How Quickly Should You Grow to Key ARR Milestones? The Rule of 56789

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Key takeaway

• For entrepreneurs: The Rule of 56789 provides a structured and realistic growth trajectory for SaaS companies, emphasizing the importance of consistent and sustainable growth to reach key ARR milestones.
• For investors: The Rule of 56789 offers a benchmark to evaluate the growth potential and performance of SaaS companies, helping to identify those with a stable and impressive growth trajectory.

Summary

The article "How Quickly Should You Grow to Key ARR Milestones? The Rule of 56789" by Dave Kellogg, published on August 21, 2022, discusses a growth trajectory framework for companies aiming to achieve specific annual recurring revenue (ARR) milestones. The Rule of 56789 is not about setting absolute growth targets but rather about passing certain ARR milestones in a consistent manner without drastic fluctuations in growth rates. The rule also compares favorably with other growth models like the triple/triple/double/double/double (T2D3) rule, emphasizing the importance of maintaining a high growth rate initially and then retaining a significant percentage of that growth rate annually[1].

Insights

• Growth Trajectory Consistency: The Rule of 56789 focuses on achieving smooth and consistent growth rates as companies scale, avoiding the common pitfalls of whipsawing growth rates which can destabilize the business.
• Comparison with T2D3 Rule: The article compares the Rule of 56789 with the T2D3 rule, which suggests tripling and then doubling ARR at different stages. The Rule of 56789 is presented as a more stable alternative that aims for consistent growth without the extremes of tripling or doubling[1].
• Retention of Growth Rate: A key aspect of the Rule of 56789 is retaining a high percentage (approximately 85%) of the growth rate year over year, which is crucial for sustainable long-term growth[1].
• Limitations of the Rule: The rule is noted to be less effective after 8-10 years as the growth rate naturally tapers off due to larger base effects and market saturation. It also may not be suitable in situations requiring reacceleration of growth[1].

Implications

• Strategic Planning: Companies can use the Rule of 56789 as a guideline for setting realistic growth expectations and planning strategic initiatives that support sustainable growth.
• Investor Expectations: Understanding and potentially adopting this rule can help align investor expectations with realistic growth trajectories, potentially leading to more stable investment and valuation over time.
• Operational Stability: By avoiding extreme fluctuations in growth rates, companies may achieve more operational stability, allowing for better resource allocation and long-term planning[1].
• Adaptation in Growth Strategy: Companies approaching the upper limits of the Rule of 56789's effective timeframe should prepare to adapt their growth strategies to maintain momentum as the benefits of the rule diminish[1].

Rule of 56789

The rule suggests that achieving certain ARR (Annual Recurring Revenue) milestones within specific timeframes indicates impressive growth. The milestones are: