About two years ago, Josh Hannah of Matrix Partners wrote an excellent article titled “That's a nice little $40M eCommerce company you have there. Call me when it scales.” In it he argues that an eCommerce business with $10 to $20 million in revenues is not that hard to build and also not very valuable. I would recommend that you read the full article, but one of the key points of the article was that if you fill a niche and have distinctive product/market fit with a set of customers, you can acquire customers very cheaply - up until a certain point, when you’ve maxed out the cheap customer acquisition channels and need to tap into more scalable channels. At that point it becomes a lot harder because the next set of customer acquisition channels will likely be much more expensive.

As a side note I’d add that the value of an eCommerce business with $10-20 million in revenue can be even more deceptive if a company has burned a lot of money to get to this level and has very low (or even negative) gross margins. The reason is that in most categories online shopping has become ultra-transparent (something which I’m not completely innocent of ;-) ) and that there’s a group of highly price-sensitive customers which always goes for the lowest price. So if you start an online shop, offer products at a loss, get listed on some of the biggest comparison shopping sites and do some affiliate marketing, you can easily get to tens of millions in revenue.

Now let’s talk about SaaS. In the last few years I’ve come to the realization that Josh’s observation can also be applied to the SaaS world: Building a SaaS business with $1-2 million in ARR is not that hard to build and not that valuable. Let me rephrase that. Starting a new company is always hard and most SaaS startups never get to $1-2 million in ARR. Every founder who accomplishes this deserves a huge amount of respect. The point is that getting to $1-2 million in ARR probably has less predictive value concerning a company’s ability to get to true scale than most people think – or at least thought some years ago.

The reason, I think, is that over the last 5-10 years it has become much easier to build a SaaS product and get initial traction...