Is your company growing fast enough to IPO? Rory O'Driscoll, Partner at Scale Venture Partner, presents data defining a minimum level of growth a SaaS business needs to remain on track for venture funding and an eventual IPO. Read more at: https://www.scalevp.com/blog/understanding-the-mendoza-line-for-saas-growth

1. The Mendoza Line for SaaS Growth
Is Your Company Growing Fast Enough to IPO?
February 2019

2. [ 2 ] C O N F I D E N T I A L / T R A D E S E C R E T
EVERY FOUNDER ASKS:
How fast do we need to grow
to eventually IPO?
[ 2 ] C O N F I D E N T I A L / T R A D E S E C R E T
THE
QUESTION
[ 2 ] C O N F I D E N T I A L / T R A D E S E C R E T
Can I raise venture dollars
along the way?

3. [ 3 ] C O N F I D E N T I A L / T R A D E S E C R E T
THE MENDOZA LINE FOR
SAAS GROWTH:
Answers those questions at any revenue stage
[ 3 ] C O N F I D E N T I A L / T R A D E S E C R E T
THE
ANSWER
[ 3 ] C O N F I D E N T I A L / T R A D E S E C R E T
Uses just 3 assumptions backed by data
from successful SaaS exits

4. [ 4 ] C O N F I D E N T I A L / T R A D E S E C R E T
“IT’S ME. NOT YOU.”
[ 4 ] C O N F I D E N T I A L / T R A D E S E C R E T
THE
DISCLAIMER
[ 4 ] C O N F I D E N T I A L / T R A D E S E C R E T

5. [ 5 ] C O N F I D E N T I A L / T R A D E S E C R E T
The Mendoza Line for SaaS Growth
VC’s are upside junkies
Assumption One

6. [ 6 ] C O N F I D E N T I A L / T R A D E S E C R E T
Assumption One: Pretty Well Understood
The main value to a VC of a $1MM
to $10MM ARR company is its
potential to scale to $100MM+
There is no value investing in venture
WHAT THIS MEANS FOR YOU:
VENTURE INVESTING
Ultimately the great
deals drive the fund return
We cannot know beforehand which
investments will be great
So we have to only do deals that
have a chance to “return the fund”

7. [ 7 ] C O N F I D E N T I A L / T R A D E S E C R E T
The Mendoza Line for SaaS Growth
Assumption Two
The low-end threshold for a successful IPO is:
Reaching $100MM+ ARR
With next year’s ARR growth of >25%

8. [ 8 ] C O N F I D E N T I A L / T R A D E S E C R E T
Assumption Two: Pretty Clear from the Data
2016-2018 SAAS IPOS
0%
20%
40%
60%
80%
100%
120%
0 100 200 300 400 500 600
GrowthRateatIPO
ARR at IPO

9. [ 9 ] C O N F I D E N T I A L / T R A D E S E C R E T
The Mendoza Line for SaaS Growth
Assumption Three
Growth rates decline as revenue increases
but in a somewhat surprising way

10. [ 10 ] C O N F I D E N T I A L / T R A D E S E C R E T
Assumption Three: Not as Obvious
We call this “Growth Persistence”
It implies that the future growth of a SaaS company
can be estimated from its past growth rate times Growth Persistence
*Within a range of between 20% and 100%
Revenue growth rates decline
Y/Y as revenue increases…
Obvious
At a fairly predictable rate…
Not so obvious
And that rate is
independent of the growth rate*
Not obvious at all

11. [ 11 ] C O N F I D E N T I A L / T R A D E S E C R E T
Turns Out to Be True: Growth Persistence Is a Thing
SAAS COMPS – 2011 TO 2016
y = 0.82x
R² = 0.77
-20%
0%
20%
40%
60%
80%
100%
-40% -20% 0% 20% 40% 60% 80% 100% 120%
Year2GrowthRate
Year 1 Growth Rate
y = 0.82x
R² = 0.77

