The Business of Govtech: Getting to $100mm in Revenue
Is it possible to build a $100mm revenue business in govtech? Here’s an easy way to think about getting to $100mm in ARR:
- 1 customer pays $100mm annually
- 10 customers pay $10mm each, every year
- 100 customers pay $1mm each, every year
- 1,000 customers pay $100,000 each, every year
- 10,000 customers pay $10,000 each, every year
- 100,000 customers pay $1,000 each, every year
*If you are thinking about getting to $1mm ARR or $10mm in ARR, this model still works great, just remove a few zeros.
Let’s be clear about the difficulty in getting to $100mm ARR; it’s fucking hard. As founders, we sometimes believe we can bend the universe to our will and shit just happens. Good founders can individually drive a company to $1mm ARR. Great founders can individually drive a company to $10mm ARR. In order to get to a $100mm in ARR, a variety of things outside of the founder’s drive need to be present. Here are several elements to consider:
Market Size: Govtech is unique in the sense that the customer count is finite. Public agencies also operate with zero-sum budgets and those budgets need to cover everything from new park benches to SaaS products. If you are selling to local government, there are about 40,000 incorporated places in the Unites States. That means the “100,000 customers paying $1,000 / annually” option isn’t possible. The “10,000 customers paying $10,000 / annually” option would require a 25% market share for a particular product. Every company will have some customer churn and govtech doesn’t have new customers like a typical enterprise market. Which means you have to both acquire 25% of the market and then retain 25% of the market.
Cash: If you are a startup, cash equals time. How much time do you have to build and distribute your product? Do you have the necessary resources to support your customers? Building a product that justifies $100mm annual contract is both difficult and expensive. It’s unlikely that most govtech companies will raise enough capital to build a product that unique. Unless we consider SpaceX a govtech company, let’s eliminate that possible path to $100mm ARR.
Competency: Is your company better suited to build a great product or acquire a ton of customers. The very best companies learn to do both well, but typically, startups are better suited for one or the other. Understanding the competitive advantage you possess in regards to competency is key to picking the right path. Technical founders might lean towards building a premium product whereas non-technical founders might lean towards a customer acquisition model.
Problem Identification: Are you solving a problem that creates more value than what you are charging? Pricing is a reflection of value generated. In other words, your price is some fraction of the value you create for your customer. Minimally, new products need to generate 3–5x their price in value for a customer to adopt. Ideally, your product is generating 10x its price in value. Translated, a $100K / year product needs to be creating somewhere between $300K-$1mm in value for the customer. If the problem your solving can’t generate that kind of multiple in value, it doesn’t matter what path you prefer.
Execution / Team Building: Each of these growth models has different team building and execution requirements. A premium priced product with fewer customers likely has a much higher engineer to non-engineer ratio. Conversely, a product prices at $10K requires a large marketing and sales team to get scale. Not only does team building look different, the strategies and tactics look much different.
Giving the various factors in govtech, I do think it’s possible to build a business that generates $100mm ARR. My own hypothesis is that it’s going to take a product that commands $100K / annually or more given the market size constraints. Typically, companies might think about internationalization as a means of growing the market, but govtech presents an entirely different challenge when it comes to internationalization.
If building a $100mm ARR business is not your goal, that’s perfectly fine. Your revenue goals can be anything from $1 / year to $100mm / year and this kind of exercise is helpful in understanding what needs to be in done in order to achieve the goal.
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