“How do you build a billion-dollar business?”
I get asked this question a lot, probably because of my background. As the first CMO of Salesforce.com I was part of building that company from ten guys in a room to a billion-dollar run-rate. As the CEO of Zuora I started my company with two other guys — Cheng Zou and K.V. Rao — and while we’re not at a billion (yet), we’ve managed to raise a quarter of a billion dollars and grown to over 500 employees. So far, so good.
With all the lessons I’ve learned along the way (and there have been many), these days when I am asked this question, I find myself coming back to the story of The Climb (with all due respect to Miley Cyrus).
Lots of people think that success is a linear path. When they look at success, they look at the end result, jumping to the outcome and skipping over the boring, hard stuff that must have happened along the way. But the path to success isn’t straight. Success is achieved through a series of twists and turns, through a series of challenges that must have been solved, not through one brilliant move.
Similarly, the path to a billion is not a single path, but a series of journeys. I like to say building a billion dollar business is a lot like climbing a mountain. Now, unlike those two crazy guys that free-climbed El Capitan, most of us don’t scramble straight up 3,000 feet of granite when we go up a mountain. Instead, we make our way along a route that has lots of switchbacks.
I like the metaphor of a switchback, because at each turn you’re doing an “about face.” You’re completely switching directions. Similarly, when a company enters a new phase, it practically becomes a new organization. And the things that made it successful in the last stage may actually hold it back from succeeding in the next one. You have to throw out the rules, bring out a clean sheet of paper and redesign the company.
After working with many companies, I’ve come to find it useful to use the ones and threes to mark off the stages of growth, e.g. $1 million, $3 million, $10 million, $30 million, etc. For a Software-as-a-Service company, these number represents ARR, or Annual Recurring Revenue. These are good places to pause and say “Okay that was fun, but how do I tackle the next leg of the climb?”
So what are the phases that define the climb to a billion, what are the things that you need to work on in each phase? Let’s take a look.
When you get started, the first thing you have to do is to prove your idea. That’s the first stage. If you have the right idea, you can generally close a million dollars or an initial set of customers. These days, you can go raise a seed around to do that. Don’t bet the whole company in an A Round just to prove the idea.
At Zuora our idea was that companies that are running on the subscription model, like Salesforce — they’re probably building their own billing systems, because telco billing systems were too expensive, and regular ERP systems just don’t do what they need. But they shouldn’t have to build something, they should be able to buy it. That was the idea.
So we said – let’s go out. Let’s go out and find a bunch of companies, mostly ones that we already know, and let’s try to prove this idea. We built a prototype. We spoke with over 50 potential customers. We actually sold a few contracts before the product was completed (the contracts were contingent on the product being delivered, of course).
Similarly, at Salesforce, we threw up some screen shots on a web site and invited people to participate in the beta. And then we called everyone that was interested, showed them the demo, and asked what they thought. We had 200 customers lined up when we launched in February 2000.
Note that you can sell an idea before you have a really fully-formed product! And that’s totally okay. But by the time you start closing in on $1M ARR, the idea should be proven.
After your first million you can say to yourself, “Okay people like the idea. They’ll pay for it.” But what were they really paying for? In the previous phase, you were probably testing a whole range of ideas, seeing which of the ideas will actually stick. But now it’s time to change course. Now it’s time to focus, and do some editing.
What is the product that you really need to build? While proving the idea, you may have tested all sorts of different ideas, but now it’s time to cull, to prioritize, and think through what you have to build first, and what can be pushed out to later years.
The reverse can also be true. At Zuora, we thought a simple billing system was sufficient. But then we realized that customers needed lots more — we had to add add APIs, payment systems, commerce platforms, tax engines. We realized during this phase that we needed a very broad product.
Now, proving the product doesn’t mean you have to have the entire thing “done,” but you should have enough of an understanding to win in the marketplace, and lay out a coherent product roadmap that will drive your engineering efforts for quarters or years to come.
That’s really the learning phase, and you want to have all that discovery done by the time you approach the $3 million market and begin the next phase. Because by that point you won’t have time to dramatically re-engineer your product — you will be looking to scale.
The scale up from $3 million to $10 million is very exciting. If you have done a good job of proving the idea, and now have a solid roadmap that resonates with customers, then you are likely trying to do the $3 to $10 million run as fast as possible. You are hiring a bunch of salespeople, spending on marketing, your engineers are focused on executing the roadmap. Some companies do the $3 to $10 million run in a year (or less!).
But as you do all this, what you also need to do is to start to define your market. Here’s why.
Is your chosen market truly a multi-billion dollar market? Is it a $500 million market? Is it a $100 million market? Because when you start raising more money to do the next round you want to have that answer. When you were raising your Seed round or A round, it was all hopes and dreams. But once you are a real business, investors will focus more on how big this market really is.
It’s okay to have a $500 million market, but then the amount of money that you raise and your exit strategy are both going to change depending on the ultimate size of that commercial audience. You want to have a great story and a bunch of statistics to prove the market.
When we started, the general perception of Zuora was, “Okay, this billing thing might be interesting, but it’s really just for other SaaS companies, right?” Our background was Salesforce and WebEx, so it made sense that people just assumed we were a strictly product for the SaaS industry.
But we said, “No, our vision is actually much broader. We think any company can use our solution, and that defines a multi-billion dollar market.” So we set out to gather the proof points. Let’s go get a media company. Let’s go get a financial services company. Let’s go get a health care company. Let’s go get a public company, so we can prove the thesis that this truly is a multi-billion dollar market.