12. [ 12 ] C O N F I D E N T I A L / T R A D E S E C R E T
0.82 0.82
82% 65%
Growth Persistence Allows Us to Estimate Future Growth
Year 1 Growth Rate
Growth Persistence Factor
Year 2 Estimated Growth Rate
100% 80%
Company A Company B

13. [ 13 ] C O N F I D E N T I A L / T R A D E S E C R E T
Predicting Long-Term IPO Trajectory Using Growth Persistence
Yr -1 Yr 0
Company A
ARR ($ MM) $5.0 $10.0
Trailing Y/Y Growth (%) 100%
Yr 1
$18.2
82%
Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7
$30.4 $47.2 $68.6 $94.0 $122.6 $153.1
67% 55% 45% 37% 30% 25%
Example: Starting at $10MM ARR
Yr -1 Yr 0
Company B
ARR ($ MM) $5.6 $10.0
Actual Y/Y Growth (%) 80%
Yr 1
$16.5
65%
Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7
$25.4 $36.6 $49.9 $64.6 $80.3 $96.3
54% 44% 36% 30% 24% 20%
Core assumption:
IPO threshold is $100MM+ ARR with forward growth >25%

14. [ 14 ] C O N F I D E N T I A L / T R A D E S E C R E T
Mendoza Line for SaaS Growth
The Definition
We call this the Mendoza Line
At any given revenue run rate there is an associated minimum forward
growth rate required to be attractive to VC investors

15. [ 15 ] C O N F I D E N T I A L / T R A D E S E C R E T
The Mendoza Line for SaaS
Next Year’s ARR Growth Rate %
Current ARR ($ MM) $1 $5 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100
Mendoza Line Growth Rate 140% 94% 77% 62% 51% 46% 40% 36% 33% 30% 28% 25%
Years to $100MM ARR 8.5 7.0 6.0 4.5 4.0 3.0 2.5 2.0 1.5 1.0 0.5

16. [ 16 ] C O N F I D E N T I A L / T R A D E S E C R E T
Keeping Above the Mendoza Line Is the Surest Track to IPO
This plot of top
SaaS IPOs gives us
confidence that the
Mendoza Line is a
reliable rule of
thumb… but there
are exceptions

17. [ 17 ] C O N F I D E N T I A L / T R A D E S E C R E T[ 17 ]
A USEFUL
HEURISTIC.
NOT A LAW
OF PHYSICS.
Only 30% re-accelerated for 1 year
Only 10% re-accelerated for 2 years
Public SaaS Comps
It’s possible to raise VC $ below
the Mendoza Line, just a lot harder
Diagnosis is not death…
but change is hard
Growth re-acceleration
doesn’t happen all that often
(Growth Persistence >1.0)
Consistent with other VC concepts like
“Triple, Triple, Double, Double, Double”
but more realistic

18. [ 18 ] C O N F I D E N T I A L / T R A D E S E C R E T
Diagnosis Is Not Death: Change Is Possible with Concentrated Effort
2010
2012
2010
2009
It implies that the future growth of a SaaS company
can be estimated from its past growth rate times Growth Persistence
POTENTIAL LEVERS
Improving churn
Hiring/replacing execs
Retooling the GTM model
Product execution

19. [ 19 ] C O N F I D E N T I A L / T R A D E S E C R E T
At any stage, how fast should a SaaS company be growing to raise VC money?
THE MENDOZA LINE ANSWERS
THE QUESTION:
[ 19 ] C O N F I D E N T I A L / T R A D E S E C R E T
SUMMARY
[ 19 ] C O N F I D E N T I A L / T R A D E S E C R E T
IT’S A PREDICTION NOT A LAW BUT IT HAS A R2 OF 77%
You can
ignore it entirely
if you generate cash
(e.g., Atlassian)
You can
beat the odds
with improved execution
But you have
to assume it is how
most VC’s will think
Your $10MM, cash burning, 50% growth SaaS company could struggle to raise VC $

20. THANK YOU