Top Rules To Grow to $100M ARR Fast with Mary D'Onofrio, Bessemer Ventures Partners

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When the term unicorn was created, it was a really vaunted distinction for only 14 total private companies. And by May, there's 1.5 unicorns minted a day. Over 1,000. We were seeing deals at Bessemer Growth going for 50x60x100x arrangements, and so all of a sudden the term unicorn was far less meaningful than it used to be. What is a true measure of an enduring business? And in our research, we haven't managed to find $100 million ARR business that hasn't endured and hasn't perpetuated.

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Hey, what's up, innovators, entrepreneurs, visionaries and disruptors. This is your Traction podcast host, Lloyd Lobo. We're a community of over a hundred thousand people just like yourself, on a mission to help you get the methods, the money and the madness to explode your business growth. Featuring stories and tactical advice straight from those who've done it before, like Shopify, Twilio, Asana and many more.

You've done an amazing amount of research, you've done a lot of investing, you've probably been on a lot of boards, you've seen a lot of things. We know what a unicorn is. What's a centaur? Why is it important? Why did you invent that name?

So it's a term that my partner at Bessemer, Adam Fisher and I coined in May, and it was really a response to what we saw going on in the valuation environment, particularly in 2020 and 2021. There was a proliferation of unicorns originally in I believe it was 2014 or a decade ago rather, when the term unicorn was created, it was a really vaunted distinction for only 14 total private companies, not just cloud companies, inclusive of Internet, e commerce, any other subsector. And by the time we were penning this article In May, there's 1.5 unicorns minted a day, over a thousand. And at the same time, huge proliferation of capital that went particularly into the sector that I invest in most at Bessemer Cloud. $129 billion last year alone. And the public markets had run up so much. Obviously that affects the private markets, but we were seeing deals on at Bessemer growth going for 50x60x100x ARR. And so all of a sudden the term unicorn was far less meaningful than it used to be. Ten years ago, it was a really enduring business. And now it was a $5 million ARR business. And that wasn't one story out of many. That was a deal a week. And so Adam and I put our heads together, we noticed this and we decided, let's refocus on actual business fundamentals. It's not necessarily that innovative. Let's focus on revenue. But given where the market was, we were thinking like, what is a true measure of an enduring business? And in our research, we haven't managed to find $100 million ARR business that hasn't endured and hasn't perpetuated. So we gave homage to the unicorn by keeping a mythical beast.

But cent being 100, it's good timing, isn't it? Because of course, in the last, what, six months, especially three, four months, valuations haven't gone up, have they?

So it's good timing certainly in the public market. I at Bessemer, I help to maintain the BVP NASDAQ Emerging Cloud Index. It's a public benchmark for cloud stocks. And it was as high as 25 times average, 30 times average last year. And it came all the way down to about 10 times, eight times in the past few months. And I think what it speaks to is like building a billion dollar business is actually really difficult, but it is well timed because I think there's a renewed focus on capital efficiency, a renewed focus on actually making the investments with the cash you have to drive top line and using that customer pool, product pool as that North Star, rather than celebrating a valuation or financing milestone.

We have a soundtrack there. It's cool, actually, given the numbers you just talked about. It seemed like for a while it was really easy to build a unicorn because anybody was a unicorn, anybody who was worth anything. Reality has set in. You're talking about Centaurs now. You said something interesting. You haven't found a case of a company getting there that didn't have staying power. Super interesting. But what have you seen that's common about the companies that get there?

There are usually a few things that are common. You have clear product pull, you have clear, obviously revenue traction, and you usually have a large enough market obviously to accommodate 100 million of ARR and generally more. There are many cases that we can talk to, but There isn't one single way of building $100 million ARR business, obviously. And I know you've even heard a bunch of stories today. I was fortunate to interview Mike with the co founder president of Zapier earlier today and he shared the story of how Zapier got to over 100 million using a relentless focus on their ideal customer. Bottoms up users, very small businesses and only recently started to move up market. They were really focused on product led growth. Our company, Service Titan, for example, they're a vertical software company and they started in residential plumbing and identified how deep they could get in that vertical, but how there was like clear adjacencies in H Vac, there are clear adjacencies in roofing and they kind of went vertical by vertical and kept applying their product more broadly. And then even the story you just heard of LaunchDarkly from Edith Harbaugh, which is Bessemer is fortunate to be invested in that company as well. They really focused on market evangelism and tying that with their product growth and building the market together, as we all heard. So there's not one way, but I think the consistent themes is resonance with customers, product and market pool, continued customer growth and a large enough market to support that level of error.

