How To Raise Your Next Round: What Does it Take to Really Raise Capital | Point Nine Capital

Hi everybody, good morning or good afternoon depending on where you are. It's great to see a lot of faces here on Zoom. Feels like we're testing Zoom's limits with so many people having their camera on. Ja, mein Name ist Christoph Jans. I'm a founding partner at Point Nine Capital, and I'm excited to talk to you today about what we think it takes to raise capital in 2021, based on especially things that we've seen in the last year or last couple of months, and we were trying to extrapolate a bit from that. Really quick introduction, if you haven't heard about us yet. We're an early-stage venture capital firm. We're focused on B2B SaaS and B2B marketplaces based in Europe, but we are very geo-agnostic and invest in early-stage companies all over Europe, but also in the US and Canada and other places. And we've been lucky enough to have been amongst the first investors in companies like Algolia and Contentful, Typeform, Loom, Zendesk, and many others. And you see some of the logos here on the screen. So what does it take to raise capital in 2021? We— I'll give you a sneak peek at what we call the SaaS funding napkin, which you might have seen before. And— oops, sorry— and if there is still time, we can talk a bit about fundraising and fundraising tips. If we don't have enough time for enough Q&A during this session, we will hop over to Clubhouse right after this session. I realize not everybody might have an invitation to Clubhouse already, but maybe there are enough people in the group here who have a couple of spare invitations, so we'll hopefully be able to get everybody who is interested in continuing the conversation on Clubhouse onto the platform. So we asked this question before, starting in 2016. It started with a blog post, which then became first a virtual and then eventually a real physical paper-based napkin. It started out from— with a question can we get the maybe quite complicated answer to this question on like the literal back of a napkin? And because that kind of guidance and simplicity resonated quite well with people, we kept doing it again in 2017 and 2018 and basically ever since. So we keep updating or publish— we keep publishing an updated version of this napkin on an annual basis. And you might have seen the real thing at a Saastro conference or other SaaS conferences. So for this year's napkin, we once again did a Typeform survey and asked a lot of founders and investors to give us data from financing rounds that they have done or seen. And the analysis that I'm going to present on the following pages is based on those submissions as well as data from our own portfolio. In total, we've got 74 financing rounds, like data points on 74 financing rounds from the last 12 months. And it's important to keep in mind that this is not a huge number. We think it's good enough to be directionally right, but it's— if you break down these data points into pre-seed, Seed, Series A, Series B, Series C, then it's not a huge number of data points per stage because this data is unfortunately relatively hard to get. It's easier to get just the size of financing rounds. You'll see that on TechCrunch and so on. But getting the depth of the data that we're asking for here, including things like valuation, ARR, and things like this is is somewhat harder to get. So keep in mind that some of the data needs to be taken with a grain of salt. It's not really scientific, but I guess that's also why we're publishing it on a napkin and not in a scientific paper. Okay. So let's start with the data for pre-seed rounds. And keep in mind that the labels are based on the labels chosen by the respondents. So there is a possibility that some people think of a pre-seed as something different than, than others. And this is just based on how the rounds were called by the, the people who participated in them, which is I think usually the best— at least the best guess here. So let's now look at the data. What you can see here are charts showing the round sizes, the pre-money valuations, and the ARR levels of these companies at or around the time when they raised their pre-seed round. And each of these blue bars represents one company or financing round respectively. So for pre-seed— [Speaker:JASON M. LEMKIN] Yeah, I can see. [Speaker:CHRISTIAN STERN] —have about 10 data points. And the lighter blue line shows you the median. So you can see that as far as the round sizes are concerned, it's quite a wide range, starting with just a few hundred thousand dollars all the way up to close to 1.5 million. In terms of the valuation, if you disregard like this outlier here with a very slow, very low valuation, and this one here with a very high valuation, then the valuations are in a relatively narrow band and In terms of ARR, you can see that some companies, and not surprisingly for pre-seed, are not yet or have not yet been generating any revenue, whereas some other companies have been in the hundreds of thousands and almost like one of them here, um, close to a million, I guess about $800,000 ARR range. Um, when we try to distill this further, and we're mostly interested in what a typical round looks like. So we're less interested in, in the outliers, we're more interested in what most founders