Strong profits, regular customers, and a growing team can make your startup feel like a full-blown company. At this stage of your journey, you might wonder what comes after the startup phase for SaaS businesses and what to do once there.
At Acquire.com, we’ve been there before.
Our CEO, Andrew Gazdecki, previously grew two SaaS startups to their late stages before exiting and using those funds to start his next ventures. We’ve compiled information from around the web to help you assess your startup stage and options for moving forward as the owner of a late-stage startup (or early-stage company).
What’s the Difference Between a SaaS Startup and a SaaS Company?
The line between startup and company isn’t always clearly defined. One of the most popular definitions for startups comes from Steve Blank, a serial entrepreneur and professor at Stanford, Berkeley and Imperial College known for his thoughts on building lean startups.
Steve defines a startup as “a temporary organization designed to look for a business model that is repeatable and scalable.” By contrast, a company is “a permanent organization designed to execute a business model that is repeatable and scalable.”
Essentially, a startup is an organization figuring out how to become a company. Startups by nature don’t fully know their business model and can only become companies once they do.
What Are the Different SaaS Startup Stages?
Most startups follow either the traditional or venture-capital-backed model for growth.
Hubspot defines the traditional startup stages as:
- Ideation – This includes the preliminary stage where you assess things like your strengths, weaknesses, free time, and capital. It also includes creating a minimum viable product (MVP) and finding those first customers.
- Proof of Concept – This is the stage after finding a target audience and building an MVP. At this point, you’ve made those first revenue dollars and are working to improve your platform and automate other processes like marketing. You may even start hiring at this stage.
- Scaling – This is where startup founders usually raise outside capital to reach a larger audience and market. They may also expand at a slower rate by bootstrapping and reinvesting their profits (more on that later).
Today many founders are much more familiar with the model VC funds like Y-Combinator (YC) promote where startups raise outside capital for every stage of the journey:
- Seed – YC defines seed startups as businesses still trying to create an MVP or find a target market. According to YC, seed rounds frequently go as high as $1.5 million.
- Series A – These startups have at least partial product-market fit and are earning revenue from customers. At this stage, businesses frequently raise between five to $20 million to beef up their engineering, sales, and marketing teams.
- Growth (Series B/C) – These startups have completely established product-market fit and are now trying to capture as much of their target market as possible. Series B and C startups can raise $10 million to over $500 million if investors are excited about your product.
- Scale (D+) – YC defines this as the stage where a tech startup starts to switch to a full-on tech company. You’ve achieved enough size to reduce your risk of failure. At this point, you’ll likely have hundreds, if not thousands of employees and have raised hundreds of millions of dollars. Thoughts of an IPO are never far from your mind.
When Does a SaaS Startup Become a SaaS Company?
You’ll notice that aside from massive amounts of capital in the YC version, both models consider startup scaling stages similarly. Almost unanimously, when you’ve built a workforce and a secure stream of revenue, you’re ready to cross the threshold from startup to business.
Silicon Valley Bank, a banking solution business for founders sums up late-stage startups as the following:
- Completely staffed
- Experiencing significant growth
- Looking for expansion opportunities
- Considering an exit
One final benchmark used by many VCs to measure SaaS startup success and maturity is the Rule of 40.
What’s the Rule of 40 for SaaS?
The Rule of 40 suggests a successful SaaS business’s revenue growth rate plus profit margin should equal or exceed 40 percent. For example, that could mean a 20 percent revenue growth rate and a 20 percent profit margin or a 40 percent growth rate and a zero percent profit margin.
Venture capitalists Brad Feld and Fred Wilson originally popularized the Rule of 40 in 2015. Both attended the same board meeting where an anonymous late-stage private equity investor told them this rule.
Many experts recommend weighing growth rates heavier than profit margins for smaller businesses. However, VCs use the Rule of 40 to tell if a startup is an attractive investment – therefore they naturally emphasize growth.
And even if your business falls short of the Rule of 40, you still may be a mature company. Consulting company McKinsey conducted a 2021 study of US SaaS companies with over $100 million in revenue that found that only 22 percent satisfied the rule.
What Comes After the Startup Phase for SaaS?
Maybe your startup easily meets the Rule of 40 and all of the other requirements for a mature startup (though perhaps you aren’t quite a household name yet). Now that you’re no longer scrambling for revenue, customers, or a business model what should you do next?
As a maturing business, you have three paths forward:
- Expand quickly without worrying about profits (usually by raising capital).
- Grow sustainably by reinvesting profit into your business.
- Sell the business.
Let’s explore each of these choices.
