What it Takes to Raise Capital with Christoph Janz of Point Nine

The topic that I'd like to talk about today is what does it take to raise capital in SaaS in 2023? Given the massive downturn that started about 18 months ago, it's a topic that a lot of SaaS founders are understandably very nervous about. I definitely don't have all of the, all of the answers, but hopefully a few answers to that question and maybe at least some food for thought. A little bit of background to this. In 2016, I tried to answer this question. I did some research. We talked to a couple of investors from our network. We then put the results onto the proverbial back of a napkin, and the rest is history. And if you missed that part of history, like it turned into this physical napkin here. This is from, I think, 2018. So this is maybe no longer that useful. We did this research every year since then, and we're now in the process of creating the 2023 version of the napkin. And I'll give you a little sneak preview as part of this presentation. I will run through the data on valuations and round sizes and all of this pretty quickly because you can read this when we publish it online. And there is also a lot of good research and reports out there from companies like Carta, Dealroom, and, and others. Um, so what I think is probably more interesting is to spend a bit more time on some of the qualitative answers that we got from investors and some of the implications which those have for founders that are trying to raise a round in 2023. Before we did the survey this year, my expectation was that the napkin could look a bit like this, this year, meaning that if you're in AI, everybody wants to give you money at any valuation. And if you're not in AI, then, hmm, well, probably difficult. I think there is something to that, but the actual results definitely have a bit more nuance. So let's— at the very first step here, let's take a quick look at the overall investment activity. This is data from Carta on the number of seed and Series A rounds and the total amount invested at these stages. You might have seen this before. It's available online. And as you probably all know, there has been a massive shift. And in the— over the last 18 months to 2 years, the number of rounds and the amount of capital raised is down by 50 to 70% or so. I think the good news, and it's always really important to keep that in mind, is that we're still approximately at the 2019 levels. So What happened is mostly that some of the craziness from 2020 and 2021 has been erased, but we're not yet back to like the nuclear winter of fundraising that we had in maybe 2008 or 2001. So I think that is important to put that a bit into that perspective. If we look at Series Bs and Series Cs, it's kind of similar. Valuations— no, sorry, the number of rounds— we'll come back to valuations in a second. The, the number of rounds and the amount of capital is down 50 to 75% from the peak, depending on what you're looking at. Um, but again, it's not much worse than it was in 2019, and I think in 2019 it was okay. So it's maybe not that bad. Now here we're starting to look at the data that we got to our— from our survey. And each of these blue bars is one data point. It represents one financing round here, starting with pre-seed. Um, we also— what you can also see here is the, the median round size and valuation, as well as the median round size end valuation from Carta. Carta, you probably know, probably a lot of you manage their cap tables using Carta, and they have a very large data set from US-only companies though. So that's why, because we also include some European, uh, financing rounds, that's why we're showing all of this here. As you can see, there is a very large range, um, but If you look at where most of these data points are, and if you take a look at the median, you can see that most pre-seed round sizes were around $1 to $1.5 million, and valuations were very roughly at $5 to $10 million. Obviously, there is always a lot of variation to that. Moving on to the seed stage, you can see that most seed rounds were very roughly in the $4 to $5 million range at around $10 to $20 million pre. And now for the seed stage, we also asked the investors how much ARR did the company have at the time. This is not really relevant at pre-seed because companies typically don't have revenue at the pre-seed stage. But at the seed stage, as you can see here, approximately half of them were pre-revenue while the other half had some ARR, anything between just a couple of hundred thousand dollars up to about a million or even 1.5 million. Um, there's also some information on the growth rates, but it's not that relevant because there aren't that many companies who already can look back 12 months to any significant revenue by the time they raise their seed round. Here is the data for Series A companies. You can see that most of the rounds were in the $5 to $15 million range. So again, that's a big range, and maybe because of that, it's, it's not that helpful. Valuations were mostly roughly in the $20 to $60 million range, and again, that's a It's a very broad picture. I think this is interesting when we try to get more information about the level of ARR that these companies had. And unfortunately, we haven't found a data source for this, like Carta and other data providers don't, don't have this data as far as we know. So this relies only on our own research. And as you can see here is that most companies, when they raised their Series A, were at around $1 to $5 million ARR, which might be a bit more than you'd expect and also is a bit more than what we saw in previous years. And I think this is one of the, one of the takeaways that investors have become more picky in this market. And therefore they tend to wait a bit. Everything is a bit slower, and so the companies tend to have a bit more ARR by the time they raise their Series A. Interestingly, when you look at the growth rates, you can see that more than half of