can expect and what kind of terms they can expect for, for a round like this. And therefore, for the purpose of updating the napkin or generating the data for the napkin, we usually disregard the outliers like the first 15 percentiles and the last 15 percentiles, like from 0 to 15 and from 85 to 100. So we're usually focusing on this range which represents about 70% of the data points, and then we We round the numbers a little bit, and that gets us to a round size between the $300,000 to $1 million range, to a valuation in the $2.5 to $4.5 million range, and in terms of ARR, to the $0 to $600,000 range. Okay. Let's update the napkin. What you're seeing here on the screen is the original 2016 napkin, and I'm now going to live update this in preparation for the new napkin, which we're going to complete and release in the next couple of days. I can— I will also in a couple of minutes give you some data points from the previous version of the napkin, which was based on 2019 data and released at the end of— early in 2020. So we also had a more recent comparison. But now let's look at what the latest data looks like in comparison to the original 2016 data from about 5 years ago. You can see that the valuations as well as the amounts typically raised in a pre-seed financing have pretty much doubled, maybe almost tripled here, which is quite a dramatic change. In terms of ARR, we originally Jason M. Lemkin: made the napkin based on, on MRR. We've meanwhile switched to ARR, so just keep that in mind. Originally, we noted zero as the typical revenue for a pre-seed financing, but turns out that some of the companies, at least based on our latest data set here, actually had some revenue already. So what does it take to raise a pre-seed round? It's mostly about the team and the idea. Usually there is either nothing yet in terms of revenue or very little. It's usually pre-product market fit. So what investors really want to know at this very early stage is why you're convinced that you found a big problem that you are uniquely qualified to solve better than anybody else. So in this early stage, it's all about the story and being able to convey how you came up with this idea and what makes you believe that you found a gap in the market. So when we look at companies at these early stages and knowing that there is very little in terms of validation from the market. We always want to know how much work did the founders do before they decided to pursue this idea and not another idea. So this is what we at PointNine— one of the things we at PointNine focus on when we look at pre-seed opportunities. Now let's move on to the next stage, the seed round. Again, here, every— each of these blue bars represents one company/financing round. And you can see that for the round size here, it's a pretty broad range, like companies have raised everything from $1 million to close to $5 million at valuations in the millions, as well as like $10 to $20 million range, and then there is one outlier here that raised at more than $30 million at the pre, at the seed stage, which is very impressive. And for the ARR, as you can see, there is a number of companies that had zero or close to zero in terms of ARR, and then a number of companies in the few hundred thousand up to about a million-dollar ARR range, and then again one significant outlier. And if we again focus on the 70% or so in the in the middle of the range, in the median of the range, disregarding the outliers, then I would put the typical round size at the seed stage at $2.5 million, pre-money valuation 8 to 17, and ARR 0 to 600K. And we can now, again, look at how this looks like on the napkin. So as you can see here, the difference between 2016 and 2020/2021 is maybe even more pronounced than it was at the pre-seed stage. So Whereas we saw round sizes in the half a million to 2.5 million range a couple of years ago, it's now very rare to see seed rounds in the hundreds of thousands or probably even a million. So that's probably like double to triple in just a couple of years. Similarly, valuations, we originally mentioned or noted the range as being $2 to $6 million, and now it's $8 to $17 million. So that's basically more than triple the valuation at the typical seed round. And the— in terms of the ARR or MRR, actually not that much has changed. And now importantly, the change between— the change that I just described is not all of this happened just in the last 12 months. So for reference, I am also showing you here the data from a little more than a year ago, where you can see that in 2019, we already put the seed round at $1 to $4 million and the valuation at $4 to $11 million. So that's somewhere in between the 2016 numbers and the 2020 or 2021 numbers. So it's been a continuous evolution or development towards higher and higher valuations and bigger and bigger round sizes. And that started in 2016, or maybe actually even before that. Now, what does it take to raise a seed round? Like, what's the difference between pre-seed and seed? What investors typically are looking for at the seed stage is some sign of product-market fit. Usually investors do not expect huge numbers, whether that's numbers in terms of customers, users, or revenue. But what they, and what at least we are looking for in a seed round, is that there are some happy users