Raising Capital in 2023: What You Really Need To Know with Creandum Partner Peter Specht

But the interesting aspect actually is when looking at this chart, as valuations actually have just gotten back to the levels they were in in 2020. So many times, you know, we're discussing and people asking like, why are valuations dropping? Why are they so low? I think actually the right way to frame it is what happened in 2021, like why was it so, so high back then? Because if you look at it from a longer time horizon, we just got back to the level which we have been for, you know, many years before. But this is kind of like old news, looking at what has happened a year ago, looking back historically. So what we did at Creandum in May was we said, let's try to get understanding of the current market. You know, there There are much fewer data points around right now of rounds happening. And so let's really like keep our ears open, see, like compare multiples the companies raised on. And we surveyed with a, with a good amount of tier 1 VCs what rounds they have seen, rounds that happened in their portfolio, and what are their current expectations for valuation and growth and multiples when, you know, companies come to them to raise money. And so this was done 3 weeks ago, and so it's very— tried to be a very real-time look into the market. So let's look at that chart here. This chart shows basically the rounds that have happened over the past weeks and months and that have been mostly flagged by top funds who have raised by very good investors. And so on the y-axis again, you have pre-money valuation. And on the x-axis this time, it's ARR that they raised on. And there are a few interesting takeaways and insights from this slide. So one is, if you look at the highest bubbles up there, all the outlier rounds that raised on very high valuation, have been AI rounds. So at the moment, there is a sort of— AI plays in a different sphere. The hypergrowth AI companies currently play in a different sphere and don't adhere that much to the, you know, laws of gravitas that we see for part of the rest of the market. Of course, these are only outliers. These are a few selected companies, but we still see some of them. And you can see here, you know, no revenue yet AI company raising on $200 million pre, or a company in like less than $1 million ARR raising above $300 million pre in AI. It's like very large hyped rounds very early on, steep bets. But we still sort of like see some of these, let's say, 2021-style rounds happening, but they're mostly focused on the category of, of AI at this point. And the other aspect which is interesting here is Series A rounds. Series A rounds typically used to be— so what is the typical number you had in mind for a Series A round? 2 million. I would say probably that's the right number today. I would say 12 months ago, 24 months ago, the most common number would have been 1 million AR. You get to $1 million ARR, you can raise Series A. That has been a bit of the gold standard sometimes. And now you're right, it moves more, even more towards $2 million. And if we look at the, the rounds that have happened here, that being done by very good funds, is, you know, between $2.5 million ARR and $4 million ARR. So you can see investors have, you know, the rounds that actually happened in the current environment have tended to be later Series A in the terms of like, you know, investors favoring companies that have, you know, more to prove. You get sort of like more ARR for the money invested and these kind of things. So takeaways here is really most seed rounds are either pre-revenue or late seeds at the moment. A or extension rounds are more mature and have around 2 and more than $2.5 million in revenue. B rounds start at $5 million ARR with a tendency towards more. And then Selective AI deals, the outliers, still play on 2021 levels, typically if they show very high growth. And they raise then on a— can raise on something like 100x ARR if it's like a very, you know, sought-after and competitive process. And then the bar is high. So when talking to investors about these rounds that happened and what we saw in the market, actually most of the rounds that, that happen have been more towards 3 to 5x in growth. So like more high-growth companies are the rounds that actually happened. So looking into the average multiples we saw in these rounds that you also saw on, on the chart and more. So at Series A, the average has been around 25x of the rounds that happened in the past months, and the median there is around 21x. So anything 21 to 25x is where sort of like the average or median lies. And of course there's a range. The range has been between 15x and 40x. For Series B, there was less of a clear pattern, so it was harder to pull a median, but the average was around 24x. So slightly lower than Series A, but not much significant. And then they have the third bucket of the AI or hypergrowth rounds. And if I say