I’ve seen a lot of companies miss this. They adopt the “bowling alley” strategy famously laid out in the book “Crossing the Chasm,” picking a single vertical to focus on. They figure to get to $10 million, it’s easier to just focus on a single set of homogenous customers. Which may be true, but then they wind up boxing themselves into a small market.
Congratulations. You have now reached or are closing in on the $10 million marker. At $10 million, your chances of survival increase. Before, you could die at any moment, you could run out of cash before you could raise more money. At $10 million you don’t have to go out of business—especially if you’re built on solid recurring revenue. You are turning into a real company.
So what’s next? Well, during the $10 to $30 million run, you need to really start focusing on your business model.
What is your cost of customer acquisition? What is your churn rate? How much does it cost really in R&D to do this? What is your customer lifetime value? What are your gross margins? Do you have a positive net dollar retention? When you look at cohort after cohort, are the trends getting better?
Now, some companies focus on this too early. You read stuff on blogs about the need to focus on things like “CAC/LTV” and other such business model metrics. I’m not suggesting to ignore these things. But the cost of a suboptimal business model at $10 million is small. It’s more important to prove the product and the market and raise enough funds to grow the company.
But if you’ve built a money-losing business, which is completely possible during the idea and product stages, you really don’t want to realize that fact at a $30 million run rate, because you’re going to bleed out more and more money. Also, by the time you get to $30 million, these things start to really get set in stone, and they get harder and harder to move.
That’s why the run from $10 to $30 million often involves some tough choices. Do we have the right sales model? If not, we’ll have to swap out our sales team. Are we chasing after unprofitable customers? If so, we have to either make them profitable, or get off that particular revenue drug. Do our price points allow us to create a business with strong gross margins? If not, how do we increase our revenues per customer?
The run from $3 to $10 million often involves chasing anything that moves. That behavior can get you into big trouble in the run from $10 to $30 million, and it’s one of the top reasons companies often stall out during this phase.
If you find yourself rounding the $30 million marker, and you’ve proven your idea, you’ve executed your product, you’ve defined that you play in a very large market, and you have built a decent business model that only gets better with scale — at that point, things get really interesting. The next marker is $100 million. That’s a big number.
At $100 million, you will finally have some resources to do some interesting things. At $100 million, an ecosystem is starting to form around you. At $100 million, the bankers will be starting to call, and tell you that it’s time to go public.
So what do you have to focus on during this run?
The first thing to note is that as you go from $30 to $100 million, your organization is likely at a size where you will be facing a whole new set of leadership challenges. You’ll have shifted from a three-tiered organization to a four-tiered organization, and on your way to a five-tiered one. These can be painful changes for an organization. I talk about this in another guide.
The other thing you have to start doing is Prove Your Vision. What does this mean? Well, if you’re going to take public money or larger sums of money, your new investors really need to know that you’re a safe bet, and you are going to be around for the long haul.
These new investors aren’t venture investors, who are playing a portfolio game, expecting some of their bets to fail as long as they hit the jackpot with one of their bets. They want to see minimal risk. So they want to know you have the right management team. You have the right board. You have predictable execution. You have free cash flow, or at least a clear path to achieving a cash flow positive business.
And that’s the protection on the downside. What they also need to see is that this big market you’ve been talking about, well, the market is real, and that you have truly established a leadership position in that market, with the right set of products, people and partners to create a sustainable competitive advantage. In other words, your new investors have to truly believe in your vision.
During this run you have to get comfortable with telling your story over and over again, constantly tweaking and perfecting it (during our last funding round my CFO Tyler Sloat was on the phone making the same pitch half a dozen times a day). You also have to start describing a broader product portfolio, and be very clear about how you’re positioned with respect to your adjacent markets.
Before the vision could be kind of fuzzy, an exciting leap of faith. Now it has to come into focus. It has to be clear.
Ah yes. One hundred million dollars. Has a nice ring to it, doesn’t it? Reaching the $100 million feels good. It means that your company has truly arrived and has scale. So what should you focus on now?
Many companies talking about being a “platform.” You read about it all the time. Microsoft was successful because it built a “platform.” Uber’s not a car service, it’s a transportation “platform.” Salesforce was just a CRM tool, until it built the Force.com “platform” and became a major cloud player like Amazon. Platforms are great.
But too many companies focus on being a platform too early. Until you are $100 million, you don’t really have enough critical mass to be a platform. But at $100 million, smaller companies are starting to surround you, like planets circling a sun. They like your customer base. They like your marketing. They like how many salespeople you have, and are hoping those they can use those salespeople to increase their reach.
That’s why the $100 to $300 million run is the time to start thinking through what it means to build an ecosystem. How you leverage your success as a gravitational force to pull other companies into your orbit. These things won’t happen overnight, but by the time your company reaches $300 million, it has to be able to talk about itself in terms of having created an industry and explain how, as the center of that expanding industry, it will continue to grow with it.
By showing how you are building a platform that will drive a multi-billion dollar ecosystem, people can now see why you will be a $1 billion dollar business. At Salesforce, when we went public, sales force automation (SFA) was a $1B market. $2B at best. People looked at us and thought of us as acquisition bait for Oracle or SAP. But when we launched Force, and then the AppExchange, everyone was, like, you just became a company that can get to $1B of revenue. Just like that.
Building a billion-dollar business is obviously very difficult. Few companies have done it successfully. But by breaking your journey into legs, the whole process becomes much less incomprehensible and forbidding.
You just have to recognize that each leg is different, and that with each new leg, the goal of the company, what you are trying to prove, is different.
Finally, you have to realize that the things that made you successful in the previous leg may hold you back in the current one. You have to embrace change, not cling to sacred cows.
Only when we round the turns do we really start to understand John D. Rockefeller’s phrase “don’t be afraid to give up the good to go for the great.”