that we can use as a proxy and that can give us the confidence that product-market fit is in the making, or that there is some product-market fit even at least for a very small subset of the market for a small niche, which gives us the confidence that there is something that can that can be grown. And depending on the type of company, if it's an enterprise SaaS company, maybe you just have a couple of pilots or proof of concepts in the making, and you get some positive confirmation from these customers. And if it's on the SMB or more consumery side, you probably have a somewhat larger number of active users who might show promising engagement numbers. Moving on to the Series A. And again, one— each bar represents one company or financing round. And you can see that the round sizes for the Series A span from just a few million dollars to all the way up to $15 million, most of them being in the $5 to $12 million range. Most of the valuations are in the $18 to $50 million range with, again, some outliers below and above that. And the ARR range is as you can see, mostly between about half a million in ARR and 4 million. And this might sound like, and actually is quite a lot. So there used to be this rule of thumb that in order to be able to raise a Series A, you should be at about a million in terms of ARR. And some companies are successful and able to raise a Series A at about a million of ARR. But what you can see here is that the vast majority of companies are actually significantly further ahead. And I think that's pretty important to keep in mind as you think about your planning and when you feel confident to go out for a Series A. It's related to the fact that pre-seed rounds and seed— and sorry, pre-seed rounds and seed rounds have become bigger and bigger and give companies just a lot more time and runway before they start thinking about a Series A. So if you've already been operating for a couple of years and if you've raised and spent a couple of million dollars, then the expectation is that you can just get further along than it was previously the case. So let's again update our napkin. You can again see here the numbers in comparison to 2016, and you will see that the round sizes and valuations have gone up, although not quite as dramatically as they have at the seed stage. And if we compare it with the 2019 numbers, you can see that most of the increase has actually happened between 2016 and 2019, at least based on our data. And again, it's a limited data set, we need to take it with a grain of salt, but based on our data, we have not seen a huge difference between the last year and the year before that. Now let's come to the Series B. You know how this works by now. We're looking at the round size and the pre-money valuation and the ARR levels of these companies that have raised a Series B. And our takeaway from this data is that the round sizes are typically in the $18 to $50 million range. For the pre-money valuation, the range, as you can see, is very, very wide. And I think that's— that is quite remarkable and something which we haven't seen a few years ago, that companies— and not only one, but actually that half of the companies here in this data set have raised their Series B north of $200 million in terms of the pre-money valuation. I think that's, that's quite remarkable. It's also worth pointing out that these companies already had millions and in some— in most cases actually more than around 5 million of ARR. And again, this is also related to the fact that some of these companies have already previously raised larger A rounds than they— than their counterparts of like a generation before. So we'll also update the napkin here. And here you can see a very substantial increase over the data from just a couple of years ago. And even just in comparison to the data from 2019, you can see just how much these amounts, round for round sizes, and valuations have gone up. Maybe a couple of words about what investors are typically looking for at these stages, except for just the ARR number. In comparison to pre-seed or seed, N-series A just gets more and more quantitative at the Series B and Series C because the everything that you're doing tends to show up in the numbers. So whereas in the Series A, people will look at the numbers, but there are like many, many other important points that do not yet show up in the numbers. Like, have you already been able to make some good senior hires? What's the product velocity and so on. All of this typically shows in the numbers at the Series B and Series C stage. So investors will really look very deeply into your cohorts and into your CACs, your LTVs, and all of that. Okay, the last stage that we're going to look at here is the Series C, where we do not have a huge number of data points, but probably a big enough number to at least have a directionally accurate picture. And as you can see here, it's quite a large range with respect to round size, and even more so with respect to valuation. And that's again not something that is quite unusual, that was much more rare just a few years ago. So you can see that the, the range for a Series C was $35 million to $120 million, and that valuation range was $100 million to, to as much as $900 million. And there is— there are two companies here on our chart that raised