“High NPS since the early days is the savior and boost after $10m ARR. The ones that are growing the fastest after $10m ARR not only had high NPS after $10m ARR — but had high NPS very early. But they weren’t always growing the fastest before $10m ARR. High NPS since the very earliest days seems to be the highest correlation to sustained growth after $10m ARR.”
Pre-Product-Market-Fit (PMF) SaaS startups face a dilemma. Is immediately finding revenue the highest priority or should it be something else? Revenue traction can be a simple proxy for product-market-fit. Getting to one or two million in annual recurring revenue (ARR) at high velocity is clearly a desirable unlock to long-term goals, whether it is raising a funding round or bootstrapped growth.
Yet most founders realize that only focusing on short-term revenue can lead to a local maxima, not the global maxima of tight PMF and highly scalable growth. In the challenging days of pre-PMF, building revenue can be a slow process. Absent strong revenue growth, signals of progress can be sparse. Is there a different north star metric that represents a better target for long-term success?
Yes. Jason Lemkin has done a lot of great blogging about KPI’s and growth. What he has found — and what we can confirm based on our experience working with a large number of early stage SaaS startups — is that the best predictor of long-term growth in SaaS is NPS. At $1M in ARR, one might expect growth rate to be the best signal of long-term growth. It’s not. The best predictor is high NPS.
To be clear, there are exceptions to every rule and there are certainly some low-NPS startups that scale well and many high-NPS SaaS companies that hit challenges. Yet looking at the SaaS companies we’ve worked with, our data set is in agreement with Lemkin. We’ve also found that the cases of SaaS companies hitting $10-$15 million ARR and then struggling are universally characterized by NPS problems.
Why is NPS such a magical predictor of long-term success?
It provides a powerful feedback loop for a startup that prevents the major problems of scaling in SaaS from metastasizing under the pressure of high growth. First, it creates tight alignment across the org chart. If NPS is high, it’s quite likely that there is a shared culture that prioritizes customers’ success. Second, when customers are net promoters it reflects strong word-of-mouth, which is the strongest source of leverage against rising customer acquisition costs. When team culture is strong and CAC is low in a growing software startup, success is virtually inevitable.
A number of sources that research customer experience indicate that 75%+ of companies don’t regularly model out the drivers of customer experience quality, which leaves them in the dark about what matters most to their customers. Given that bootstrappers tend to be cost conscious, our experience across client companies and other bootstrappers is that they map at least with these numbers (if not beyond market-average thresholds). For bootstrappers, the question about where to spend time and money often comes down to opportunity cost and in our next post, we’ll get into why we view NPS as very high leverage even for the highly cost-conscious, self-funded business.
Horizon Partners is a boutique M&A advisory firm for bootstrapped technology businesses. To learn more, subscribe to the Horizon Partners blog or email us at firstname.lastname@example.org.