Escaping the Churn Plateau

I was catching up with a founder I’d invested in and he mentioned how they’d been stuck in the $50-60K MRR range for ~2 months.

To a founder, that feels like forever.

We dug into what was happening and, this week, I want to share (an anonymized version of) how we dug into the problem, the surprising root cause, and how to solve it.

It might be helpful for you too.

Getting Your Startup Out of a Rut

The Problem

After half a year of consistent 20-30% monthly MRR growth, the startup hit a plateau due to churn.

Many founders don’t realize this plateau exist until they hit it.

When you’re just starting out, a little churn doesn’t seem so bad.

Yeah, you’ll add an offer to your cancellation flow and message the customer to learn why they churned, but you’d rather focus on bringing in more revenue via new customers.

It feels ok to do this when things are working, you want to keep the momentum going. A lower growth rate = bad.

But as you grow, even if your churn rate stays consistent, it becomes a larger raw amount of money that you need to replace each month.

10% of $5,000 is only $500 of new user growth you need to add per month, but 10% of $50,000 is $5,000, just to stay at the same MRR level.

You can see how this gets challenging. You only have so much time to sell, and so much budget to invest in marketing.

So, churn is the problem. Right?

As we dug into the conversation, I realized churn actually wasn’t the root cause, hiring too quickly was. Let me explain…

The Cause

When things are going well at a startup, there’s a natural inclination to want to solve all the problems that exist with it.

Here’s the natural progression:

You think something like: “If we’re growing at x% with all these bugs, then obviously we’ll grow faster than x% if we solve them!”

So, you go hire some people fast, but maybe they’re not quite ideal candidates. Good, maybe even great in some ways, but missing something.

Most commonly the people you find are either:

1. Junior and inexperienced, but good scrappy builder types.

2. Senior, but have worked at big companies primarily.

You think this is ok because the added revenue you’ll gain by getting a warm body in the door to help solve bugs will make up for their lack of being exactly what you’re looking for.

Unfortunately, this is almost always wrong.

As a startup grows, a founder’s time becomes increasingly stretched thin.

Being able to connect the dots for someone, help them prioritize, and spell out the details of tasks works on a small team with a small company.

But as your revenue grows you’ll need to master delegation. And that’s much easier with a team that has already built up their startup instincts and toolkit (both, not one or the other).

You want builders, not passengers.

The scrappy junior engineer ends up creating more bugs.

The senior big tech engineer ends up wanting the code to be too perfect.

In both cases, the result is you slow down.

There’s both a proactive and reactive way to solve this, though…

The Solution

If you already have this problem, you have to fire people.

That might seem particularly daunting since you already feel you’re moving slowly, and you’ll continue to hemorrhage in terms of churn until new hires get ramped up, but it will pay off in the long run.

Save your capital rather than continuing to pay them, and reinvest your time in hiring the right person.

Otherwise you’ll end up spending that time managing them anyway, and growth will suffer regardless (but you’ll have less capital leftover).

But to avoid this in the first place, look to hire based on two things:

1. The right experience → Fewer, senior hires who have experience at early stage startups.

2. Slope → You believe they can continue to learn and grow with the company as your needs evolve.

It remains to be seen how my friend does with his startup after he escapes this rut, but this simple approach should help you avoid it.