5 growth lessons learned scaling from $2M to $3M ARR

Every million dollars added to your Annual Recurring Revenue (ARR) feels like another World Cup kick that lands on target. The reality is that it usually takes many on-target goals to scale through every additional million, and these do not get any easier.

I’ve worked diligently to not only keep track of all the lessons I learned while scaling my startup that I co-founded two years ago, but also to share them with you. In my previous articles I discussed those key facts that I learned during my $0 to $1M ARR and my $1M to $2M ARR. This one will be no different.

While it may seem that not much changes between each successive million, you would be surprised at the mistakes one can make in this latest stage of startup growth. I’ll share with you why hiring earlier is frequently better, consistently allocating 10% of revenue to marketing throughout your expansion and the importance of strategic partnerships.

1. Don’t hire too late

Apart from select software startups, it is no secret that as you scale up it becomes necessary to increase your staffing levels. I learned this lesson during my own startup experience, and unfortunately made key hires too late, leading to stagnation in our growth, as the team quickly became inundated with too much work.

You must keep track of everyone on your team and their bandwidth consistently during the high-growth stages, because workloads can vary dramatically month to month, and even week to week. At my startup we weren’t doing this. Some individuals on the team were assigned tasks that should have realistically been shared by at least three employees, which inevitably led to errors and lost clients.

In addition, hiring experienced talent that has already accomplished what you’re seeking to do is vital and should occur as soon as your cashflow allows. The moment we made hires for our C-suite was the moment we began to break through numerous plateaus of growth, as their experience pushed us forward. When possible, make these key strategic hires sooner than you might otherwise realistically think you need to.

As a gauge on hiring for your team, ask yourself the following two questions:

How is the weekly bandwidth of everyone on our team?
If we brought on X hire, how much faster would our growth be?

2. 10% marketing budget

As our CMO, the budgeting for our marketing team falls directly under my domain. I am a firm believer that 10% of net revenue should be applied directly to marketing expenses. This includes paid acquisition spends, influencer deals, blog content writing and tools.

In B2B specifically, if you constantly spend the same amount while revenue is increasing and everything else stays equal, you won’t have enough volume to support the sales team. For example, we spent the same amount for six straight months, even though our revenues had increased 50%, leaving our sales team with the same lead volume. We expected to continue driving more closed deals, but that was a huge misconception as marketing spend stayed the same.

Percentage of marketing spend should move at the same rate as revenue. Image courtesy of Jonathan Martinez.

Make sure that you have a clear directive within your startup on what percentage should be allocated towards marketing each month to avoid stagnation.

3. Partnerships can 2x efforts

What may seem like obvious information, I have realized, is not typically of significant importance to early-stage startups. When we started to reach out to strategically-sourced companies, our acquisition was quickly diversified, which is crucial. Another huge upside to partnerships is that retention is typically higher from clients that are referred over, since they’re coming from a trusted source. If bandwidth allows, start sourcing for partnerships around this stage after you’ve achieved product-market-fit and have more brand affinity.

A quick method to closing more partnerships:

Find out which X companies share similar audiences, with non-competing products.
Reach out to close colleagues on LinkedIn that are 1st-degree connections with someone at X company.
Setup a call with X company from your close colleague’s referral.
Discuss potential partnership to help each other out.

Typical partnership deals formats:

Revenue share
Pay-per-referral

The two most common types of partnership agreements I’ve run into are the sharing of revenue on each sale closed or the paying of a flat fee per referred client. There are other various creative agreements, but these two should get you off the ground for your first few partnerships.

4. Diluted growth pillars

When trying to stand up various growth pillars such as video content, blog content, influencer deals and more, there’s only so much that can be done by one marketer. For a long period of time, my startup only had one marketer, who was directly responsible for the execution of multiple growth pillars. My mistake here is that we became too ambitious with all the pillars we wanted to launch at the same time, which resulted in the dilution of success of every one of them.

Instead of trying to launch various growth pillars at once, I recommend only executing on two growth pillars per growth marketer. Early on, it’s okay to test multiple growth pillars to see those which stick, which we did. However, it eventually becomes too difficult to manage many at scale. It’s better to have 100% juice squeezed out of the video and blog content than 10% squeezed from each of six growth pillars.

Most recently we’ve hired an additional marketer who has enabled us to split growth pillar responsibilities between greater levels of staffing. It may be hard to understand when to make new marketing hires, but if you’re consistently getting under-par results on various growth efforts, that is a sign!

5. Constantly bifurcate responsibilities

As you scale your startup, beyond simply checking on individual team members’ bandwidth, it becomes fruitful to reduce key responsibilities. What was once possible for one Operations Manager to do at 100 clients, becomes impossible at 150 clients. The same can be said for many other positions.

My co-founders and I would have weekly Saturday calls to discuss the team, their bandwidth and how we should bifurcate responsibilities. At times, this would lead to difficult conversations with team members, but it’s important to voice the issues faced with workload at scale. Every startup faces this challenge and makes its teams larger due to it.

Example of an individual in Operations whose responsibilities were adjusted as we scaled:

Previous responsibilities -

Managing customer success team
Managing agent success team
Managing client escalations
Reporting internal team incentives
Maintaining operations tooling
Maintaining operations reporting

New responsibilities -

Maintaining operations tooling
Maintaining operations reporting

This may seem like a radical shift in value or output, but as we scaled each individual responsibility became more work to manage. Two tools became five, one report became six, etc.

My hope is that this will help to alleviate some of the bumps faced when scaling your own startup. If there’s one takeaway, it’s that it is critical for you to constantly reevaluate your team sooner than you might feel is necessary. Outside of my own startup, I’ve witnessed this problem firsthand at Postmates and various other hyper-growth companies that I’ve advised. Evaluate, evaluate, and then evaluate some more.