Have you ever wondered how some software companies become incredibly valuable?
It’s not by accident; it’s a well-planned strategy.
There’s a framework called T2D3 that many successful SaaS businesses follow. It’s like a recipe for creating a super successful company.
In this article, we’ll explain what T2D3 is, where it came from, and its important parts.
We’ll also show you how it can help your SaaS company grow and succeed.
Whether you’re starting a company, investing in one, or just interested in how these businesses work, this guide will help you understand how they achieve such amazing growth.
T2D3 Framework
T2D3 Framework means “Triple, Triple, Double, Double, Double Framework”. This business tactic shows that SaaS companies should increase their business revenue three times for two years and two times for three years.
I am going to explain it in more detail in this article.
T2D3 Framework Formula:
T2D3 = MQL/CAC * Conversion Rate % * ARPU / Churn
Here’s the Full Forms
MQL = Marketing Qualified Lead
CAC = Customer Acquisition Cost
ARPU = Average Revenue Per Customer
The origins of T2D3
T2D3 was introduced by SaaS Investor Neeraj Agarwal, a General Partner at Battery Ventures. He is a frequent writer and speaker on software and related topics. He specialized in investing in B2B software companies and created the “T2D3” growth model for SaaS businesses.
Here’s his investments list.
Neeraj Agarwal strongly believes creating a highly successful company is like climbing a mountain. You reach the top by focusing on each small step rather than getting overwhelmed by the whole journey.
In his article, Neeraj introduced a concept called T2D3 to explain the journey of growing a software company. At first, he used T2D3 as a way to measure success. Later, he started advising the companies he invested in to follow the steps outlined in T2D3. Many other software companies are trying to copy this model for their growth.
Neeraj Says: You can’t climb Mount Kilimanjaro in a single day, and similarly, you can’t build a successful software company overnight. Focus on small, achievable goals and work tirelessly towards them to reach the next level of success.
He thinks there are seven important stages in a SaaS company’s journey to successfully launching and selling its product.
Most of these stages involve achieving big revenue growth every year. He calls this the “triple, triple, double, double, double” approach, which means tripling your revenue twice and then doubling it three times in a row.
There are other ways to achieve success in SaaS, as companies like Cornerstone, ExactTarget, and SuccessFactors have proven. But T2D3 is one proven path to get there.
Each stage requires a different focus, like adapting your sales process, strategically expanding your team and company, and growing internationally.
Neeraj Says “You succeed by placing one foot in front of the other, of course — and more pragmatic, in that the journey is always broken into multiple, distinct phases,”
T2D3 in 7 steps
Step 1: Establish a great product-market fit
This means figuring out what problems your customers have and which are the most important to them. Then, make sure your product solves those specific problems.
Many people starting businesses ask Neeraj Agarwal how they’ll know if their product is a good fit for the market. Sadly, there’s no simple answer.
Usually, He talks to potential or current customers in a specific industry and asks them about their biggest challenges. He knows we’re on the right track when he hears similar problems from several of them. After we create the product, it’s easy to test it to see if customers actually find it helpful.
It’s also very important that the problem we’re solving is one of the top two problems for our target customer. Neeraj Highlights that he has learned that customers rarely have time to deal with anything beyond their top two priorities.
Step 2: Reach a $2 million ARR (annual recurring revenue)
During this stage, the focus is on getting the initial customers for your business. It’s about finding the ‘right’ first few clients and refining how you sell your product or service. If your typical sale is worth around $30,000 to $80,000, you’ll need to reach 30 to 60 customers. This phase usually takes one to two years to complete.
In my view, this early phase is crucial for any startup. It’s where you validate your product-market fit and establish a solid foundation for future growth. It requires a lot of hard work, dedication, and resilience from the founders. It’s not just about making sales; it’s about building relationships, understanding customer needs, and continuously improving your product or service.
Step 3: Triple to $6 million in ARR in First Year
Neeraj observes that SaaS founders often reach their first “triple” goal in one of two ways:
- The “hero” approach: Founders personally close almost every deal. This is hard work but doesn’t allow for long-term growth.
- The “sales machine” approach: Founders hire a sales leader and a team. This is tougher to set up initially but leads to sustainable growth. It may take time for the whole team to become fully productive.
Step 4: Triple to $18 million in ARR in Second Year
This is where things get exciting, like reaching the first base camp on a mountain climb. Renewals and referrals start driving sales, and only a small sales team is needed. The next milestone is adding another level of sales management below the VP of sales.
This can be challenging for a founder/CEO, as they’re now further removed from the sales process. But it’s a chance for them to grow, focusing on developing managers and closing big deals. The key moment is when sales happen without the founder’s direct involvement.
This sets the stage for huge growth potential. Adding that second layer of sales management is often one of the hardest things for SaaS companies to do successfully.
