How do you build a billion-dollar business? It’s not a linear process. When I started at Salesforce.com (CRM), we were 10 guys in a room. Our path to success was much more of a slow climb, with lots of switchbacks along the way.
I like the switchback metaphor because it represents how companies entering a new growth stage must essentially become a new organization. The things that made it successful during one stage may actually prevent it from succeeding during the next. So at each stage, it must be willing to change the rules and toss the sacred cows.
I started Zuora in 2007. And over the years, I have learned what it takes to build a $1 billion company. These are some of the biggest lessons I learned, at each stage of growth:
Prove the idea: $0 to $1 million
With the right idea, you can generally raise $1 million with a seed round. You don’t have to bet the whole company on an A round. At Zuora, for example, our idea was that subscription-based companies shouldn’t have to build their own billing systems just because telco billing systems were too expensive and regular enterprise resource planning (ERP) systems didn’t provide the required features. So we built a prototype and spoke with over 50 potential customers. Through Salesforce.com, we put screen shots on a website, invited people to participate in a beta, showed a demo to everyone interested, and asked what they thought. We had 200 customers lined up when we launched.
Prove the product: $1 million to $3 million
What product do your customers really need? You may have to cull your ideas and decide what to build first and what can be pushed out to later years. Or you may have to do the opposite. We initially thought a simple billing system was sufficient. Then we realized we needed a very broad platform, including application program interfaces (APIs), payment systems, commerce platforms, and tax engines.
You’re still learning at this stage, but you have to complete the process now. You won’t have time to dramatically re-engineer your product during the next stage because you’ll be looking to scale. You’ll also need a coherent product roadmap in place.
Prove the market: $3 million to $10 million
This stage is very exciting. You’re hiring salespeople, spending money on marketing, and focusing on execution. Defining your market is now essential. Is it truly a billion dollar market? $500 million? $100 million? For your seed or A round, it was all about hopes and dreams. Now investors will demand to know how big this market really is, and you’ll need the story and statistics to prove it.
When we started Zuora, many assumed our product was strictly for the software as a service (SaaS) industry. We knew any company could benefit from our solution, so we gathered the proof points by going to media, financial services, and healthcare companies. We even went to a public company. Don’t automatically limit yourself to focusing on a single vertical. It can actually box you into a smaller market.
Prove the business model: $10 million to $30 million
Now it’s time to focus on your business model. What is your customer acquisition cost? Your churn rate? How much does your R&D really cost? What is your customer lifetime value? Your gross margins? Do you have a positive net dollar retention? Are the trends getting better?
I’m not suggesting you completely ignore business model metrics during earlier stages, but the cost of a sub-optimal business model at $10 million is small. But now you need to make the tough choices so you don’t find yourself at a $30 million run rate with a money-losing business. Do you have the right sales model? If not, swap out the sales team. Are you chasing unprofitable customers? If so, make them profitable or stop doing it. Do your price points allow for strong gross margins? If not, figure out how to increase revenues per customer. Keep in mind that at this stage “chasing anything that moves” is one of the top reasons companies stall.
Prove the vision: $30 million to $100 million
If you’re going to take public money or larger investments, your new investors need to know you’re a safe bet and will be around for the long haul. They aren’t venture investors that expect some of their bets to fail. They want minimal risk. They want the right management team and board. They want predictable execution and positive cash flow, or at least a clear path to achieving it. They also need to see that the market size is real and that you’re a leader with the right set of products, people, and partners to create a sustainable competitive advantage.
Prove the industry: $100 million to $300 million
At this point, your company has scale. Smaller companies are starting to surround you, like planets circling a sun. They like your customer base and marketing. They like how many salespeople you have and hope to use those salespeople to increase their reach.
Now is the time to build an ecosystem. It won’t happen overnight, but by the time you reach $300 million, you need to be able to explain how, as the center of an expanding industry, you will continue to grow with it. By creating a ‘platform’ with a burgeoning ecosystem, you are actually demonstrating how you will become a billion dollar business.
Prove the company: $300 million to $1 billion
You have everything in place to reach a billion. Now it comes down to execution. Never get complacent. Never lose sight of how the industry and competitors are evolving, especially start-ups with new and potentially disruptive ideas.
Few companies make it to a billion, but by breaking the journey into stages, the process becomes more comprehensible and less forbidding. Just recognize that each stage is different and what you are trying to prove is different. Embrace change. Embrace the switchback. For only when you round the turns can you begin to understand John D. Rockefeller’s phrase, “Don’t be afraid to give up the good to go for the great.”
Tien Tzuo is the CEO of Zuora, a software company that designs and sells SaaS applications for companies with a subscription business model.