“When a great team meets a great market, something special happens…if you address a market that really wants your product – if the dogs are eating the dog food – then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.” – Andy Rachleff on product-market fit.
When the dogs are eating the dog food, i.e., a company has found product-market fit, there seems to be a magical self-sustaining quality. Another way this manifests is in R40 persistence. In our previous post we highlighted the uniqueness of certain software companies with high, persistent R40 scores. How do we define persistence? At what percentage do we consider a company to have exceptional R40 resilience? We took a look at a group of 48 public software companies* over three years to see whether their R40 scores were at least 85% or 90% of the prior year. The comp group’s years 1-3 primarily occurred in 2017, 2018, 2019 or 2020. If you asked a random sample of people they’d most likely assume R40 would decay overtime. However, we see quite the opposite.
% of companies in comp group with at least 85% persistence each year:
- Year 1: 66%
- Year 2: 75%
- Year 3: 76%
% of companies in comp group with at least 90% persistence each year:
- Year 1: 55%
- Year 2: 65%
- Year 3: 70%
Average and median R40 persistence over the period:
This analysis shows us that this group of high-growth software companies largely defy the economic principles of regression to the mean. Rather than slowly decaying over three years, we see the average and median persistence scores remain fairly stable. We define persistence of R40 as at least 85% each year, however we see that even if we raise the threshold to 90%, more than half of the companies still see incredible resilience. A few standouts include Atlassian and Veeva Systems, both with median persistence of 107%. We’ve linked a few articles discussing how they nailed product-market fit with Atlassian spear-heading the bottoms-up approach and Veeva dominating a vertical-niche. When you have product-market fit, it clarifies everything. A team at a company that doesn’t have product-market fit will appear to be failing, but that same group of people at a company with tight product-market fit will seem superior. It’s as if these companies have found the magic formula that links team and product; everything else falls into place. We’ll dive further into the importance of people and product for successful bootstrappers in our next blog post.
* The Bessemer Emerging Cloud Index is comprised of 52 companies. We analyzed most of these and excluded some with low growth (<20%). We added in a few other interesting, high-growth SaaS businesses that aren’t included in the index such as Snowflake Inc. and Unity Software Inc. Our analysis group is comprised of: ASAN, APPF, AVLR, AYX, BILL, BL, COUP, CRM, CRWD, DDOG, DOCU, ESTC, EVBG, FIVN, FROG, FSLY, HUBS, MDB, NCNO, NET, NOW, OKTA, PD, PLAN, PS, QLYS, RNG, SHOP, SMAR, SNOW, SPT, SQ, SUMO, SVMK, TEAM, TENB, TWLO, TWOU, U, VEEV, WDAY, WIX, WORK, XM, ZEN, ZI, ZM, and ZS.
Horizon Partners is a boutique M&A advisory firm for bootstrapped technology businesses. To learn more, subscribe to the Horizon Partners blog.