18 months before $50M in ARR
When math and middle management decide your destiny
My specialty is helping startups navigate transformative change on the path from $10M to $100M in ARR. Over the course of this quarter I’m exploring a question that’s been bugging me for years: Why aren’t we hiring leaders based on their ability to build teams of lieutenants?
To recap last week’s post (The magic of middle management):
Middle management is where the balance is struck between having the context-specific expertise to go deep in one area every day vs. having the ability (and time) to step back and understand goals that you’re not directly responsible for.
Without a middle-management layer the burden of cross-functional coordination falls to the IC level and devolves to being tactical – and, as a result, upward feedback on strategic decisions gets stuck with teams too busy chasing weekly goals.
Leaders can’t live up to their full potential without the shoulders of middle managers to stand on. As a leader, it feels like pure magic when your teams connect the dots on their own, close your blind spots without even asking, and operate autonomously across reporting lines.
But here’s the $$$ question: at what point on the journey from $10M to $100M in revenue does the lack of middle management become an existential risk?
If you add an extra management layer too early it will:
Slow down decision-making – instead of allowing leaders to focus on “bigger” decisions.
Lead to an explosion of 1:1s – instead of setting up semi-autonomous teams that operate in lock-step.
Default to decision by consensus – instead of proactively identifying opportunities and risks.
So, as a prudent steward of company resources and the cap table, you need to know: how late in my company’s journey can I wait before I add this middle management layer (without taking on an unreasonable amount of risk)?
If you’re in B2B SaaS, 18 months before $50M in ARR is the breakeven point when it comes down to talent and org design. Growing past $50M without a functioning middle management layer in place is an existential threat.
The impact to new business sales is easiest to quantify here. A few rules of thumb to keep in mind:
At $50M in ARR you need to be growing at least 40% YoY in order to reach IPO “escape velocity.”
The best performing startups get ½ of their growth from expansion i.e. 120%+ NDR (Net Dollar Retention).
Quota achievement declines rapidly when the span of control (ratio of sales managers to individual contributors) exceeds 7.
For fast-growing startups the de-facto span of control is 5: you need to create room for more coordination, problem-solving, coaching, and ongoing hiring.
A high-performing enterprise seller, when setup for success, can achieve ~$1M in bookings per year.
This means that without middle management you can support:
5 AEs per manager x $1M in bookings per AE x 2 sales front-line managers
= $10M in New Business
plus expansion (120% NDR) → $20M of total growth on a base of $50M = 40% YoY
Why only 2 sales front-line managers?
Your Head of Sales also has a cap on their span of control. Without middle managers to support them, they’ll need to manage 7 people directly:
2 sales front-line leaders (to deliver $10M in new business)
2 AM/CSM front-line leaders (to deliver a similar $10M in growth from NDR)
1 SDR leader (based on a 2:1 ratio of SDRs to AEs)
1 Sales/RevOps leader
1 SE leader
Past this point, without middle management in place, your growth slows down rapidly: you keep capping out at $20M in new bookings per year
It looks like this: $50M → $70M (+40% YoY) → $90M (+29% YoY) → $110M (+22% YoY). All of a sudden, you’re on a path to hit ~$100M with only ~20% growth – metrics that are not good enough to raise another round on or go public.
This constrains your choices:
Run a cash flow break-even company or get bought for 3-4x ARR. Both of these are, arguably, existential risks in a venture-capital backed context.
A death spiral could look like this: you’re forced to take a down round, you slow down or even freeze hiring, morale suffers, your best talent quits, your growth slows down further as a result…
Bringing in middle management allows you to scale past +$20M in New Bookings and maintain 50% growth on the way to $100M in ARR.
An extra layer of leadership removes the constraint of having only 2 front-line managers for new business and, in turn, puts capabilities/systems in place to expand the span of control from 5 to 7.
If you’re an early stage startup, you may choose to call this layer “VPs” instead of “Directors” (I would advise against this – and will cover the trade-offs next week), but the reality is that their job description, as captured in the Abacus & Pencil career framework, is that of a middle manager – to coordinate cross-functionally on the way down and aggregate feedback into patterns on the way up.
Last but not least, the middle management layer needs to already be in place and functioning well if you want to avoid a mad rush the moment you hit $50M in ARR. To do this well you need an 18 month head start!
You’re solving for consecutive ramp periods: 6 months for middle managers to ramp + 6 months for them to start humming as an organizational layer + 6 months for all the ICs they hire to ramp under them.
In my view, the best way to do this is by hiring upwardly mobile high-potential senior managers / directors who can grow into a director / senior director / VP role in 18-36 months. (More on that in next week’s post.)
What about the rest of the company?
The complexity of your Marketing, Product, and even Finance teams needs to mirror the complexity of your sales org.
Here’s a non-exhaustive list of what you’ll need to support a multi-layer GTM org:
Director of FP&A. The moment you start bringing in a layer of decision-makers between your executives and front-line managers you need a proper budgeting and planning processes to empower them – otherwise, these new leaders will quickly devolve into glorified supervisors. In parallel, you will also want more checks and balances on headcount approvals, discounts, sales commissions, etc.
A product marketing team. More AEs & AMs means you need repeatable messaging and positioning. You can no longer rely on hiring the handful of sales talent out there that’s capable of figuring out their own narratives, packaging, processes etc. Ditto for a sales enablement team.
Middle managers in Product. While you may think your PMs don’t need much supervision and guidance you will need to have someone ready to ingest, direct, and prioritize the torrent of feedback that is likely to come from a larger sales and marketing org. Middle managers in GTM need peers in Product & Engineering to partner with. Without this, the company will tilt too quickly from being guided by multi-year product vision to quarterly sales execution. (More on that next week.)
Let’s pressure test this “18 months before $50M ARR” rule of thumb.
Here are some counterexamples that, in fact, confirm the general rule.
You may be able to get away with not hiring sales middle managers if…
A big chunk of your growth is self-serve (e.g. B2C, PLG) and doesn’t require sales people. But if that’s the case…that same complexity and the need for middle management is likely hiding in your product and marketing orgs (it’s just harder to measure).
You are selling very large deals, have amazing product market fit, and are hiring high-performing $300K+ OTE talent: then each AE could conceivably deliver $2M+ of growth instead of $1M. But if that’s the case…all you’re doing is shifting complexity and the need for middle management into your AM/CSM/SE/Eng orgs. Large customers will require more people involved in the sales process, more layers of support, technical implementation, compliance & security, etc.
You’re happy to hit $100M in ARR, growing at 20%, and running the company at break even. Then perhaps sell it at a 5x multiple. But if that’s the case…you’re executing a very tight balancing act in finance – and will need layers of middle management in place to keep everyone focused and cash-efficient. (Is anyone ever truly happy when an oversized finance org is telling them what to do?)
Next week I’ll talk about how to best upgrade or introduce this middle management layer if you don’t already have one. Paraphrasing a comment in response to the first post in this series:
Without intentional and ruthless clarity, you move slowly or not at all. Will you inevitably destroy your culture in the process?
Specifically:
Should you hire upwardly mobile high-potential senior managers / directors and let them grow into more senior roles?
How do you upgrade your talent while ensuring continuity and keeping the existing team motivated?
As the balance of your headcount shifts from ProdEng to GTM, how do you protect the company’s ability to prioritize a multi-year product vision – and not over-index on quarterly sales execution in its decision-making?
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PS: Today’s cover image is The Businessman from Le Petit Prince