T2D3 is the growth yardstick in every SaaS board deck. In numbers it is a 72-fold increase, a sales budget above opening ARR, and a fragile return for whoever pays for it.
T2D3 means tripling ARR for two years, then doubling it for three: from $2m of ARR that is 6, 18, 36, 72 and $144m after five years, a 72-fold increase and a compound growth rate of 135.2 per cent a year. At an illustrative magic number of 0.8 it takes $177.5m of cumulative sales and marketing spend, and in year five alone $90.0m, or 125 per cent of the ARR the company starts that year with.
Worked in full in The Growth Equity Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The phrase was popularised by Battery Ventures in 2015 as the path of the fastest SaaS companies from about $2m of ARR to a public listing. Growth investors still use it as the yardstick in a board deck or an investment memo. The useful questions are what it means in numbers, what it costs, and what an investor who underwrites it earns if the company falls short.
| Input | Value |
|---|---|
| Starting ARR | 2.0 |
| Growth multiples, years 1 to 5 | 3x, 3x, 2x, 2x, 2x |
| Magic number (net new ARR ÷ S&M spend in the year) | 0.8 |
| Growth round at the end of year 2, multiple of ARR | 15.0x |
| Investor's stake, no further dilution assumed | 20% |
| Exit at the end of year 5, multiple of ARR | 8.0x |
ARRt = ARRt−1 × multiplet: 2 → 6 → 18 → 36 → 72 → 144
Five-year multiple = 3 × 3 × 2 × 2 × 2 = 72x
CAGR = 721/5 − 1 = 2.352 − 1 = 135.2%. Excel: =(144/2)^(1/5)-1
| Year | Opening ARR | Closing ARR | Net new ARR | S&M spend | S&M % of opening ARR |
|---|---|---|---|---|---|
| 1 | 2 | 6 | 4 | 5.0 | 250% |
| 2 | 6 | 18 | 12 | 15.0 | 250% |
| 3 | 18 | 36 | 18 | 22.5 | 125% |
| 4 | 36 | 72 | 36 | 45.0 | 125% |
| 5 | 72 | 144 | 72 | 90.0 | 125% |
| Total | 142 | 177.5 |
S&M spend = net new ARR ÷ magic number. Year 5: 72 ÷ 0.8 = 90.0
As a share of opening ARR: tripling costs (3 − 1) ÷ 0.8 = 250% of opening ARR; doubling costs (2 − 1) ÷ 0.8 = 125%.
This is the part of T2D3 that the slogan hides. Doubling a $72m business means adding as much ARR in one year as the company built in its whole life, and at a reasonable sales efficiency the sales and marketing budget alone exceeds the ARR the company starts the year with. Before gross margin, R&D and G&A, the company is burning heavily by design. How the SaaS magic number is measured quarter by quarter is worked separately.
| Magic number | Year 5 S&M | Year 5 S&M % of opening ARR | Five-year total |
|---|---|---|---|
| 0.6 | 120.0 | 167% | 236.7 |
| 0.8 | 90.0 | 125% | 177.5 |
| 1.0 | 72.0 | 100% | 142.0 |
The investor comes in at the end of year 2, at $18m of ARR and 15.0x: a $270m post-money valuation, and a $54m cheque for 20 per cent. From there T2D3 still asks for 8x growth in three years, 100 per cent a year.
| Path from entry | ARR, years 3 to 5 | Exit value | Proceeds | MOIC | IRR |
|---|---|---|---|---|---|
| T2D3: 2x, 2x, 2x | 36.0, 72.0, 144.0 | 1,152.0 | 230.4 | 4.27x | 62.2% |
| Decay: 2x, 1.7x, 1.5x | 36.0, 61.2, 91.8 | 734.4 | 146.9 | 2.72x | 39.6% |
| Plan miss: 2x, 1.5x, 1.3x | 36.0, 54.0, 70.2 | 561.6 | 112.3 | 2.08x | 27.7% |
The decay path is still an exceptional company, growing 50 per cent in its last year to $91.8m of ARR, and the round does not return 3x. It would need an exit at 8.8x ARR. A round priced on T2D3 is priced on the top row; the memo should show the second. The general version of this test, solving for the entry price, is in the maximum entry valuation for a 3x return.
Averaging the growth multiples. The average of 3, 3, 2, 2 and 2 is 2.4, which reads as 140 per cent annual growth and, compounded, as $159.3m of ARR in year five. The true figures are 135.2 per cent and $144m. The gap looks small in a growth rate and is $15.3m of ARR, worth $122.0m of exit value at 8.0x. Always state growth as the compound rate between the two ARR figures.
One test for a board deck that cites T2D3: divide next year's planned net new ARR by the planned sales and marketing budget. If the answer is well above the magic number the company has actually achieved, the plan assumes an efficiency gain it has not shown yet.
T2D3 takes $2m of ARR to $144m in five years, 135.2 per cent compounded, and at a 0.8 magic number costs $177.5m of sales and marketing to get there. An investor who pays for it and gets a merely excellent 2x, 1.7x, 1.5x earns 2.72x, not 4.27x. The book's companion file models how a growth fund's reserves and follow-on rounds play out across positions; it is in the free workbook for this case.
135.2 per cent a year over five years. Tripling twice and doubling three times multiplies ARR by 72, and the fifth root of 72 is 2.352. Averaging the five multiples to 2.4 would suggest 140 per cent and overstate year-five ARR at $159.3m instead of $144m from a $2m start.
At a magic number of 0.8, tripling costs 250 per cent of opening ARR in sales and marketing and doubling costs 125 per cent. From $2m of ARR the five years need $177.5m in total, $90.0m in year five. At a magic number of 0.6 the total rises to $236.7m.
Entering at $18m of ARR on a $270m post-money valuation and exiting at 8.0x ARR three years later, a 20 per cent stake returns 4.27x on the T2D3 path, 2.72x if growth decays to 2x, 1.7x and 1.5x, and 2.08x at 2x, 1.5x and 1.3x.
This article is one calculation from The Growth Equity Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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