The path from zero to IPO: Revisiting the Mendoza line in 2024 - Scale Venture Partners

Key takeaway

• For entrepreneurs: To stay on an IPO trajectory in 2024, startups need higher growth rates sustained for longer periods compared to 2018, with a target of $250M ARR growing at 25%.
• For investors: The bar for venture-backable SaaS companies has risen significantly, requiring more careful evaluation of growth rates and potential trajectories.

Summary

The article revisits the concept of the "Mendoza line for SaaS," updating it for 2024 market conditions. It outlines the growth rates and ARR levels needed for startups to stay on track for an IPO, emphasizing the increased difficulty compared to 2018. The piece introduces a tool for calculating custom Mendoza lines and discusses strategies for companies that fall below the line.

Insights

• The target for IPO-ready companies has shifted from $100M ARR growing at 30% to $250M ARR growing at 25% with a clear path to profitability.
• Growth persistence remains at about 85%, meaning each year's growth rate is expected to be 85% of the previous year's.
• Starting at $10M ARR, a company now needs to grow at least 100% and maintain high growth for eight years to reach IPO scale, compared to 77% growth for six years in 2018.
• Only about 1% of startups actually achieve an IPO.
• Companies that fall below the Mendoza line should focus on reaching cash-flow breakeven and consider alternative exit strategies.

Implications

• Entrepreneurs need to set more ambitious growth targets and maintain them for longer periods.
• Investors should adjust their expectations and evaluation criteria for potential investments.
• The importance of efficiency and profitability has increased, even for high-growth companies.
• Alternative exit strategies, such as PE buyouts or mergers, may become more common for companies that can't maintain IPO-trajectory growth.
• Early-stage funding may become more challenging as the bar for "venture-backable" companies rises.