at a billion and 2 billion respectively. So that, that's quite remarkable. And we're happy that the one with 2 billion is a data point from the Pointnine family. So adding that to the napkin as well. And here you can see like a really gigantic difference to the Series C data from 2016. And it might be that we just didn't have enough data points when we did the original napkin in 2016. Maybe we missed some of the bigger rounds and higher valuations there. But directionally, I think it's fair to say that there has been a a very substantial increase in the amounts of money companies can raise and the valuations at which they raise it at the Series C level in comparison to just a few years ago. Okay, so let me try to wrap this up with a couple of takeaways and Then after that, we can either open it up for questions or discussion and discussion, or I can continue to talk about a couple of fundraising tips. But let's go straight to the, to the takeaways. So the first takeaway is that in terms of valuation and round sizes, we almost see a shift or a relabeling, if you, if you will. Like, what used to be called a seed is now a pre-seed. What used to be called a Series A is now a seed. What used to be called a Series B is now a Series A. And what used to be called a Series C is now a Series B. So you can almost shift the columns one step if you look at this napkin. It's important though to keep in mind that the expectations have gone up too. So it's not just that valuations and round sizes have gone up and everybody raising a seed round can basically just 5x all the numbers. If you've raised a million dollars in pre-seed and $5 million in, in seed, as an example, then Series A investors will usually look for more than the million dollars in ARR, which previously we consider to be a rule of thumb. So as we saw when we looked at the the detailed data for the Series A, most companies had already several million dollars in ARR. So that's important to keep in mind, apart from the typo that I've just seen here and that I'll correct afterwards. And then another thing that's important to keep in mind here is that having said what I just said is that the the best or the hottest, if you will, 10 to 20% of the companies, they kind of defy all rules. So we've seen companies raising at really very, very remarkable terms in the last years, but even more so, or especially in the last 12 months. If there is an exceptional team in a in a hot market, they can raise basically a Series A, like in terms of valuation and round size at the seed or maybe even pre-seed. And they can raise like a Series B style round at seed. So if a company has the right ingredients, which in the early days usually means an exceptional team in a very sought-after market, and a bit later on means exceptional growth, which usually means growing faster than 3, 4, 5x depending on year over year, depending on where you're at, then most of the rules that apply to most normal— I don't know what the right term— like most like most normal mortals, if that's the right term, then they kind of don't apply. So that is what I've prepared. And I do have a few bonus tips for— that might help you. I think they are kind of like evergreen tips. So maybe the current situation emphasizes or amplifies parts of these things or considerations, but I think those are mostly pieces of advice that we would have given or have given already for years. And the first one is that you should— I just bring it up— or like, I think that the first one is you should, in almost all cases, run a fundraising process. Investors will often try to pull you into preemptive fundraising discussions. I think that's mostly good for them, not necessarily good for the, the founders. And I think in almost all cases, you are better off if you decide when you go out fundraising, and then you By the time you're really ready, have your ducks in a row, have an excellent deck and due diligence materials, and then you start conversations with a relatively long list of VCs and pretty quickly disqualify the ones that— where you don't get like strong signals. So you can Kind of, you see the parallels here to a sales process. You could pretty much say everything here about a sales process. Like run a process, yes, that's what you should do in sales. Have a killer deck and DD materials, yes, you should have great sales collateral. Start with a long list and disqualify ruthlessly, same for sales. You should have a big top of the funnel, but then qualify or unqualify strictly, and essentially raising money from investors is a sales process, right? And there is no reason why you shouldn't treat it as such. It's always tempting to, like, to talk to investors outside of a process like this, and I'm not saying that it's always wrong, But in our experience, and we've really seen or helped companies raise, I don't know, dozens, maybe hundreds of Series As and Series Bs, it's almost always better if you as a founder can control the timing and you talk to several investors in parallel so that once you start to get to the finish line, you have several investors interested in the round, and you can also create some competitive pressure. Thank you, Caitlin, and thanks to the entire SaaStr team, as well as to everybody who was listening in or calling in here from various places in the world.