Expand Quickly and Take the Market
If your goal is to be the next Facebook, Hubspot, or Canva with millions of customers around the world then you’ll likely need to start raising money. As a late-stage startup, you can promise investors a return on investment (ROI) as you already have a demonstrated market need and history of doing business.
Some additional questions to ask before expanding and scaling:
- Can your business handle more growth? Are you making enough money to pay employees or are you burning through revenue just to stay afloat?
- Are there enough expansion opportunities?
- Can your business absorb the loss if your expansion attempt fails?
Run a Steady-Growth Business
While many prominent SaaS businesses like HubSpot, Spotify, and Netflix took outside funding to reach their dominant market position, that doesn’t mean it’s the only route to success.
The vast majority of SaaS startup founders take the middle road – growing their companies slowly using reinvested profits while providing themselves with a healthy salary.
If neither massive growth nor exiting your business appeals to you, just keep on building. You can grow your team, refine your processes, improve your product, or bolster your marketing without outside investment. If you want to know what this road to success looks like, read our sister publication, Bootstrappers. Many of our featured founders make millions of dollars in ARR or even IPO without any outside investment.
Advice For Late-Stage Startup Growth
In Later Stage Advice for Startups, Y Combinator gives this advice to late-stage founders growing their startups:
“Before product/market fit, your number one job is to build a great product. But as your company grows past roughly 25 employees, your main job shifts from building a great product to building a great company.”
Later-stage startups need to focus on internal structure as much or more than their products as it’s what will eventually set your business apart from its competition.
Here are other aspects of team building Y Combinator recommends for late-stage startups:
- Invest in an HR team for faster scaling.
- Make sure everyone understands explicitly your mission, vision, and goals.
- Create internal teams that make sense and make sure management understands who their direct reports are.
- Find succinct ways to communicate with your entire team.
Sell Your Startup and Start Again
- Do you love building things?
- Are you wary about taking investment?
- Do you have a new idea you’re itching to try?
Some founders are obsessed with the startup phase and have little interest in shifting focus to marketing or day-to-day operations. If you’re this type of entrepreneur, it’s normal to sell your SaaS startup (or business) and use that money to start again (or take a well-earned break).
Another benefit of late-stage SaaS businesses is that they are asset-light, easy to sell, and fetch a relatively high sale price. At Acquire.com, we regularly see SaaS businesses sell for two to five times revenue or up to seven times profit.
Exit Your SaaS Startup Quickly and Securely on Acquire.com
Want to exit your SaaS business quickly, easily, and with zero fees? We think we’ve created one of the best places on the internet today to do just that.
At Acquire.com, you can access three different ways to sell your SaaS business:
- By yourself (for free) – We’re one of the only online startup marketplaces where you can list and sell your startup by yourself with zero fees. We expect most businesses to sell within weeks, not months.
- With a broker – If you still want the personal touch of a brokerage service but the reach and security of Acquire.com, we’ve created a pairing service with brokers specialized in every aspect of sales. Prices are completely transparent and usually a percentage of the sale (most pay for themselves).
- Managed by Acquire.com – Does your SaaS make over $1 million a year? Do you want someone to take care of your acquisition for you? For just a small percentage of your sale, we’ll manage the entire sale process. You just choose from our curated list of qualified buyers and we’ll make sure you get the best deal possible for your business.
Ready to validate all of your hard work with an exit? Or are you just interested in seeing how we work? Check out our marketplace and please send us a message or email if you have any questions.
And best of luck on your startup journey.
How many employees should a late-stage startup have?
There is no correct answer for how many employees a late-stage SaaS startup should have. According to research from fintech recruitment firm Storm2, the average headcount of a Blockchain company at the Series B stage is 170 employees – most in engineering and product development.
Generally, startups in this stage have at least a CEO, CTO, and CMO and a handful of other leadership positions. They should also have a growing number of employees in key areas like engineering.
For more information on startup team building, read our article How to Grow a Lean Mean Tech Startup Team.
Do most startups raise capital?
No, the vast majority of startups never raise capital. According to the Harvard Business Review, fewer than one percent of U.S. companies have raised capital from VCs.
What percentage of startups sell their business?
It’s unclear exactly how many startup owners try to sell their business every year. It has, however, been well documented that 65 percent of US small businesses fail after 10 years. Many of these businesses are likely sellable.
At what stage should a startup be profitable?
There is no clear answer as to when a startup needs to be profitable, however, by Steve Blank’s definition, a startup must be profitable in order to become a mature company.
How small can a SaaS company team be?
SaaS startup teams can range from a CEO and a handful of contractors to thousands of employees. Tomasz Tunguz of VC firm, Redpoint Ventures published data showing the median startup with between $1-5M in ARR has 12 engineers, six sales people, and three marketing staff.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
