To get a self-funded modern SaaS-like business off the ground in 2023 requires that you basically have the following attributes of your business:
Delighted Customers with High Customer Satisfaction Scores & NPS Scores
High trial conversions > 10% rate
High willingness to pay > $100 MRR per customer
Low churn < 5%
Have a growth plan to hit next month's revenue and growth targets
Annual subscriptions > 25% of all customers have this plan over monthly
High margins > 40% net margin
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There are other ways to succeed of course, but the math of the business is just easier if these boxes are checked.
If you don’t believe me, watch the Jason Cohen (Founder of WPEngine) make the case here:
Four Phases of a Self-Funded Business
As your business passes through each of these four phases of growth, you should change your strategies and tactics to respond to the demands of each.
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Milestones | Default Alive | Ramen Profitable | Left the Garage | Crossed the Chasm |
Active Trials | 30 | 750 | 2000 | 3000 |
Paying Customers | 10 | 150 | 500 | 1500 |
Monthly Revenue | 1k-2k | 15k | 40k | 200k |
Valuation* | $25k | $350k | $1M | $5M |
*Valuation assumes 5x Net Profit multiple, 40% profit margin
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1. Getting to “Default Alive” (10 clients & 1k MRR)
The focus here is to validate that you have something that people are willing to pay for and that your product solves that need. With this money you can keep servers running and continue to support the business in a “nights and weekends” manner.
10 paying customers and at least 2 have committed to an annual plan
Charge Enough > $100 MRR per customer
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Don’t want to continue growing this idea? At this point, with a ~$25,000 valuation you might just stop right here and consider selling on MicroAcquire or a similar business listing. Getting to Ramen profitable is going to take some serious hustle.
2. Ramen Profitable* ($1k - $15k MRR)
To get to the stage where you can pay yourself a salary requires a lot of hustle to meet your aggressive growth goals. To double signups each month will require “doing things that don’t scale” and just finding anyway to meet your growth goals.
Double Signups Each Month
Trial Conversion > 10% rate
Low Churn < 5%
The “Get to Ramen Profitable in four months” growth plan:
As a back-of-the-envelope calculation to get from 10 clients / $1,000 MRR to 100 clients / $10,000 MRR, you need find ways add additional MRR each month. Note you also need to drive as many annual signups as you can to get the cash-flow into the business to support this growth.
Month | Additional MRR
to add each month | Client Growth | MRR
(month end) |
1 | $1,300 | 10 → 17 | $1,700 |
2 | $2,500 | 17 → 30 | $3,000 |
3 | $5,000 | 30 → 55 | $5,500 |
4 | $9,800 | 55 → 105 | $10,500 |
Expand this to see how the Founder of Teachable used these tactics to scale his company:
*Paul Graham’s coined “Ramen Profitable” in 2008-2009, read his original piece here
3. Left the Garage ($15k-$40k MRR)
Now you have $40k / month growth revenue to support a small team of 2-4 people to build the business. This stage could focus on growing expansion revenue, reducing churn and delivering as much value as you can. At this stage you have enough customers so that customer referrals can start to drive revenue. Here you can work on your product, positioning and brand.
Team Growth: Establish repeatable processes and hire people to get yourself out of the day-to-day.
Organic Growth: Target 5%-10% new user growth
Expansion Revenue: Expansion Revenue > Churn and Average MRR increases to $150
Customer Delight: High Customer Satisfaction Scores & NPS Scores
4. Crossed the Chasm ($40k-$200k MRR)
At this point you have enough clients where you can learn so much from them that you will need to revisit all assumptions about your growth strategy. You can no longer rely on growth from early-adopters and you will need to expand to more “Pragmatic Buyers” (read more here). Luckily you have the team, industry insight and track record of delivering value to overcome many of these sales obstacles. Some of your next moves might be:
Multi-Channel Growth by potentially pursuing other verticals
User Segmentation grow ARPU through higher-priced feature tiers
From Product to a Platform as you deepen the user experience, increase product stickiness and expand the offerings of the platform
Essentially you are repeating steps 1-3 several more times as you expand
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Speed Run: Can we do this in 6 to 9 months?
- 1 week - Getting to “Default Alive” (10 clients & 1k MRR)
- 3 weeks - Ramen Profitable* ($1k - $15k MRR)
- 2 months - Left the Garage ($15k-$40k MRR)
- 3-6 months - Crossed the Chasm ($40k-$200k MRR)
- Your are essentially repeating the first three months of work one to two more times
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