hypergrowth rounds, those have been partly companies that have been growing, for example, from like $1 to $5 million ARR within a couple of months. So like very, very fast growth. And they have been raising at, you know, anything 40 to 100x multiples, or sometimes even pre-revenue with like very high valuation, as we saw. So here in the slide, we, uh, we see the current expectations of VCs for a healthy ARR multiple at Series A and Series B. So when you ask them like, hey, what do you think is a healthy multiple at Series A? What would you like to see? And here the answer is between Series A, it's roughly 20 to 30x. So 70% of the people fall into that range. The bucket actually with the largest, you know, share of answers, 40%, it's 25 to 30x. And we ask people here to assume $1.5 million ARR for a Series A, which means for a 25 to 30x, $37.5 million pre-money, up to $45 million in pre-money. And then roughly 30% are fine to, you know, go higher than that. For example, 20% said they're fine to pay the 30 to 35x, or see that as healthy, uh, which would be a $45 to $52 million, uh, pre-money for a company that does $1.5 million in ARR. If you go to the right-hand side here of the slide, uh, this is Series B, and here we assume $6 million ARR for Series B, and there the picture is slightly more concentrated. Where most of the people think that 15 to 20x is a healthy multiple, you know, for that stage. You can see it goes down by stage, and also the distribution is less and more people sort of like say that this is sort of like the right amount. It's like 55% that go for it. There is, you know, a small percentage that says it should be even less, And roughly 30% that say it should be even more. So 18% say it's 20 to 25x, which would be $120 to $150 million in pre-money. And 80% say 25 to 30x, which would be $150 to $180 million in pre-money. But the majority lies— of 55% lies around $90 to $120 million as healthy pre-money for a $6 million ARR SaaS company. So what defines if you are in the lower multiples or in the higher multiples? And of course, as a founder, everyone wants to be in the higher multiples. And as, you know, VCs, we also try to help our portfolio companies to raise great rounds and like discuss this a lot. But in the lower multiple buckets, like in the— let's say in a range of like 15 to 25, you would rather end up at the 15x multiple range if you are growing, let's say, 2 to 3x. So solid, good growth, but not hypergrowth, not like very fast growth. That has an impact on your multiple, and you rather end up at the lower range of sort of like the ranges you just saw. The other aspect is margins, where if you are below the classical software margins, This also typically gives a discount on your multiples. And then the third aspect is round dynamics. So if a round is less competitive, if there's no tier 1 term sheet, then, you know, it's likely that you also end up at the lower range of, of, of the multiples. Subsequently, you end up on the higher end of the multiples if you're growing fast. From what we see, this is like growing more like 4— around 4x or more. And then, of course, if rounds are competitive with multiple term sheets on the table— and actually, it's important to have tier 1 term sheets among the mix. So this drives really competitiveness of round, typically. And then, and then you have, you know, a very good chance to end up at the higher range of, of some of the multiples there. The caveat is, of course, If the base of the ARR is very low, then the multiple is of course higher. As you know, if the denominator is very small, like 1 million ARR, it's just a very— it's just a high number coming out of it. So for it to be, you know, more comparable, typically I think the multiple comparisons work well from like 1.5 million, 2 million ARR upwards. When the base is, you know, much lower than that, then multiples are simply just very high because the denominator is so small in the calculation. What do people expect for growth? And here the picture is more mixed. The good news is, I would say probably used to be 3x throughout the bank, like 1 or 2 years ago, like you have to grow more than 3x. And you can now see is for founders, I mean, expect— growth expectations have gone slightly down. So right now at Series A, it starts between like 2.5 to 3x as the minimum growth expectation. And then at Series B, it starts at 2 to 2.5x as the minimum growth expectation. And if you look at it, the picture is like, you know, at Series A, 47% want to see minimum 2.5 to 3x, 40% want to see 3 to 4x in growth, Then 13% would love to see minimum 4x of growth to get excited right now. For B, it's 47% for, uh, for, uh, 2 to 2.5x. The same pattern, 2.5, 3x is 40%, and a smaller percentage wants to see, you know, higher 3 to 4x here. But growth is only seen as very valuable if it comes also with efficiency these days. So the times where you could just grow very high, like have very high growth, but burn a shit ton