Startup Growth Trajectories and the SaaS Mendoza Line

2024 Mendoza Line Support Sheet.xlsx

Key takeaway

• For entrepreneurs: Understanding your company's growth trajectory relative to the updated SaaS Mendoza Line can help you gauge if you're on a venture-backable path and adjust strategies accordingly.
• For investors: The criteria for venture-backable SaaS companies have significantly changed since 2018, with higher ARR and growth expectations at IPO, necessitating a reevaluation of investment thresholds.

Summary

The article discusses the evolution of the SaaS Mendoza Line, a concept introduced by Rory O'Driscoll in 2018 to define the minimum growth rate for venture-backable SaaS companies. It compares the original 2018 version with the updated 2024 version, highlighting changes in IPO expectations and growth trajectories. The piece also contrasts the Mendoza Line with other growth metrics like T2D3 and the Rule of 56789, emphasizing the importance of understanding these benchmarks in the current market context.

Insights

• The IPO bar for SaaS companies has significantly increased since 2018, from $100M ARR to potentially $400M ARR with 40% growth.
• The 2024 Mendoza Line starts at $10M ARR, acknowledging the unpredictability of early-stage growth.
• Growth endurance (maintaining 85% of the previous year's growth rate) is a key factor in these models.
• Different growth trajectory rules (Mendoza Line, T2D3, Rule of 56789) produce varying results and are applicable in different contexts.
• The time to IPO for SaaS companies has extended, with a median of around 14 years.

Implications

• Entrepreneurs need to reassess their growth strategies to align with current market expectations.
• Investors should adjust their evaluation criteria for potential investments, considering the higher bar for successful exits.
• Alternative funding sources like PE, regional VCs, or revenue-based financing may be more appropriate for companies not meeting top-tier VC growth expectations.
• The applicability of growth models is limited to specific ranges and market conditions, requiring careful consideration in their use.
• Companies may need to maintain high growth rates for longer periods to achieve the new IPO thresholds.