Understanding Revenue Growth Endurance
Understanding Revenue Growth Endurance
Benchmarking the decay rate of revenue growth
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The arch nemesis of any successful SaaS CFO is an ever-increasing denominator. The score of the battle is measured in the company’s Revenue Growth Endurance Score.
Revenue Growth Endurance is the rate at which growth is retained from one year to the next… It’s basically a measure of how good you are at keeping your annual growth number up, despite an increasing base.
I picture a thousand little hands trying to prop up a growth rate curve as the line gets longer and the accumulated inertia mounts.
As a metric it’s measured as:
This year’s growth / Last year’s growth
40% / 50% = 80% growth endurance
“Growth endurance helps investors understand the ARR trajectory of a business, and more qualitatively indicates market pull, customer velocity, and general interest in your product.”
-Allison Pickens, solo gp
Bessemer plotted the percentage of ARR growth lost between each year, and found that the decay is fairly predictable at 30%. In other words, you should expect next year’s growth rate to be 70% of the current year, as the stakes get higher.
And it’s obviously easier to hit a long term revenue milestone like $100M in ARR when you have higher revenue endurance. The longer you can keep your growth rate up, the more your revenue compounds, which can make a MASSIVE difference in valuation models, which are stretched out for years (or even decades). It’s in these later years that the majority of a company’s value sits, so convincing investors that your growth will stay strong not just next year, but for years to come, is crucial.
“In a post-pandemic investment world, we believe that revenue growth endurance is a useful metric to differentiate between companies that experienced a one-time revenue surge or collapse in 2020 revenues versus sustaining revenue growth rates in 2021 and beyond.” - Drawing Capital
What does good look like?
Anything under 100% means your growth rate declined compared to the prior year.
Anything over 100% means your growth rate accelerated.
The decay of private companies tends to be 30%, meaning they retain 70% of growth
At Bessemer they say 70% growth endurance is “good,” 75% is “better,” and 80% is “best.” And obviously there's a long distribution on both sides.
Top tier public companies have revenue growth rates above 80%
Public companies are usually growing slower than private companies, given their scale, so it’s “easier” to decay a bit slower (generally speaking)
The best companies have both strong endurance scores and strong growth rates
A revenue endurance score of 80% on an annual growth rate of 3% is not as cool as a revenue endurance score of 80% on annual growth of 20%
The Golden Rule: Don’t lose your customers
It should go without saying, but the fastest way to keep your revenue endurance score up is to not lose your existing customers. If you are constantly refilling a leaky bucket, you’ll have to work harder to recruit net new customers to maintain your velocity. This can be measured as Gross Dollar Retention Rate, and in the current year period as Renewal Rate.
And the easiest way to scoop up points is to expand existing customers. This can be measured as Net Dollar Retention Rate. 120% net dollar retention means that you already have 20% growth baked in.
Public Market Examples
Here’s a basket of companies across the Security, Infrastructure, and Database worlds. CyberArk and UiPath actually accelerated growth year on year, with endurance scores above 100%. Dropbox, Dynatrace, Palo Alto, Atlassian, and Rubrik defied gravity to stay above the 80% mark. And Zscaler, Elastic, Fastly, and Jfrog remained above the rough ~70% mark that BVP quotes as a high-water mark.
A word of caution
What admittedly doesn’t come out in my simple bar chart is how fast the company was growing the year before in absolute terms. DDOG gets overly punished here; if you look at the prior fiscal year they grew at an eyewatering 63%, and then fell to to a still very respectable 27%.
Adobe scores really well, putting up 10% annual growth after a year in which they did 12%. So there are certainly flaws in using this metric in isolation. Context is everything.
Like all metrics, you can form fit them to prove a point, or you can use them as a piece to a larger, more comprehensive analytical puzzle. How long you can keep growth going is a big piece.
Run the Numbers
Apple | Spotify | YouTube
Eric Newcomer joined the pod to discuss the Art of a Fundraising Announcement. Eric runs the largest independent media outlet covering the business of Venture Capital, Newcomer.
We discuss:
What makes venture capitalists so intriguing to cover?
How the whole Tech Crunch and Forbes 30 under 30 worlds work
How media companies are becoming VCs and VCs are becoming media companies