I gotta love that name launchdarkly. It sounds so, I don't know, science fictiony and I don't know cool name. Now what about commonalities among companies that look like they're aimed at that trajectory but fall off or fail? What commonalities have you seen there?

I think there's some common failure patterns. Building a product without a very clear customer need. Obviously there's a little bit of a push and pull. Always you're like making some bets about the way the market, the world will evolve and you hope that your product and your company meets them. But you also want to make sure that there's enough customer pull before you make incremental investments. Especially early on a journey when you're not that well capitalized, you're making really clear decisions. And now more than ever, now that we have a downturn and capital is less easy to come by ensuring that the bets that you do make have really clear ROI and you do some early experiments in order to validate them. And I'm talking about anything, whether it's a new product launch, a new customer segment, a new geography, a new sales strategy. I think leaping before the experimentation is done is a really common pitfall. Another one which can affect especially the earliest stage companies and founders, where candidly I don't invest quite as much, but I think it's probably the biggest pitfall is just simply a bad hire early. Again, you don't have that much money, you don't have that much time and you're really trying to set not only the product and company trajectory, but the team culture. And a bad hire can really affect that journey.

It's also really challenging when the total environment, the global environment changes massively and you've got companies that were amazingly timed for pandemic times and all of a sudden it's over. Things change. One thing that you saw as you looked at all these different companies, you saw as you get bigger margins go down and CAC payback goes up. How come?

So with CAC payback, this is customer acquisition cost payback. So the amount of money generally software company, but any company expends to acquire customer and then is repaid over time. Generally that goes up over time because the marginal customer is always more expensive to acquire. Your early adopters tend to be cheaper. They're organic growth, they are word of mouth. But over time you end up having to expand to additional additional sales and marketing strategies generally which are costlier. However, businesses in general again can usually support that higher CAC because what you see is generally the evolution upmarket for most companies. The earliest stage companies generally can't serve large enterprises, especially in the SaaS. But over time, for example, we're invested in a company called Auth0 which just sold to Okta. Originally they were still serving individual developers and now they're part of Okta. They're investors in Twilio. Like they didn't start serving the largest enterprises in the world, which they now do. But as they matured, the product matured, they could afford to support higher CAC because they're selling higher ACVs which generally accompanies higher retention dynamics.

You had an interesting score in the report that I thought was cool. Talk about cash conversion score and what that says about a company.

It's a high level kind of proxy for the efficiency of a business. And Cashkin's conversion score is total ARR over total capital raised to date minus cash. And what it means to do is to capture just the efficiency of every dollar ever raised and spent by a business. It obviously is going to be less precise on sales and marketing productivity or COGS productivity as some other metrics that we're all very familiar with. But it's really impossible to have a company with a strong cash conversion score that doesn't have clear resonance with customers. Doesn't have strong product market fit, doesn't have sales and marketing efficiency. And you put that all together, it's captured in that one synthesized metric.

I've seen some examples of very poor cash conversion scores and I'm sure we all know a couple examples examples like that. Hopefully no personal examples in your portfolio, but I'm pretty sure most VCs do it. I won't ask you to open the the history vault and tell us those ones. What I thought was interesting is there's a lot of different metrics, benchmarks that just are indicative of a well run startup that is growing and on track. What do you see? If you want to be 100 million ARR company, what do you see for instance for ARR growth rate?

So what you usually see in cloud businesses in particular is this really high, what we call a Bessemer Growth endurance. It's the retention of growth rate year over year for cloud businesses and it's actually pretty exceptionally high. If you look at private cloud, it's 70%. And if you look at public cloud, again from this point, BVP NASDAQ Emerging Cloud Index, it's 80%. So that's to say obviously absent a lot of other information or any other information, a heuristic you can use is that a public cloud company's growth rate is going to be 80% next year as it is today. So it's 100% this year, 80% next year. As you look at the trajectory of $100 million ARR businesses, usually companies are trying to get to exit velocity. They're trying to get to this minimum, let's call it 30%, 40% growth rate year over year, which again is the average for public cloud today. In order to make it to IPO scale, make it to strategic M and A scale and you can then back into the requisite ARR growth rates that you need year over year, back into being a $1 million ARR business. So what we find, or what we suggest is that that story that you've probably heard is true. Triple, double. That's what we recommend. Obviously not every company hits that exact trajectory, but given the relatively predictable obviously across many companies, but given that relatively predictable distribution, it's important to start on that high growth trajectory because it'll decrease over time.