of money, I would say these times have shifted. And now things like efficiency come more and more into play, and burn multiple has been one of the metrics that investors look the closest at right now. And so what does this mean for Series A? The expectation for Series A is, I think, very clear on this chart where 1.5x, like the minimum expectation, or like the range is like 1.5x to 3x is the burn multiple range that you can play on as an A company to meet expectations. And so 40% are fine with 1.5x to 2x, 40% are fine with 2x to 3x, and then there's a percentage of 30% that are fine with, you know, burn multiple higher than 3x at Series A. That said, the expectations get, you know, much higher at Series B, and efficiency becomes much more relevant even more at that stage, where 40% of the people expect a burn multiple between 1 and 1.5, which is considered to be a great burn multiple, and 53% want to see 1.5 to 2x burn multiple. So 90% of the people, of the funds, want to see burn multiples ideally below 2x, and, um, 40%, as said, between 1.5x. So the expectations really go down, which means companies should improve their burn between Series A and B and optimize more for efficiency at that stage. So on that question, um, What to prioritize, growth versus profitability? And this is a discussion we have with many founders and probably in many boardrooms. And here the unfortunate number is, it's actually both. So growth and burn needs to be looked at in combination. I think they're, you know, high growth gives you a bit more sort of like margin to have a higher burn multiple. but the burn multiple still needs to be roughly in line with the benchmark expectations. So it cannot go completely whack. And then I think there's another caveat to it, which is, you know, it depends a little bit on how much cash you have in the bank. If you have 3, 4 years of runway and know that you're not raising for the next 3, 4 years, then likely, you know, in year 1 it's fine to spend— go more aggressive and have a higher burn multiple. Why? You know, in the year leading up to your next fundraise, it's a metric you should really monitor even more closely to meet sort of like the metric expectations when you, when you hit your next fundraise that investors look for. This here is actually a really great framework to look at this for a budget planning perspective for startups or also for board discussions. So I'm a big fan of the burn growth matrix as a framework where you put burn multiple on the y-axis, year-over-year growth on the x-axis, and basically look at the two in combination when you do your planning. And ideally you put in lines for percentile benchmarks. And there are, you know, great growth funds out there publishing great benchmarks online. Andreessen is one of them that publishes them online. You can look them up. What is 50th percentile? What is 75th percentile or 90th percentile for SaaS? And then map, you know, map these in the lines in this matrix here. And I think it really helps to discuss priorities of like how much you should push for year-over-year growth versus, you know, how much should you burn and how high can the burn multiple be in that case. Fundraising is of course about hitting the metrics, hitting about expectations. But one aspect that sometimes gets overlooked, which I think is really important and almost equally important to just having a great business and great metrics, is preparing your fundraise well. And, you know, thinking strategically of how you approach your fundraise. And last year at Saastr, I talked a little bit about, you know, how to run a good fundraising process and what are the tips and tricks around it. And these are a few summary highlights from it which I briefly will go through, but also point out a little bit of the changes to some of the things from last year. So first of all, Preparation is key. So it's actually worth it to spend the time to prepare and think strategically around your fundraise. And then it's typically smart to divide it into like 3 phases. That's how I think around it, of like fundraise planning, concrete preparation, and an active process. And fundraise planning is where you set your goals, round size, timing. Like when should I go out before, you know, you run out of money, who do you want to raise from, looking at potential roadblocks. Then fundraise preparation. And there I say, you know, start typically 1 to 4 months before with like relationship intro chats and then warm-up relationships 2 to 4 weeks before sort of like you actually go out and fundraise. Reach out a week before you want to go out to the market to the funds to set up meetings. It typically takes, you know, a couple of days or a week to set meetings up. And do things like prepare. Pitch to your existing investors before, have mock pitches, pitch to angels, other entrepreneurs, gather feedback from them, and optimize sort of like your pitch and be prepared for the questions that are asked