Where Baseball and SaaS intersect

By the title, I'm sure you were wondering what that article will be about and and what SaaS has in common with baseball.

I’ll tell you: The Mendoza Line.

Rory O'Driscoll (Scale Venture Partners) first used the Mendoza Line reference for SaaS in 2018. In SaaS, it is represented by a revenue growth threshold at each stage of a company, below which it is not on a clear VC-backable trajectory.

It is based on two main assumptions:

1. Investors prefer to invest in companies that have the potential to get to IPO (i.e. making it to $100M ARR, while still growing 25% yoy).
   

2. Growth rates decline over time, which is quite predictable (on average). Depending on which source you use, the growth rate for a given year should be between 70% and 85% of the growth rate of the same company in the previous year.^1,2

The "original" Mendoza Line for SaaS introduced by Scale VP shows target growth rates as a function of ARR (see below).

Bessemer Venture Partners shows a similar chart with the approximate growth expectations as a function of time (years after crossing $1M ARR) in their “Scaling to $100 Million” report.

Please keep in mind that the model shows a path to a potential IPO – and we all know how few companies actually make it. Therefore, the line should be considered as a guide / rule of thumb rather than a fixed criterion.

Falling below these lines does not mean failure by any means. It just means that the company is less likely to ever reach $100M ARR. Still, it can become a decent business and generate a positive return for founders and investors in case of an exit.

Below is what it looks like, if we compare the model to the reality and the broader market of successful SaaS companies (including bootstrapped and VC-funded companies). As you can see, only the top 10% are sitting at or above the line.

A more feasible guide / realistic Mendoza line for VC-funded SaaS startups is obtained by connecting the green median growth rates in the chart below.

If we analyze bootstrapped companies separately, we see that their imaginary Mendoza Line is almost a straight line at a growth rate of ~30% yoy through all stages. Fun fact: At this growth rate, after reaching $1M ARR, it would take you another 17.5 years to reach $100M.

Concluding Thoughts

I am a big fan of both simplifications and benchmarks. In this case, it can provide guidance to founders on what the ideal path looks like and whether they should raise (more) capital or better look for other options because they are far from growth rates investors would expect.

However, as we have seen, the ideal scenario is far from reality - so you should not worry too much about it. Instead of obsessing over hitting that IPO jackpot, maybe you should take a page from Mario Mendoza's book:

After his time in the Major League, he went to play in the Mexican League and became known as "Silk Hands" for his amazing fielding skills. Not only that, he had a successful career as a manager and even got inducted into the Mexican League Hall of Fame.

So, here's a lesson: You can choose your own path to success, focusing on building a sustainable business for the long term instead of chasing the $100M ARR dream and fizzling out along the way. Sometimes, betting on the odds and doing things your way is the real winning strategy.