Scaling revenue after $1M ARR and staying focused
Avoiding common pitfalls and doubling down on strengths between $1m and $10M ARR
I have now had the opportunity to work with a handful of startups that have grown revenue 3X or more in the year after hitting $1M in annual revenue. Some as a full-time employee and some in my work as a hands-on consultant and advisor. In a couple of cases, I have seen 5X+ growth during this time.
The harsh reality is that finding P/M fit and getting to $1M is brutally tough, but for many startups getting from $1M to $10M is even tougher. Many startups get stuck, run out of money, or slow down in the stage between $1M and $10M. I don’t have all the answers, but here are two big lessons learned for startups in this critical stage. (note this is based on working with VC-backed startups seeking to build a $100M+ business).
Stay focused on your best customers
When you are looking for ways to grow revenue, it can be tempting to expand to different verticals or different-sized customers. For example, B2B startups are often tempted to move “up-market” and sell to larger businesses or move into adjacent categories. For example, if your current customer base is brick-and-mortar restaurants, you may feel the urge to expand into brick-and-mortar retail. It seems like a no-brainer, right?
But at $1M in ARR, unless you are already seeing strong pull from a market, e.g., organic inbound leads that are converting to sales— this is often a mistake. Why? Because if you have a strong P/M fit at $1M in revenue and are operating in a large market, you should be able to get $5M, $10M, and $20M, within that existing base of potential customers.
The fastest-growing startups I have worked with double down on what is working post $1M vs. trying to find product/market fit all over again with a new customer base. They understand the value of their product and their distribution advantage from a place of first principles and apply those principles carefully to their growth strategy and resourcing.
I understand the temptation to expand. If you have dozens of happy customers in X industry with 100 employees, it’s easy to convince yourself that a 1,000-person company in that industry also needs and wants your product.
But as it turns out, they likely have a completely different set of needs and buying criteria. The reason people buy products is not the product itself— it’s to address their priorities, problems, wants, and needs. Companies of different sizes have huge differences in these areas, so even when your product fundamentally does the same thing for them as it does for your best customers, their likelihood of buying it is far from guaranteed.
As an aside - in addition to focusing on your best customers. Stay focused on your core product. If you are at $1M in ARR, you should be careful to attempt to build and distribute multiple products.
Related, if you are a Marketplace, you probably shouldn’t get distracted by multiple ways of monetizing your marketplace yet, unless it is simply experimentation.
In the early days at Yelp, we had tons of consumers using the product to find local restaurants, so when we began to monetize the platform, we sold Ads to restaurants. Thankfully we resisted the urge to sell to large restaurant chains. Instead, we asked ourselves, “What do these restaurant owners value about Yelp? How are they measuring the ROI?” Their answers to those questions didn’t mirror buyers at large restaurant Franchises, Chains, or even small Restaurant groups. Instead, small home services businesses, nail salons, and Dentists had similar priorities, problems, wants, and needs. So that is who we expanded to. And we sold them the exact same product.
Another breakout startup I’ve worked with has taken a similarly focused approach. As a Marketplace startup, we have asked ourselves the question - what does the demand side value in the supply side? And we have stayed incredibly focused on finding those businesses on the supply side. Instead of focusing on scaling the volume of suppliers across a huge TAM, we focus on quality and not diluting the value the marketplace delivers.
It takes an incredible combination of creativity and discipline to stay focused when you are facing daunting revenue targets. But no one said building a $100M+ business is easy.
Long story short, if you managed to find P/M fit and a reasonable approach to distribution and customer acquisition—take advantage of it! Double down on your strengths. Once you begin to win the market, I promise you there will be new opportunities to capitalize on and invest in down the road. But sub $10M—stay focused.
Continue to look for outlier people
If you have managed to duct-tape your way to $1M+ in ARR, chances are you, as the Founder, did a bunch of selling, and maybe you found yourself 1-2 incredible sellers.
You may have also churned through a few salespeople who couldn’t get it done.
If you’re lucky, you’ve now raised a Series A and might be thinking it is time to “document your sales playbook, scale the team, and create a repeatable, scalable sales process.”
Sounds great in theory, and a lot of startups hire me as a consultant to do this exact thing. But I’m here to tell you that $1M ARR is often too early to start copying and pasting what your team is doing.
Oftentimes, your existing process isn’t repeatable at this stage, so you still need to claw your way through the dark to find something that is.
Other times, you haven’t yet hit your ceiling in sales productivity. If you focus solely on creating a playbook, you are not allowing your team the space to continue to experiment and try new things and discover innovative ways of delivering results.
Remember, if your baseline is two years of selling and ~5 people selling your product, it’s entirely possible that you haven’t landed on the right hiring profiles, core competencies, sales process, and sales messaging yet.
The best startups continue to hire independently-minded and motivated sellers well past $5M in ARR, who are going to push the boundaries on what is possible, do things their way, and break some rules. You should too.
So why do we hear so much talk of “playbooks” and “scaling” within early-stage startups? I’ve got to think this has to do with survivorship bias. “This is how it worked at X, so we should do that here.” I am all for leveraging prior experience, mistakes, and learnings.
But I also understand that building a massive, industry-changing company is a scary bespoke process that must be forged, not copied. Only once you have built a novel, unique and defensible approach to sales and distribution can you think about “scaling it.”
Stay focused on your strengths and unique competitive advantage. Good luck out there!
-Pete
Pete Hancock is the Principal of Hancock Consulting, where he partners with Seed-Series B startups to accelerate revenue, develop go-to-market strategy, and build & scale sales teams. For more info: petehancock.me