Jason Lempkin famously said that a startup’s continued success becomes inevitable upon reaching $10m in ARR.
What a lot of people don’t know is that a giant astrisk was later added because it turns out you can still fail past $10m if you don’t have one very important thing in place.
We’ll dig into exactly what that is in a moment.
Inevitability in SaaS comes around $10m in ARR […] once you hit $10m in ARR or so, you cannot be killed by anything. That’s the power of compounding SaaS revenue.Jason Lempkin
Over the years Jason’s quote and the $10m ARR milestone have come to have a great deal of significance to investors and founders.
It’s no wonder either. It’s a nice simple rule and it appears to often be true. Yet as is so often the case, reality is not quite this simple.
The power of SaaS is that it compounds. The thinking goes that once you hit $10m in ARR you are compounding such a large number that even if the annual rate isn’t high you are going to inevitably grow at a significant pace for the foreseeable future. Except that’s not always true.
So what is 50+20 revenue? It means that you are getting 50% of your revenue from word-of-mouth (brand “I heard of you” and other zero-cost lead sources) and that you are getting 20% from expansion revenue (i.e. your net churn is actually negative.)
When you hit that large ARR milestone of $10m it is going to be customer happiness that fuels your ability to compound revenue into the future. It’s the combination of these 2 things that causes inevitable success.
This is crucial! By the time you hit $10m ARR (and ideally way before this point) you should be getting:
- 50% of your revenue from word-of-mouth, brand “I heard of you”, and other zero cost lead sources.
- 20% of your revenue from expansion revenue (net negative churn.)
All the best of breed companies hit 50+20 by $10m ARR. It’s what makes them “best of breed.” Scaling is pretty easy because:
- Your blended CAC is super low.
- Your CLTV is super high.
It’s this combination that makes you unstoppable. You are super capital efficient and growing your leads like a monster.
Jason calls 50+20 your “Magic Number.”
Don’t pat yourself on your back because of your ‘pretty good’ Magic Number. Hooray, you pay back your sales and marketing costs in 13 months. But if you don’t have 50+20, you’ll hemorrhage cash at $10m ARR.Jason Lempkin
To really understand why 50+20 revenue is so important (and just how f@$ked you can end up without it) it’s helpful to really understand the mathematical impact of 2 things:
- The law of shitty click-throughs.