The rule of 40 & Sanjay Nath on how to build, scale & measure growth in B2B and SaaS startups

  
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In today’s episode we are joined by Sanjay Nath, who is the Managing Partner of Blume Ventures, one of India’s leading early stage VC firm.

From his early career when he was as a management consultant in Silicon Valley to the days when he helped his father scale a tech company (which went on to then be acquired by a global tech giant), to being one of the first angel investors to put his own money in deep tech startups before AI was a thing, Sanjay is a force to reckon with when it comes to his knowledge of building and scaling enterprise technology companies. In this episode Ravish and Sanjay go deep into the intricacies of building and scaling B2B, SaaS and deep tech startups (see timestamp below for exact topics covered).

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Note: When Sanjay’s co-founder, Karthik Reddy was on the show he talked about the need for Indian startups to balance growth and profitability. In a similar context during the episode, we mention the Rule of 40 - which we believe is an important mental model for investors and founders to measure the balance between growth and profitability . According to it, as a rule of thumb for SaaS companies, your growth rate + your profit % should add up to 40%. So, if you are growing at 20%, you should be generating a profit of at least 20%. If you are growing at 40%, it’s okay if you are generating a 0% profit. If you are growing at 50%, you aren’t in bad zone if you have a loss of 10%.

It goes to show that both the growth rate and profitability are important in determining the valuation multiple of a SaaS company and a balance between the two must be maintained. See the graph of public SaaS companies in the US plotted by Pacific Crest below.

The rule was suggested by Brad Feld, MD of Foundry Group and co-founder of Techstars, based on his learnings from various board meetings of global SaaS companies. Remember though, that this is not set in stone, but just a general mental model to remember that balancing growth with profitability is important, especially as it impacts your company’s valuation.


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Timestamp/ Topics covered

  • 00:33 - Industry level changes in B2B/Enterprise tech startups in last 10 years

  • 02:35 – Talent and capital shifts in India; the lack of non-consumer datasets to tie real economy to enterprise technology

  • 08:10 – Dependency of Indian B2B startups on US/ other international markets for data and sales as a major barrier to entry and ways to overcome that – lead generation, sales, incubation, tips for founders

  • 16:47 – Pricing software- art or science? Understanding the difference between Asian and western markets, discounts and positioning

  • 21:45- Three chasms in growth: ARR $1mn, $5mn and $10mn; metrics & benchmarks to measure B2B/SaaS companies – Annual Recurring Revenues, Net Dollar Retention, Margins, etc...

  • 26:00- Has the larger Indian IT industry done enough to grow the domestic Indian B2B startups?

  • 28:45- Board room shifts in B2B startups during early stages; the rule of 40 for SaaS companies – valuation as a function of growth and profitability; current market valuations

  • 34:00- Closing thoughts for founders


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See you next time!

Thank you for listening,

JPK and Ravish


Correction (added after publishing):

At 22:30, I mix Annual Recurring Revenue and Accounting Rate of Return as the definition of ARR. Apologies for the mistake!
-Ravish Bhatia

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