Those numbers sound really scary if you're a founder sitting out there right now and those are really significant numbers that you've got to hit. Talk about what a founder who's not at those levels right now or a company that's not at those levels right now needs to do. Some are tempted to just throw cash at the problem and artificially generate sales that may not last. What are your, what is your suggestion? If somebody says, you know what, I think we have it, I think we can do it. I think we can be a hundred millionaire, I think we can be a centaur, I think we'd be a unicorn. But we're not there yet.

Yeah, again, unfortunately, I think it's difficult to generalize because every business is so different. But I will note that there are a lot of businesses that stay within this perfect growth rate trajectory that I'm talking about. For example, Bessemer's company Toast. Now it's a public company worth almost $10 billion. It's had top quartile gross rate trajectory this entire time. However, Procore didn't. That's a vertical software company in construction and, and early on they were like growing a little bit. And then Bessemer invested and helped to expand the target customer profile, helped with pricing and packaging, helped with figuring out how to not only expand to additional verticals but also deepen within the existing verticals offering additional solutions. And that can help to bend the growth curve. I think that's what is the most important is identifying for your size, scale and stage what are initiatives that you can invest in that are actually going to bend your growth curve. Obviously that gets harder the higher your ARR is. It's much easier on $1 million than it is on 10, as it is on 100. But I would encourage founders to really search for those things and maybe something can work. But if it's not going to deliver that additional uplift meaningful enough for you to stay on that growth rate trajectory, it might not be the right place to invest.

That's always really interesting, right? Because I've seen a number of companies that you thought hey, we're on that trajectory and didn't quite get there. And maybe they weren't quite ready, maybe the product wasn't quite ready, maybe the team wasn't quite there. Lots of things you can work on. You've also done some benchmarking on ways to spend money that you've raised or that you're earning in terms of sales and marketing. In terms of R and D and stuff like that. How do you see the R and D spend change over the lifespan of a soon to be 100 million ARR company?

I can even generalize more. Pardon me? I can even generalize further. Sales and marketing, R and D and G and A are all expense Line items from which you should get leverage over time. So early on in your company's life cycle you should be spending, you probably are spending far more money than you're earning and R and D can be more than 150, 200% of the revenue you're bringing in every year. But that's your core differentiation, that's your competitive advantage. That is actually going to be what perpetuates your business more than anything. And so that investment makes a lot of sense. However, over time the thing especially in a cloud company that's going to be your largest expense driver is sales and marketing expense. It's the kind of the most variable expense that most closely obviously would drive your revenue. So R and D becomes only 20 to 25% of what a centaur should spend on their, on their R and D. And so you're just expecting that leverage to take hold at maturity at this kind of $100 million ARR mark and to perpetuate from there. And that's generally stays true until a public benchmark as well.

I want to ask you for, for your top three tips for founders to grow operationally efficient businesses today. It's hard, it's not easy, it's never been easy, but there's been a lot easier money out there. How do you grow operationally efficient businesses now?

So I think this ties to something I already said, but ruthlessly prioritize. You can't fund every initiative and you shouldn't try to whether it's prioritizing your time, prioritizing your investments. Focus on those experiments before you make investments and make sure they have really clear roi. More so than any time that in the past few years venture investors like myself are really focusing on capital efficiency and making sure that when you take our dollars are you going to be using them effectively. And so we want to know that you've done that historically and that you will with the impact incremental capital. I think the second thing is maybe a little bit counterintuitive, but take advantage of the opportunity. Hiring in particular for many of our companies has been incredibly difficult over the past few years because capital has been very rife and free flowing. Maybe the CMO that you wanted to hire had five other offers at three times the price you could pay and that and unfortunately some layoffs also might create some opportunity for you you to hire some great people and to take advantage of dislocations in the market. Maybe your competitor is actually struggling on financing. They don't have the cash on their balance sheet. But you do. There is also an opportunity to be a little bit more aggressive than the market might suggest. And talking about efficiency and operational efficiency, you might be able to do it for cheaper than you might have before. So look for those opportunities and those dislocations. And I think the last thing is just to maintain culture, morale and employee support. It's very difficult in times of downturn and there have been lots of stories and headlines around on layoffs, on potential for businesses shutting down. And you want to make sure one of the hardest things is recruiting, hiring, retention. It's also really expensive to replace fake people. So making sure your team is motivated in for the long run and is working towards the same vision as you are is incredibly important.

Love it. I have to say one thing that's super refreshing about how you're looking at businesses and Centaurs is valuations are so arbitrary. Seemingly you put a certain amount of money as a VC into a company, there's a valuation, it's throw a dart, it's something. There you go. Everybody wants the number to look big. So the valuation doesn't necessarily represent reality. If you're looking at ARR and it's real, that's hardcore. It's hard to fake that. It's hard to just invent that. Anyways, thank you for your time.

Thank you.

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