SaaS Companies that Don’t Grow Pretty Quickly Have Something Bad Going On

Just read Jason Lemkin’s post on SaaS company growth.  He talks about two examples:

-  Workday, a $250M SaaS company growing at 90% a year

-  An unnamed smaller $40M SaaS company growing at 33% a year because, “growth is slowing, but we’re still doing great, because it’s all recurring revenue, and growing recurring revenue takes time.”

That bit about growing recurring revenue taking time, as if it is harder to grow recurring than big one-time license sales, is bunk.

Let’s do the math on two examples.  In the first, let’s assume a big one-time license sale company.  For the sake of simplicity, let’s say their average sale is (best Dr Evil impression):  ONE MILLION DOLLARS!

Further, let’s assume their marketing produces enough leads that they close 10 of these deals a year, and therefore have $10M a year in revenue.  Now they have to go on closing 10 deals a year, every year, just to stay flat.  No growth at all is implied in that scenario and that would be a very unhappy software company indeed.

Okay, now let’s consider the SaaS company, and let’s assume they’re in the same market.  So, they charge some fraction of the license company’s one million dollars.  Industry averages are anywhere from 2 1/2 to 4 years until the

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