Ask any startup founder how things are going and they’ll tell you it’s “going great”. They’ll talk about some new feature they’re rolling out, or a new round of funding. Or maybe they’ll mention how much user growth they’ve had or that they just got covered in TechCrunch. All signs will point to “crushing it”.
But, for better or worse, there’s a very high probability that they are, in fact, not crushing it. The exact opposite, actually.
We’ve conditioned ourselves to fake it until we make it, but most companies never make it…so we’re perpetually faking it and never actually being honest about our struggles.
That prevents us from getting the actionable help and feedback we need and just perpetuates the false narrative that you’re some sort of failure if everything isn’t roses all the time.
“That’s great, Josh, but certainly things aren’t that dire, right?” Wrong, little Jonny. Let’s look at the numbers.
If dig in to our live SaaS Benchmarks you’ll find a few of interesting data points about small to medium sized SaaS companies.
Then one additional, crucial data point not listed on the Benchmarks page: the average SMB SaaS startup has 12 employees.
Now, let’s translate that.
Average User Churn of 7.7%. You may think that’s not terrible, and you’d be right. The companies that have 25%+ user churn are in a much worse spot. But what does 7.7% user churn functionally mean?
It means that every single year most businesses are losing all of their customers! Every 12 months, they’ll not only need to replace the lost customers but add new ones as well.
There aren’t an infinite number of customers and at that churn rate, you’ll quickly plateau. Outgrowing your churn will becoming impossible.
We’re going to have a quick lesson in growth efficiency, because it really puts things in perspective. To measure growth efficiency, we use a metric called Quick Ratio. How reliable can a company grow revenue given its current churn rate? That’s the question the Quick Ratio metric answers.
To calculate your Quick Ratio you simply divide new MRR by lost MRR. The higher the ratio, the healthier the growth is at the company.
To put it in a formula: Quick Ratio = (New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)
Say a company has $10,000 in MRR growth. That growth could be made up of any combination of MRR types (New, Expansion, Contraction, Churn) and the Quick Ratio shows you the difference in “growth efficiency” between them.
Let’s look at a few scenarios of how that company got its $10,000 in MRR growth and what the Quick Ratio would be.
Scenario A
$12,000 (New + Expansion) / $2,000 (Contraction + Churn) = Quick Ratio of 6
Scenario B
$15,000 (New + Expansion) / $5,000 (Contraction + Churn) = Quick Ratio of 3
Scenario C
$20,000 (New + Expansion) / $10,000 (Contraction + Churn) = Quick Ratio of 2
Scenario D
$50,000 (New + Expansion) / $40,000 (Contraction + Churn) = Quick Ratio of 1.25
All four scenarios result in $10,000 of Net New MRR, but Scenario A is vastly more efficient at growth as the company is adding the same amount of Net New MRR with much less effort.
So, now, when you see that the average Quick Rate of most SaaS companies is 1.4, you realize how untenable that is.
There simply aren’t enough customers in the world for any company to survive when your growth efficiency is in the pits.
In the companies we benchmarked, the average monthly recurring revenue was $19,000.
I want to be very careful here and not imply that “$19,000 a month” isn’t impressive or something to be proud of. It’s a heck a lot more than a lot of startups ever make and for you, individually, it may be exactly what you want or need out of your business.
But there’s another metric that when paired with this number is just frightening: the average team size is 12.
Let that sink in for a moment.
The average startup is making $19,000 per month…with 12 people on their team.
Sweet beard of Zeus.
Still think all those startups are crushing it?
This is the reason founders and teams get burned out. This is why CEO’s become Chief Fundraising Officers. This is why so many companies get “acquihired” for the people instead of the business (because there wasn’t much of a business there at all).
This is why the fairytale “everybody’s crushing it” mentality is insane. It normalizes terrible economics.
Now look, if revenue isn’t your goal (or you’re delaying revenue in the name of growing another metric for a while), that’s cool. Everyone has different motivations and outcomes they’re pursuing. There are certainly multiple ways to get what you’re after.
But can we just be honest for a change? Can we stop pretending everything is amazing when the economics clearly show they aren’t? What’s the benefit of that to anyone?
Next time someone asks you how your startup is doing, try not sugarcoating it. Maybe say, “You know, we’re having a tough time with user acquisition” or “churn has been a beast to tackle”.
Then, instead of the incessant high-fiving and pats on the back, you’ll get legitimately useful feedback. You’ll likely find others are struggling with the exact same things and they may even have some business-altering advice for you.
Remember, we’re all winging it.