Building a B2B SaaS business that generates significant revenue is no small feat, especially for companies with less than $1 million in Annual Recurring Revenue (ARR). For early-stage SaaS companies, growth can be both an exciting and daunting journey, particularly in a competitive market where industry benchmarks for performance set a high bar. This blog post focuses on practical strategies and insights tailored to companies under the $1 million ARR mark, helping them navigate challenges, accelerate growth, and thrive.
Understanding the Growth Landscape for Early-Stage SaaS Companies
According to SaaS Capital’s 2024 Benchmarking Report, SaaS companies with less than $1 million ARR can experience massive variability in growth. Top performers in this category showed a 263% growth rate in 2023, a significant rebound from 181% in 2022, illustrating how small SaaS companies can skyrocket if they effectively harness growth opportunities. Despite these impressive numbers, many small SaaS companies struggle with maintaining momentum, given limited resources, funding, and the complexities of establishing a reliable customer base.
Figure 1 from the report shows the 90th percentile growth rates for companies with less than $1 million ARR. In 2023, the top 10% of companies grew at 263%, compared to 444% in 2020 and 500% in 2021. This highlights the volatility that smaller companies can experience, influenced by market conditions and the ability to quickly adapt.
Growth is about finding a balance between achieving product-market fit, scaling the team, and acquiring customers. However, it is vital for early-stage founders to benchmark against peers of similar size to avoid misleading comparisons that could lead to either overconfidence or discouragement. For a SaaS company with less than $1 million ARR, striving for growth rates above 56% places it among the top quartile, which is a reasonable and aspirational goal..
Growth Rates by Company Size
Growth rates vary significantly by company size, and it’s essential to benchmark against similar-sized peers to set realistic expectations. For companies with less than $1 million in ARR, achieving high growth rates is possible but can be volatile due to smaller revenue bases. In 2023, the median growth rate for companies under $1 million ARR was 30%, down from the 35% median growth rate seen in 2022. This decline highlights the challenges faced by smaller SaaS companies amid shifting market conditions and economic pressures.
In comparison, companies with ARR between $1 million and $3 million saw a median growth rate of 25%, while those with ARR between $3 million and $5 million experienced median growth of 20%. As companies grow and reach larger ARR thresholds, growth rates tend to stabilize, and the variance in growth decreases. This trend reflects the typical progression of SaaS companies as they mature—initial rapid growth followed by steady expansion as they achieve greater market penetration and scalability. By understanding these growth dynamics, early-stage companies can set more realistic targets and better navigate their growth journey.
Growth Rate by Funding Type
The growth rate of SaaS companies also varies significantly based on the type of funding they receive. According to the SaaS Capital 2024 Benchmarking Report, equity-backed companies tend to have higher growth rates compared to their bootstrapped counterparts. For instance, in 2023, the median growth rate for equity-backed companies was 30%, whereas bootstrapped companies had a median growth rate of 25%. This difference can be attributed to the additional capital that equity-backed companies can use to fuel aggressive marketing, product development, and sales initiatives, helping them scale faster in a shorter time frame.
However, it is also noted that equity-backed growth often comes at the cost of profitability. Equity-backed companies, on average, spend significantly more on customer acquisition and operational expenses, relying heavily on external funding to sustain their growth. Bootstrapped companies, by contrast, tend to focus more on sustainable, profitable growth, often operating at a profit while scaling more conservatively. This divergence highlights that while equity funding can accelerate growth, it requires a careful balance to avoid overextending resources and ensuring long-term financial health.
Growth Rate by Company Age
Growth rates for SaaS companies also differ significantly by company age. Younger companies, especially those in their first few years, often exhibit high growth rates due to their smaller revenue bases and the impact of early-stage product-market fit. In the initial years, companies are typically focused on rapid customer acquisition, product iterations, and capturing market share, leading to higher growth rates. For example, companies that are less than three years old often experience growth rates exceeding 50%, depending on how well they address market needs and how effectively they execute their go-to-market strategies.
As companies mature, growth rates tend to stabilize. By the time a SaaS company reaches around ten years of age, the growth rates generally level out, often falling into the 15-20% range. This decrease reflects the challenges of scaling a larger organization, where expanding into new markets and adding incremental revenue becomes more difficult. Mature SaaS companies often focus on increasing operational efficiencies, reducing churn, and maximizing the lifetime value of existing customers to maintain steady growth. Understanding how growth evolves with company age can help early-stage founders set realistic milestones as their businesses mature.
Key Strategies for Growth Under $1 Million ARR
1. Focus on Product-Market Fit
The first step for any early-stage SaaS company is to validate that its solution addresses a significant problem for its target audience. Achieving product-market fit means that customers are not only willing to buy the product but are also deriving meaningful value from it. Early adopters will often become advocates, helping to spread the word and create organic growth opportunities. Companies that excel at understanding customer pain points, iterating quickly based on feedback, and improving user experience can create strong foundations for rapid growth.
To measure product-market fit, look at metrics like customer retention, customer satisfaction (using tools such as Net Promoter Score or customer feedback), and engagement rates. When customers are continually using your product and find it valuable, that’s a sign of a strong fit.
2. Prioritize Retention and Expansion Revenue
Retention is critical for growth, especially in a recurring revenue model. The SaaS Capital study highlights that companies with the highest Net Revenue Retention (NRR) experience growth rates that are more than double the median. Improving NRR from 90% to 110% can add as much as 10 percentage points to a company’s growth rate. To prioritize retention, you need to offer outstanding customer support, develop in-depth onboarding experiences, and continuously invest in customer success.