those companies were growing at more than 2x, but there is also a significant number of companies that was growing at less than 2x. So this might also be a function of the slowdown and the fact that Series A happened a little bit later. So the number of data points is somewhat limited, but I think it's a reasonable takeaway to assume that in comparison to 2 years ago, the Series A happened at a slightly later stage, slightly more ARR, and slightly lower growth rates. What that means, of course, as well, like, if you keep in mind that the valuations haven't changed that much at the Series A, is that the multiples have, have compressed. So you have somewhat higher levels in AR, relatively similar valuations in absolute terms. So valuations have definitely come down a little bit. Last but not least for this part of the presentation, If we look at the Series Bs, we don't have a lot of data points here, but we've also again included the data from, from Carta. You can see that most of the Series B rounds were very roughly in the $10 to $40 million range, and valuations were again very roughly between $80 to $200 million. Now, looking at ARR levels at the Series B companies, you can see that most companies were around $6 to $12 million in ARR. And interestingly, more than half of them were growing at less than 2x. In previous years, that proportion was lower. So it's a bit similar to what we saw previously for the Series A's. The rounds tend to happen a little bit later at a little bit more ARR, but with a little bit less growth. I think every— almost every company had to reduce their growth targets in the last couple of— last 1 or 2 years. The investors still get excited by growth. They still want to see a lot of growth to even consider an investment. But it looks like the expectations had to come, come down at least a little bit. Now, what we also asked and what I think is maybe even more interesting than the numbers is we, that we asked investors what really matters to you when you look at a potential investment in 2023. And we asked them to rate this, to rate several factors such as capital efficiency, valuation, AI strategy, product-market fit, quality of the team, market size, growth rates, and several other factors. And we asked investors to tell us if these factors, if they consider them more important than previously or less important or equally important. And what's very clear from this picture is that almost everybody, like more than 90% of the respondents told us that capital efficiency has become more important than it was in previous years. Also, the vast majority of investors told us that valuation has become more important for them than previously. And half of them, maybe not surprisingly, also told us that a convincing AI strategy has become more important than it, than it was previously. Maybe as an aside, you can see that there are are a lot of things that investors said have become more important, but there isn't that much that they told us is less important. So either that just shows that investors are bad at prioritization or that they have the luxury to just ask for, for more. Like, I want growth, but I also want capital efficiency. So maybe that's just a sign of the market where the power has been shifting a little bit towards the investors. And now with all of this, let's try to take a look at how the next version of our napkin might look like. You can see this on your screens, I'm assuming. And I think the— on the valuations and round sizes, there will be some updates. But it's not, it's not that material. When it comes to ARR and growth rates, as I talked about, there will be some minor updates. But I think really the clear takeaway, the most important difference to 2022, but even more so actually to 2021 and previous years, is this immense focus on capital efficiency. And that's why I'm going to talk about this a little bit more, as well as the AI strategy, which for sure everybody will ask you if you're trying to raise a round in 2023. So we'll continue to do some more work on this, this napkin. If you'd like to get a copy of it once it's done, please feel free to send me an email at christoph@pointnine.com. You'll also find me online, and then we're happy to send you the real napkin once it's done. Now let's talk a bit about those 3 factors which stood out as being the most important things investors care about this year. This whole topic about growth efficiency and how to find the right balance between growth and capital efficiency is something I've been talking about a lot over the last 18 to 24 months. I did a whole presentation specifically about this here at SaaStr a year ago. So we, we can't cover all of this now, but I'll try to give you a few takeaways from that presentation, and you can see a few slides here, and I'm happy to answer any questions later on or discuss that with some of you after the— after my talk. So up until 2020, 2021, investors or the market as a whole was really rewarding growth almost at any cost. And that has drastically changed when the stock markets went down and when, like, obviously, like the big macro change started early in, early of, early in last year. Investors care now much more about healthy and sustainable growth. And because of that, you need to pay attention more to— you need to pay more attention to factors such as a burn multiple or your CAC efficiency. And maybe the most important metric that you need to keep an eye on is your burn multiple. I'm sure a lot of you have already heard about that or read about it or maybe use it to, um, to manage your, your company. But just in case, it basically just tells you how much do I have to raise in order to add a dollar of net new ARR. So it gives you a very holistic picture about the efficiency of your business. And it's generally considered that in the relatively early stage, let's say up to $25 million in ARR or so, if your burn multiple is 1 to 1.5, that's good. If it's even lower, that's great. Very early on, it