I personally love the "land and expand" model—it's a great way to maximize the value of existing customers. However, at this stage in the company's lifecycle, I would argue that net new ARR is more critical than expansion ARR.
The reason for this is that, in today's startup environment, there’s a lack of defensibility for many businesses. We're seeing companies reach $1M ARR faster than ever, which underscores the importance of being able to consistently attract new clients. If a founder at this stage is focusing too much on expansion ARR, it might signal to VCs that they are struggling to land new deals and scale beyond their existing customer base.
From an investor’s perspective, I would much rather see a startup with a strong focus on landing new deals and expanding their client base using the current products and offerings. Once the startup has achieved this, then focusing on a "land and expand" strategy with new features or product developments can become a natural next step. But at this early stage, the priority should be on showing the ability to win new business. If a company can demonstrate strong traction in attracting new customers, it signals to investors that the founder is capable of selling to the market, which is crucial.
I believe this is a perspective many VCs would share, especially at this stage—net new ARR is key to fueling growth and proving market demand. Only after establishing a solid base of new clients should the focus shift more toward expansion ARR and broader "land and expand" strategies.
Now, I also wanted to share a more granular thought that may be a bit outside the core of the discussion, but I think it's important to note. Part of my personal diligence when I dive into data rooms is evaluating the percentage of revenue generated from a company's largest clients. Sometimes, I notice that a company's largest clients can make up 40%, 50%, or even 60% of their total revenue base. In my view, this could be a red flag or a reason for hesitation, as it exposes the company to significant risk if things were to go south with those clients. While "land and expand" is always a strong strategy, it's important to be cautious not to let just a few clients make up the majority of the revenue at an early stage. It's something to keep an eye on to ensure you’re diversifying your client base and not over-relying on a small group. Just a personal thought I wanted to share!
There's no magic number. Will argue it'll vary on the market, business itself, vertical, etc. I do agree though high level that expansion ARR ideally should not be more than 40% of next year's projected ARR as a general rule of thumb.
Completely agree with you re upselling, churn/retention, and growth. I sometimes see founders focusing too much on pleasing and increasing with their current customer base, and it limits growth. That's fine for bootstrapped businesses but those who are venture backed have different 'pressure' or 'expectations'. This goes in line with some of my thoughts around venture actually killing some businesses (but that's a separate conversation for another time). Then we also see the flip side of neglecting current customers and solely focusing on new wins/deals/clients. It's definitely an art mixed with science.
If we had to toss a number here, I'd target 30-40% maximum expansion ARR at this stage. Closer to 30% would be my bet. Of course the most important aspect is the company is growing and fundamentally doing well. If a VC is hounding too much about expansion ARR at this stage and everything else looks great, they're doing too much in my opinion. Just be sure to show pipeline and validity, confidence, and atcertainability of achieving targets.