Figure 5 from the report shows the relationship between growth and retention, where companies with the highest NRR report median growth rates more than double the population median. Increasing NRR from the 90-100% range to the 100-110% range results in significant growth improvements.
Expanding revenue from existing customers—through upselling and cross-selling—is often easier and more cost-effective than acquiring new ones. Focus on delivering value and new features that your existing customers will pay for, enhancing the overall customer lifetime value.
3. Optimize Go-To-Market Strategy
At less than $1 million ARR, companies should focus on building an efficient go-to-market strategy. This involves clearly defining the target customer, refining the value proposition, and ensuring that all sales and marketing efforts are aligned to target high-probability opportunities.
For early-stage companies, the founder is often the best salesperson, as they possess the deepest understanding of the product and its value. During this phase, founders should work closely with customers to understand their needs and continuously refine their messaging and positioning.
Experimentation is also key at this stage. Test various marketing channels—such as paid ads, content marketing, partnerships, and organic social media—to identify which channels offer the best return. Invest in building a solid inbound marketing strategy that creates a sustainable pipeline of leads over time.
4. Raise Strategic Capital When Appropriate
Bootstrapped and venture-backed companies often follow different growth trajectories. SaaS Capital’s research indicates that while equity-backed companies tend to grow faster, this is often because they were high-growth companies before securing venture funding【5†source】. For companies under $1 million ARR, venture capital may not always be the right answer, especially if founders want to retain control over the company’s vision and direction.
Instead, consider raising strategic angel investment or leveraging growth debt to extend your runway without significant dilution. The key is to understand when and how capital can effectively fuel growth rather than being seen as a simple path to scaling faster. Growth debt or revenue-based financing can be effective alternatives, allowing founders to keep more equity while supporting operational growth.
5. Develop a Metrics-Driven Approach
Metrics are crucial for early-stage SaaS companies to measure growth, understand what’s working, and make informed decisions. Key metrics that companies under $1 million ARR should focus on include:
- Monthly Recurring Revenue (MRR): Track the growth in recurring revenue to understand whether customer acquisition efforts are working.
- Customer Acquisition Cost (CAC): Measure the cost to acquire each new customer and compare this with the average customer’s lifetime value (LTV).
- Customer Churn Rate: Monitor how many customers are leaving. A high churn rate indicates potential issues with product-market fit, customer support, or value delivery.
- Net Revenue Retention (NRR): A strong NRR often signals that customers are getting value, leading to upsells and reduced churn.
Using these metrics helps create a culture of continuous improvement, allowing founders to make data-backed adjustments to their growth strategy.
Common Challenges for Companies Under $1 Million ARR
1. Finding the Right Sales Model
For early-stage companies, finding the right sales model can be challenging. Companies at this size may not yet have the resources for a dedicated sales team, leading founders to be the primary sales representatives. It’s crucial to understand your customers and how they prefer to buy—some might prefer a low-touch, self-service model, while others require a more traditional, high-touch sales approach.
Early-stage companies can experiment with product-led growth (PLG) strategies, where the product itself is the primary driver of user acquisition and expansion. By offering free trials, freemium tiers, or limited-time demos, startups can reduce barriers to entry and encourage potential customers to explore the product’s value on their own.
2. Managing Cash Flow
Limited ARR means limited cash flow, which makes financial planning crucial. SaaS companies with less than $1 million ARR must optimize spending, ensuring that every dollar is invested in activities that directly drive growth. Prioritizing what to invest in—whether it’s product development, marketing, or sales—can be a critical challenge.
Consider experimenting with pricing models to drive early cash flow, such as offering discounts for annual upfront payments. This strategy can not only boost cash reserves but also improve customer retention by committing users to a longer-term relationship.
3. Building a High-Impact Team
Another significant challenge for early-stage SaaS companies is building the right team without overextending resources. During the early growth phase, hiring generalists who can wear multiple hats and adapt as the company’s needs evolve is a practical approach.
Team culture also plays an integral role in early growth. A strong focus on collaboration, accountability, and a willingness to adapt will help foster a startup environment where employees are motivated and engaged in helping the company achieve growth goals.
Lessons from Top Performers in the Under $1 Million ARR Club
- Leverage Customer Feedback: Successful SaaS companies prioritize listening to their customers. They implement feedback loops that ensure product development is aligned with customer needs.
- Growth Takes Time: There are no shortcuts to growth. Companies that achieve a strong product-market fit and take the time to iterate on their product often see sustainable success.
- Retention Over Acquisition: Customer retention is vital for early-stage growth. Focusing on delivering value to current customers often drives word-of-mouth referrals, which can reduce customer acquisition costs.
- Experimentation is Key: The early stages are ideal for experimentation. Whether it’s a new pricing model, onboarding flow, or marketing channel, successful companies continuously test new ideas.
Conclusion
For SaaS companies with less than $1 million in ARR, the path to growth involves focusing on product-market fit, retaining existing customers, optimizing go-to-market strategies, and managing cash flow carefully. Growth at this stage isn’t solely about adding new customers—it’s about ensuring that every new customer is a successful customer.
With the right combination of strategy, persistence, and adaptability, early-stage SaaS companies can overcome common challenges and position themselves for sustainable growth. Remember, the journey to scale is a marathon, not a sprint, and leveraging your unique strengths is what will ultimately set your company apart.
Also published on Medium.