The Death of the Three-Act Playbook
Original author: Mike Vernal, Investor and Engineer at Conviction
Compile: Peggy
Editor’s Note: In the past, enterprise software startups often followed a clear path: first, identify a small but scalable entry point and achieve tens of millions in ARR with a single-product offering (narrow feature entry into the market); then, expand the product suite around the same buyer to reach over $100 million in revenue (expanding into a product suite); and finally, after accumulating sufficient users and data, become a new platform (rebuilding the underlying platform).
But in the AI era, this "three-act strategy" is becoming obsolete. As software development costs plummet rapidly, the time from concept to product launch has been drastically shortened—startups no longer need years to prove a niche market before gradually expanding. Companies like Cursor, Clay, and Harvey have reached or even surpassed $100 million in annual recurring revenue in a short time, demonstrating that the pace of enterprise software competition has been rewritten.
The core insight of this article is that in a rapidly changing market, relying on a "safe entry point" may actually become conservative. New-generation software companies need more than just finding a wedge—they must begin with the ambition to reimagine entire workflows or even replace existing platforms. The death of the "three-act play" is essentially the beginning of software entrepreneurship’s shift from incremental growth to full-scale commitment.
The following is the original text:
In the past, there was a fairly clear playbook for building an enterprise software company.
Act One: The Entry Point, That Is, the Split
Start by targeting a feature or market segment that current solutions serve poorly. During the platform migration, identify one feature from the existing platform and enhance it by 10x under the new paradigm, using it as your entry point into the market.
This niche market must be large enough for the company to quickly reach tens of millions of dollars in ARR (annual recurring revenue), but not so large that it immediately attracts devastating competition. Statsig initially entered the product experimentation space; Rippling began with workflow automation tools for employee onboarding and offboarding, and so on.
Most startups spend 3 to 5 years refining their initial product, building an early GTM team, and scaling to $10 million to $50 million in ARR before entering the second act.
Act Two: Product Suite
The core of Act Two is launching adjacent products, enabling the company to break through $100 million in ARR. At this point, you’re no longer just offering a single-point product, but beginning to build a comprehensive product portfolio.
Statsig initially focused on product experimentation, then added capabilities such as feature flags, session replay, and product analytics. Rippling began with payroll and HR workflows—such as employee onboarding and offboarding—and later expanded to a full suite of HR, benefits, and recruiting products, creating a comprehensive solution for the same buyer.
For companies that have made it this far, this typically requires an additional 3 to 5 years of real time. When the first product grows to $50 million in ARR, the company begins cross-selling second and third products. By the time it reaches $100 million in ARR, the subsequent two products may each generate $10 million and $1 million in ARR respectively. It is this product suite strategy that opens the path to achieving $200 million, $500 million, or even higher ARR.
Act Three: Platform
The final stage is rebundling. As your company accumulates sufficient scale and user engagement, you eventually qualify to replace the underlying platform you originally depended on. This is the fundamental logic behind all “Systems of Engagement” seeking to commoditize their underlying “Systems of Record.” In theory, this is precisely the path a company takes to grow beyond $5 billion in valuation, with sustained revenue and high retention.
Quickly master this strategy
I’m concerned that this three-act approach is already dead. I think the world is changing too quickly.
The three-act path implicitly depends on a certain calendar timeline, especially in the early stages of a startup. Founders have limited options: initially focusing on product-market fit, then building early GTM motions, and later expanding GTM. In the past, companies did not move to the second act until reaching $10 million to $50 million in ARR because they still devoted all their energy to the first act.
Over the past few years, a number of companies have grown from nearly $0 to $100 million in ARR, such as Cursor, Cognition, Clay, Harvey, Sierra, Baseten, Fireworks, and Lovable. This alone is evidence that the world has changed.
There is no longer time to meticulously refine a step-by-step strategy. As software engineering costs plummet, the time required to complete the first and second acts is approaching zero. I believe the rational approach is to plan from the outset to rapidly build everything all at once.
Ambition
This has also profoundly changed how I view early-stage investments. In the past, I would look for a protective entry point—a safe harbor that would allow a company to reach $10 million to $50 million in ARR. Now, what used to be considered an entry point seems too small-scale. I find myself preferring entrepreneurs who dive straight into the deep end.
For example, I still remember meeting Anysphere, which is Cursor, during their seed round. At the time, their plan seemed to be directly replacing VS Code, because they believed VS Code was too limiting for AI-powered programming. I thought that was crazy—VS Code was incredibly popular then. After years of IDE fragmentation, VS Code had finally won. Why would a seed-stage company come in aiming to replace VS Code outright? A more reasonable path would have been to start with a plugin and gradually earn the right to replace it.
By the way, I was wrong back then. Now it seems that replacing VS Code isn't even ambitious enough. Why stop there?
As the cost of writing software approaches zero, I find myself valuing ambition more than anything else—not ordinary ambition, but unreasonable, relentless ambition.
I believe the three-act strategy is over. In a rapidly changing period, relying on a single entry point is too timid. If you're truly going to do it, you should aim for the entire landscape from the start.
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