Reverse Engineering the Ideal Speedrun SaaS

ayoooo

Sorry it’s been a minute since I dropped one of these. I've been slowly chipping away at this one for a little while now and she ended up getting a bit thicker than I initially planned.

But here she is, ready for you're reading enjoyment. let’s get into it.

There's one thing that I wish I had realized before starting Drippi.

Not all SaaS companies are created equal. It seems so obvious now as I write this. But I really thought software is software, just build something that solves a problem and it doesn't really matter.

I could not have been more wrong. Especially when optimizing for a speedrun.

There are a ton of factors that impact growth rate and exit multiple - the 2 most important attributes of any FFSR optimized business.

But before we can start reverse engineering - I think its important that I quickly define what I mean by an "Ideal speedrun SaaS".

The definition is pretty simple. An "Ideal Speed Run SaaS" is a SaaS company whose properties create a high probability of FFSR success. In my case, this is essentially analyzing the company to answer the question: how easy will it be for me to scale and exit this puppy for $25M+.

"For me" is an important qualifier here. I'll be attempting to cover both the overarching principles that can be applied to any SaaS, and breaking down the factors that apply to my scenario specifically. What's optimal for me may not be optimal for you. We likely have different unique abilities and financial goals. You might be an expert marketer with limited product skills - I'm the opposite.

Alright. With all that out of the way, let’s tap in.

1. ARPU(Average Revenue Per User) & Market

Both high and low ARPU software companies can reach pocket inflating scale.

However!

The lower your ARPU the better your marketing has to be.

Failing to understand this has doomed countless Indie Hackers. It feels like every day that I see another dev who hates marketing building a B2C company with atrociously low ARPU. They have simply failed to recognize that in B2C you need to build a marketing-first organization while in B2B, product and sales are king.

This highlights the importance of playing to your strengths.

Love growth hacking and posting tiktoks? Build the next Umax.

Prefer cold emails and sales? Maybe you should be building a niche enterprise product for office plant wellness managers.

A SaaS's ARPU is largely a function of its market.

Here's a quick breakdown of the customer count required to hit a $40M valuation (at a 6x ARR multiple)

Drippi's ARPU is ~$140

Ideally, my next SaaS will command an ARPU of $2,000 +

Implicit Churn

Churn might be the single most important factor when it comes to scaling a SaaS business. This is something I wish I realized much earlier.

In February of this year, Drippi hit a wall. We were adding 10k+ in new subscription revenue every month but losing the same to churn, causing our MRR to flatline.

Before this, I hadn't been paying much attention to churn. But as soon as I started looking into the numbers, I realized we had hit a growth ceiling. The most effective way for us to grow was no longer just to find more customers. We had to find a way to boost retention before we were able to continue growing.

Every SaaS has a theoretical minimum churn. This number is impossible to calculate, but it's important to understand that some businesses implicitly have a lower theoretical churn minimum than others.

Think about deeply integrated B2B products like Salesforce vs a B2C product like Duolingo. It would be impossible for Duolingo to get its churn as low as Salesforce (even though Duolingo's retention is best in class).

This is largely driven by the switching cost / sticking power that B2B SaaS can create along with the naturally more fickle nature of consumers.

The more deeply your product integrates into the customer’s life or business the more sticky it will be.

It would take us over a month to switch off of stripe or google cloud.

It would take us a week to switch off of Loops, our email platform.

It took us a couple of hours to switch from Calendly to cal.com

The next SaaS I start will have incredibly low implicit churn, will be deeply integrated into the businesses of my customers, and ideally have a large switching cost.

Platform Risk

Platform risk is the primary reason I wouldn't start Drippi again today. Its the one thing that still keeps me up at night. X is a constant existential threat to Drippi, and at the end of the day, there’s not much we can do besides work towards platform diversification.

This is the first and last product I will build whose existence is reliant on another company.

Some general rules to apply here:

• Do not build your entire platform on the back of a single API or company

• Do not build a product that violates TOS

Expansion Revenue

If you talk to any B2B SaaS founder worth their salt, they are either striving to reach or have reached the elusive NET NEGATIVE CHURN milestone (when MRR growth from existing customers > MRR loss). To reach net negative churn, your business needs to have both low churn and lots of expansion revenue.

As with nearly every item on this list, some businesses/business models lend themselves to expansion revenue better than others.

I think there are 2 questions that can be used to determine if your SaaS will have great expansion revenue.

1) Does your business add additional value as your customer’s businesses grow?