to you. When you run the active process, I think it's very, very important to be fully committed to it. I mean, like, It takes a lot of time these days, so most founders actually take 70-80% of your time fully for a fundraiser. Like, one co-founder of several co-founders do this. They typically have one person in the— as a backup supporting them, like helping them with data, helping them with questions, to be able to have like fast process iteration with VCs. Speed is always a good indicator, and and something people like to see in a process. I also always recommend to maximum have 5 investor calls per day and not go for like 15 because you sometimes realize that people are, you know, worn out at the end of the day, don't have the right energy of it. So rather, you know, focus your energy on 5 to 6 calls a day max. And then really follow up. So this is a process. It's like a sales process. It's a pipeline. Follow up with investors. If you've pitched them, if they haven't gotten back to you yet, 2, 3 days later, send them an email, ask about next steps, and really drive your process. And the most important point here is don't get blinded by initial love. Only a term sheet counts. What do I mean with that? It's the job of a VC to show, you know, to show you initial love. So think about it. You're a founder. You chat to a VC. You're like, "Hey, you know, you want to look at this?" And the VC goes like, "This is great. I love this area. And like, we've been looking into this. Like, I'm really excited to talk to you. It looks very interesting what you're building. Your first call was great." This is what you'll hear most of the time. And you like it, right? But because if the other person, if another VC would say like, "Mm, it's kind of interesting." "Let me think about it. You know, it's tough, but maybe we get there. Let me think about it." Who do you like more? Of course, person number 1 that shows you love and is excited and, you know, wants to spend time on your area and these things. But reality is most of the people behind the scenes are type 2 and have those critical discussions internally. But they're salespeople as well, and they show you love initially. And what we sometimes see is people get flattered by it and say like, "Oh, I raise money easily. Everyone says they love my product and my area is so exciting. I only need to talk to 5 VCs because everyone's so excited." No. You treat it as a sales funnel. Don't get blinded by the initial love and speak to more VCs. So what has changed here over the last year? Typically I said like raise money for 24 months of runway now, or 20 to 24 months of runway. Now I'd say actually 24 to 30 months of runway, ideally more towards 30 months of runway given the uncertain market. It's not starting 6 months before cash-out anymore. It's more starting, you know, 9 months before you run out of cash because after 2, 3 months you realize if the fundraise was probably successful or not. And if it's, you know, tough fundraise or maybe struggling, you still have the time to either try to push for profitability or try to pursue an M&A route and go for an exit. So time is an important factor here. So what does this mean in practice of what's different now these days? It's widen your funnel, speak to more funds, take more time, go out and raise earlier. Adjust valuation expectations. If your expectations are too high, likelihood is that, you know, to raise is much lower. And then flat and down rounds are happening. We're seeing them across in the market. Everyone wants to avoid them. No one likes them, but they're the reality. And I would suggest prioritizing making a round happen over pushing on valuation. And I think the market is accepting and, and You know, everyone needs to accept that down rounds are happening and also flat rounds are kind of happening if it was inflated valuations before. So this brings me to the key takeaways. The market today prefers late seed and A rounds with more ARR. Average ARR multiples for As are 25, for Bs were 24 in the last month. At the same time, investors consider 20 to 30x as healthy and 15 to 20x as healthy. So a slight disconnect there. And I don't know, we don't know yet if, if that disconnect in expectations leads to, you know, even multiples going further down and more aligning with expectations in the coming months. Growth expectations have gone slightly down while efficiency expectations have gone up. And then accumulate more ARR before raising, prepare your fundraising, plan more time, speak to more fans, adjust valuation expectations. And I hope everyone here that in the room, but also beyond, that goes out and fundraises soon, that it will be a very successful one. And that these data points here have been a little bit helpful in planning your next fundraise, how to think about your next funding round. If there are any questions, I would love to open it to Q&A. There's a mic up here which you can come up for and ask any questions.