might be significantly higher because you don't— you're not adding so much net new revenue yet, but you already have costs for your product organization and a lot of other upfront costs. So it can be higher early on. It can also be higher when you've just raised a round and you're spending more money to build up your sales team. So there is no one-size-fits-all answer to what is an acceptable burn multiple. It depends on your runway and many other factors, but it's important to keep it in mind. If you are in a situation where your runway is like dangerously short and you think your burn multiple is too high and you're trying to think about like where, where to save, it's extremely important that you look at other metrics such as your CAC payback period, which measures how long does it take to recoup a dollar invested in the sales and marketing organization. Because if your marketing and sales spend is quite efficient, then you probably don't want to cut there because it might actually reduce your runway. Because if, let's say, a dollar that you invest in sales and marketing becomes a dollar of cash flow within 6 months, then you probably don't want to cut that. So this is why I came up with this matrix here where you see the CAC payback period on one axis and the burn multiple on the other axis. And depending on where you find yourself on, on, on this chart, there are different implications. If your sales and marketing spend is inefficient, then this is probably or obviously the first area to cut. But on the other hand, if your sales and marketing spend is efficient, then you probably want to try to protect that and find other ways to reduce costs in order to increase your runway. Now, the other factor that really stood out was valuation, and that's probably no surprise if you look at a chart like this, which shows the Bessemer Emerging Cloud Index. And as you can see here, although there has been a recovery in the last couple of months, it's still down about 50% from the peak. And that has a more or less direct impact on the valuations that pre-IPO investors are willing to pay. And then it trickles down to Series E and Series D and Series C and Series B. Maybe it's less relevant at seed and Series A because I'm like, the rationale for early-stage investors is somewhat different, but it definitely has a big impact on what— on the logic of a Series B or Series C investor. Also, if you try to remember what 2020 and previous years looked like, there were so many unicorns, so many decacorns. It looked like everything is going through the roof and all of this excitement and hype made investors pay very high valuations. But if you look at the list of public SaaS companies today, there aren't that many companies that are still worth more than $5 billion. So I think that has been quite a reality check. Not so many companies will eventually exit at several billion dollars or even more than that. And I think that is something that investors are starting to factor in more than they did that some years ago. Now, last but definitely not least, expect to be asked about your AI strategy. If you're not a, let's call it like an AI-native startup, but a SaaS company that's been around for a few years, investors will ask you that question and they might wonder, if you're just trying to sprinkle some AI on your product or sprinkle some AI on your deck because, you know, investors are going to ask for it. So I think you have to have a really convincing strategy. And I can't tell you what that is for your product or your company without discussing it in more detail. It obviously depends on a lot of factors, but you'll— I think you'll have to show that you really understand what your customers want and that you have an idea and maybe some data on what problems you can solve with AI and that you can solve with AI better than without AI. I think you have to think about how deeply is AI integrated in your product. Probably the deeper the better. Like anything that is just a copy and paste from ChatGPT away is probably not that valuable. You'll also be asked, how are you going to win against OpenAI and some of the other large foundational models? But also about also how are you going to win against the incumbents in your space? So far, I think the learning is that the bigger SaaS companies are pretty fast to embrace AI. So it's not like they are the dinosaurs from the on-premise world that didn't manage to move to the cloud. If you look at what Intercom, HubSpot, Notion, Zendesk, and others are doing, they are pretty, pretty fast to leverage this new or this relatively new emerging technology. So you'll really have to think about What's your edge given that these big companies have the data and the customers and a lot of knowledge? So you have to really have something very special if you are in an existing category. You probably also want to think about, is AI just a building block like maybe a database technology or something else, which is okay, Or is it really something which you think will make your product much more valuable and more defensible in the long run? If you think that's the case, then expect to be asked about, like, your unique differentiation and, like, what is your— what is the feedback loop? What is it that allows you to sustainably have better model performance than others? Last— lastly, I think this is probably the first time for many SaaS companies to have significant COGS. Usually infrastructure has become very cheap with AWS and other cloud providers. So usually it's not something that you have to think about a lot. But now if you're using OpenAI, especially if you use some of the latest models, you might have significant costs for those APIs. And so you'll have to think about what that means for your margin structure. And is that like, what does it mean for your pricing? Is that something that you can charge extra for? That is all I prepared. Thank you so much for your attention, and I'm happy to take questions or discuss later.