or better. And if you're doing better than that, awesome. And if you're doing less, it's going to make you less attractive to investors. I think the rule of 5, 6, 7, 8, 9 is a good rule. You know, 5 years to 10, 6 years to 20, 7 years to 50, etc. Learn those thresholds, and that's a good rule. I think— was there one other growth trajectory rule we had? I don't— there's 5, 6, 7, 8, 9, T2D3. Oh, there's the Windows Align, which is basically just a dressed-up version of the 85%. growth retention rule. Ray, before we sign off, you want to talk about what the world looks like for the big companies?

Well, yeah, if you look at the public comps today, right, so we talked about that, we think we should be at 30-35%. The median growth rate for public companies today is 17%, and even the top quartile, it's at 34%. So to go public, using this Mendoza Line metaphor, it's kind of like It's in the top quartile of all companies even today that are currently public. And at median, the scale of public companies today is around $750 million. So I think there is some pretty aggressive growth that needs to be had to go public in today's market.

Yeah, just to be clear, you're looking at the people who already went public, not what they were doing when they went public, which would be first different time, and second, they certainly had higher growth. You're also talking about much bigger companies because the median scale in the Meritech, it was around $750 million. of ARR. So I think it's an important data point to look at. I think it reinforces the idea that it's cold out there, and I think it also reinforces the idea that, that there is an IPO bar and that bar shifts. And right now I'm guessing some of these, some of these companies with those growth rates probably wouldn't be able to go public off their current numbers.

Totally agreed. Well, Dave, using another baseball metaphor, I think you hit it out of the park today with the Bedoza line. Did a blog And I was always a home run hitter, so I didn't worry about batting average. I just hit those home runs once in a while.

Well, there you go, Ray. That's one way to do it. Okay. All right. Well, thanks a lot.

Thanks. Bye-bye now.

Take care. The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarkit 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 relies upon the information presented here. Ray Grothreich is based in New York City and available on X @rayreich. Dave Kellogg is based in Silicon Valley and available on X @kelblog. Schedectady, which is French for unspellable, is not our actual production location. Thanks for listening.