Scaling to $100m ARR (1)

The average growth rate for companies between $1-10MM of ARR was nearly 200%, decreasing to 60% for companies over $100MM+
Optimizing Margins

Gross margins average 65-70% across company lifetimes
While COGS are primarily variable costs, you should expect to get leverage from fixed operating expenses: Research & Development (R&D), Sales & Marketing (S&M), and General & Administrative (G&A)

By $100MM of ARR, these expenses average 35%, 50%, and 20% respectively of cloud company revenue

Target $100MM+ of GAAP revenue and visibility to FCF breakeven within 1-2 years before eyeing the public markets.

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What is ARR?

YoY Growth Rate Trends by ARR Scale-

The average growth rate for companies between $1-10MM of ARR was nearly 200%, and this average decreases to 60% for companies over $50MM of ARR.
By $50MM or $100MM of ARR, the Cloud Giants are crowned. Given the virtuous cycle of market leadership, the leaders that emerge are able to further consolidate their markets, accelerating growth.
Expanding into “Second Act” products

Second, market leaders tend to accelerate their growth and expand their total addressable markets (TAM) by adding “Second Act” products, so even if there is growth decay in the core product, there are constant second, third, and even fourth winds behind company growth as a whole.

On the persistence of growth - “Examining our cloud company data, we also note that it is very rare to see a best-in-class growth rate company quickly devolve into a laggard. Similarly, it is very rare to see a mediocre grower evolve into a high-grower.” Reorientations of the magnitude needed to change growth trajectory are difficult.
Growth Endurance

Every cloud company quickly learns that every percentage taken out of your retention is taken out of your growth rate.
Gross retention will vary based on customer segment, and we have seen successful cloud businesses that address SMB segments – such as HubSpot (in its 3 years pre-IPO) – with 70-80% gross retention
Net retention - Unlike gross retention, the data for net retention shows more variance over time, ranging from 105-145% between $1-10MM of ARR and decreasing slightly to a range of 105-125% by $100MM+ of ARR
Only the bottom quartile of cloud companies have <100% net retention rates
Again, net retention often differs by segment, with SMB segments experiencing lower net retention rates than enterprise segments. For example, when Mindbody went public it had 109% net retention on ~$2K ACVs—compare that to Okta which had 123% net retention on $50K+ ACVs.

Retentions by ARR Scale

Net Retention Revenue = (Beginning ARR + Expansion ARR - Churned ARR) / Beginning ARR
Gross Retention Revenue = (Beginning ARR - Churned ARR) / Beginning ARR
NRR varies across industries!

Developer tools have the greatest average and median net retention rates across our portfolio, in line with what we would expect from a bottoms-up sales strategy that expands seat count and usage as it permeates an org. Collaboration software shows a similar dynamic. Though there are exceptions, industries such as sales and marketing software, customer experience software, and finance / legal tech tend to have lower net retention, likely because land ACVs are higher and expansion over time is lower (often these tools sell a complete platform, rather than individual seats or usage tiers).

For two companies with the same ARR and growth rate, you can distinguish them by looking at profitability / burn rate, efficiency etc… One spending 10m on sales and other spending 50m on sales shows clear winner.
A high gross margin means that a cloud company can invest more into operating expenses rather than product delivery, leading to more selling, product iteration, and ultimately, growth
Typical expenses that you will find in COGS for cloud companies are hosting costs, software implementation costs, and services costs, including customer success—these are all variable costs.
Good gross margin range as ~60-80%

Some of the strongest cloud companies in our portfolio have been ones with gross margins below that range. For example, throughout much of its life in the Bessemer portfolio since the seed round in 2009, Twilio’s gross margin was ~50%, which accounted for the fact that it had to pay telecom service providers in its COGS.

S&M, R&D and G&A Spreads as You Scale

Given its importance to your business, the irony is that R&D tends not to be the major cost driver for most cloud companies, representing an average of 95% of revenue in the early years but decreasing to only 35% by $100MM+ of ARR. This is generally because an investment in the product—and product innovation—propels a company’s growth in the early years, but ongoing investment in R&D does not scale linearly with revenue growth over time.
For example, when we invested in PagerDuty in 2014, R&D expense was almost 60% of revenue; however, by the time it went public, it was only about 35%.
The general and administrative (G&A) expense line item on the income statement generally includes the functions that run the back office of your company, including executive leadership, finance, legal and compliance, HR, information technology, and other administrative functions.

Average G&A expense goes from being 70% of revenue from $1-10MM of ARR to only 20% at $50MM+.

S&M represents the highest cost centers in cloud companies, representing over 50% of the total revenues brought in every year even at maturity, as salespeople and marketing talent scale more linearly with revenue growth.

The primary metric that we like to use to evaluate S&M efficiency is Customer Acquisition Cost (CAC) Payback. CAC payback is the rate at which the costs spent to acquire a customer are repaid by that customer, and it usually includes sales, marketing, and customer success expenses (at least the portion that ties to renewal/upsell/cross-sell).

While we present the averages across Bessemer’s cloud portfolio, CAC paybacks can range materially, generally due to customer segment. For cloud companies selling into SMB-focused accounts, you should target CAC payback <12 months; for mid-market-focused accounts, target CAC payback <18 months; and for enterprise-focused accounts, target <24 months.
Put another way, enterprise segments tend to have long lifetimes and therefore high CLTVs and SMB short lifetimes and therefore lower CLTVs, thereby supporting significantly different customer acquisition cost structures.