2) Is your value metric aligned with a metric that will naturally grow over time?

If you can answer yes to both of these questions you're in the money - otherwise you might be cooked.

For example: I just canceled my Baremetrics subscription because their pricing is tied to MRR(#2✅) however, we don't inherently get any additional value from metrics as the company grows (#1❌).

Industry & Scale

A few things stand out to me about this table.

Firstly, I had no idea that valuations varied so drastically by industry. It's definitely worth considering what industry you are building in for this reason. However, Founder-market fit is certainly more important than building in a high multiple industry. e.g. if you try to build in the ERP space but you're anything like me and don't have a fucking clue what Enterprise Resource Planning is, you will be wayyy less likely to succeed. Thus, negating any hypothetical multiple advantage.

I was also surprised that more money = even more money. You actually get a higher multiple the larger your business gets.

It makes sense intuitively when considering the power of compounding. But, its still crazy to see that not only are you already going to make a bag if you hit the 10M+ range, but you are also getting a 3x multiple advantage on that MRR. This solidifies one thing in my mind - building 1 huge company > building a few small or medium ones. Fuck the hold Co. noise.

Funding

If we look at the top quartile of companies we can see that VC-backed companies hit 1m ARR 16.6% faster than their bootstrapped counterparts. The gap widens a bit at the median, and then becomes massive at the bottom quartile.

This emphasizes something that you might not expect(or maybe that you already knew). You are adding massive risk by raising funding. I don’t think the gap is so large in the bottom quartile because the additional funding is helping VC backed companies grow faster than their bootstrapped counterparts. I think its because if you raise capital but aren't growing the business fast enough, your business is dead. The VC backed companies who took too long to reach 10M simply died before getting there. But the bootstrappers are able to happily chug along even if they aren't growing at a VC pace.

However, if you are embarking on an FFSR, I doubt you plan to be in the bottom quartile. So VC funding can be worth it, so long as you manage your risk.

Do not fumble the bag by raising too much too fast and losing control of the company!

It's important to remember that most VCs don't give a fuck if you exit for $50M and happily retire to a small mountain town in the alps. They'd actually prefer that you don't do this. Their business model relies on you pumping their bags to a billion plus.

VC definitely has the potential to be advantageous for your FFSR. Just make sure you play the VC game on your terms, not theirs.

Founders

Whether or not to bring on co-founders is a tricky question. I think it highly depends on what your NW target is. We can get an idea for the upper limit of growth potential from the previous section.

Let’s say your NW goal is 30M & you want to reach it in 3 years or less.

We know the upper limit of growth rate is 0 - 10M ARR (0 - ~60M equity value) in ~3 years.

So the math checks out. With a 50/50 equity split, you could hypothetically hit your target.

In this case - it might make sense to have a co-founder IF you think you will only be able to hit this growth rate with them on your team.

Simple rule: You should only bring on a cofounder if you're confident that cofounder will 2x the growth rate of the company compared to what you could achieve alone.

If you are non-technical - e.g. cannot build the product yourself, you 100% need a co-founder (to build SaaS anyway). If you are building software - the software is your core competency. You cannot outsource your core competency.

Build for users you would get a beer with.

I realized something recently... I don't like talking to Drippi Users.

When I first started Drippi, I was talking to users nearly every day. The pure excitement of building something from 0 was enough to motivate me to do so. Over time, however, that excitement and novelty began to fade, and I began to dread speaking with users.

The problem? I don't actually vibe with most of our users on a personal level. Unfortunately the average crypto bro who wants to send DM spam to promote their pump and dump just isn’t that interesting to talk to. (If you're a Drippi user reading this we'd probably get along though so hmu)

To build an enduring company, you need to be obsessed with your users. It's hard to be obsessed with users you wouldn't want to get a beer with outside of work.

Alright here's the tldr (at the end of the article (get fucked))

The optimal FFSR SaaS (for me anyways):

• $2,000+ ARPU

• Incredibly low implicit churn

• 0 platform risk

• Maximum expansion revenue - naturally growing value created & value metric

• No outside capital unless from a highly strategic investor (will be applying for YC)

• 1 Founder

• Built for users I would want to get a beer with.

Oh. One more thing.

What if I told you I already started building this company - the business that will secure generational wealth for my future offspring? (alongside Drippi of course)

Introducing Flywheel.cx

The next email (whenever I get around to sending it) will be a deep dive into Flywheel.

See ya then 😤