Step 5: Double to $36 million in ARR in Third Year
At this stage, there’s a larger sales team and multiple managers. The big challenge is expanding sales to Europe. International expansion often begins now, with someone hired in the EMEA region (some combination of U.K., France and Germany).
Many companies try expanding to several international regions at once, but it’s better to focus on one region first. Get EMEA working well before expanding elsewhere. It’s better to have a strong team in one country like the UK, rather than spreading thin across multiple countries. This allows you to build customer references, create a successful strategy, and develop local leaders who will ensure continued success.
Step 6: Double to $72 million in ARR in Fourth Year
This phase comes with many operational challenges. Questions arise about leadership: Promote someone internally or hire externally for North America? Should EMEA report to the US leader, or hire a global CRO? Another challenge is achieving non-linear growth or getting a reseller/partner channel working.
Starting a reseller network before reaching a $50 million annual revenue rate is usually too early. The financial incentives for partners aren’t strong enough. Focus on quality over quantity – aim for one or two successful channel partners rather than many. It’s difficult to even get one reseller relationship working effectively.
Example Channel Partners for SaaS Companies:
- Value-Added Resellers (VARs): Resell your software and add extra services, increasing its appeal. (Example: Project management software bundled with consulting.)
- Managed Service Providers (MSPs): Offer IT services and include your software in their package. (Example: Cloud backup included with IT infrastructure management.)
- System Integrators (SIs): Connect different software systems, helping integrate your software with others. (Example: Integrating CRM software with existing ERP system.)
- Consultants: Industry experts who recommend your software as part of a solution. (Example: Marketing consultant suggesting a social media tool.)
- Technology Partners: Have software that complements yours, partnering for joint solutions or marketing. (Example: E-commerce platform partnering with payment gateway.)
- Distributors: Buy your software in bulk and resell it to others. (Example: Distributor selling learning management system to schools.)
- Affiliate Partners: Promote your software and earn commission on sales. (Example: Blogger reviewing software and including purchase link.)
Step 7: Double to $144 million in ARR in Fifth Year
The company is nearing a major achievement: reaching a $1 billion valuation and possibly going public (IPO). But this is just the start. Most great companies create most of their value after going public. That’s why investing in both early and late-stage companies is important. The current focus is on building these private companies into successful businesses. After completing Phase 7, the next big goal is to reach $1 billion in revenue.
The chart shows how seven well-known, publicly traded SaaS companies followed a specific growth pattern to become successful. They roughly tripled their revenue twice, then doubled it three times in a row. This pattern is called “triple, triple, double, double double” or T2D3.
Is T2D3 right for your business?
It’s worth noting that while T2D3 is a metric used by investors to predict success, it’s not the only factor that determines a business’s success. There are other things besides valuation to consider.
For example, public companies can have high valuations even if they aren’t profitable. This can happen after rapid growth. Research shows that free cash flow (FCF) might explain this phenomenon.
The connection between FCF and a company’s overall value is even stronger than the connection between revenue and value. You can increase FCF by increasing revenue or profit. This means profit might be just as important for achieving a high valuation, supporting the idea that “sales fixes everything.”
Here are examples of companies that achieved high valuations without following the T2D3 growth pattern:
- Qualtrics: Acquired for $8 billion despite moderate revenue and growth. They attribute their high valuation to profitability and their unique position in the growing “feedback economy.”
- PluralSight: Went public with a high valuation due to profitability and their potential in the corporate e-learning market. They had a long history of bootstrapping before seeking venture funding.
Focusing on profits has its advantages. It provides a safety net for businesses during economic downturns or when funding is scarce. It’s better to have slow growth and be profitable than to go bankrupt.
While success is possible without rapid growth, growing too slowly has its drawbacks. It’s much harder to reach $100 million in annual recurring revenue (ARR) at a slow pace, and slow-growing companies struggle to attract top talent and keep up with faster competitors. A deliberate slow-growth strategy can backfire if conditions aren’t favorable.
Venture capitalist Christoph Janz highlights this in his blog post titled “How Fast is Fast Enough?“
He says “If your goal is to eventually get to $100M in ARR, I think you should try to get there as fast as possible, and getting there by the end of year seven after public launch feels about right to me. This may seem like a very ambitious goal, but it would be boring if it was easy, wouldn’t it?”
Conclusion
Neeraj Agrawal suggests that the T2D3 growth pattern is a reliable way to succeed in the SaaS market, but it’s not the only option.
Other companies have achieved great success by prioritizing profitability and finding their niche.
The key is understanding your business and choosing the best growth strategy for you.
Whether you focus on rapid growth, steady profits, or a mix of both, having a clear plan is crucial.
There’s no single path to success in the SaaS world, so find what works for you and your company.
Reference Articles:
1) The T2D3 Path to SaaS Growth and $1B Valuation by Russ Hardy
2) How fast is fast enough? by Christoph Janz
3) T2D3 framework: how startups hit $1B value in 5 years by Roberta Aukstikalnyte
4) T2D3 playbook by Stijn Hendrikse