What it takes to raise capital in 2021 with Christoph Janz of Point 9 Capital

semester, and we are super glad you're joining us from wherever you're at, whether it's early morning or you're East Coast, or for our speaker to kick us off, he is overseas in Germany. So our first session of the day for spring semester, Saster University, is What Does It Take to Raise Capital in 2021? by Christoph Janss. He's partner from Point Nine, um, and he's gonna flip to the next slide so we can go through some housekeeping since this is the first session of the day. This is gonna be, as you guys can see, an interactive session. We encourage you to keep your cameras on. Feel free to throw chats into the— or questions into the Q&A and the chat box because we wanna be able to have that option to go through them with you at the end. And but keep your audio muted as you can, and if, if we need to put you on mute, we will. If you wanna join the conversation again, you can use the chat box or to throw in your questions. Or you can raise your hand to speak and we can, once we get to that Q&A portion, we can call on you. Just as a reminder, these sessions are recorded and they'll be available post-event on demand. It can also be seen on our YouTube should you want to go back and catch yourself. But again, they are live streamed. But without further ado, I'm going to kick it over to Christoph to get us going this morning. Welcome, Christoph. Thank you for joining us here.

Hi, Caitlin. Thank you so much. Thanks for the kind introduction. And 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. Yeah, my name is Christoph Jans. I'm a founding partner at 9 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, 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, 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 Saastr 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 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 others. And this is just based on how the rounds were called by 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, we 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, 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, close to a million, I guess about $800,000 ARR range. 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 in the $300,000 to $1 million range, to evaluation 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 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 have 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 made the napkin based 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 a 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, in 2016, or maybe actually even, 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 netkin 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 around— 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 get hotter, or that might help you with your fundraising process. But I'll just pause here quickly and see if there are any questions or if anybody has raised their hand.

Hey Christoph, so you definitely have questions. So what I'm going to do, guys, if you put questions in the queue, I'm going to ask you to go on mute and turn your camera on once I call your name, and so you can have some dialogue with Christoph. So the first one is from Chris, uh, Chris Messina. He asked, at the beginning of your session. So what are some things that you consider key points on the founder's story to invest at the pre-seed stage?

Thank you. Yeah, thanks for that question. And hi, Jason. I can see Jason M. Lemkin there, our host here in a very fitting outfit. Yeah. So like, so what are we primarily looking for at the At the pre-seed stage was the question. For what we are looking for is founder market fit, because there is no product market fit yet at the time. And what I mean with product— with founder market fit is that we think that we can be convinced that this is the right team for this problem, which can be very different depending on the problem, like whether that's a developer tool an enterprise solution or an SMB product or like a more consumer freemium product. So we want to be convinced that the, the team has the right DNA and the, and the right background, the right skills to tackle this specific problem. And alongside that, what we're always looking for is if the team has some kind of unique insight which led them to start this company and solve this problem as opposed to something else. And this is related to the fact that all markets, almost all markets are so competitive and that all products, SaaS products are comparably easy to copy. So to prevent that from happening, you need to have a founding team that has a head start because they know about the problem based on their domain expertise or their intuition or their research, which gives them just 1 or 2 years of a head start, then we're also okay with the assumption that everything can be copied because we are convinced that we bet on a team that will just keep innovating and that will, once they have been copied by others, will already be 1 or 2 steps ahead.

Right, so I guess that— I'm sorry, my camera is turning me into a gray blob, so apologies. But essentially you're looking to make sure that the founders have the ability to get out ahead of the market before anyone else else can copy them and we'll continue to pivot and grow the business in unique ways as the competitors start popping up.

I think that's a— thanks, Chris. Yeah, I think that's a good way to describe it. And obviously there are always a ton of unknowns, right? And especially at the pre-seed or seed stage. So we might invest based on what I just described and then maybe there will still be a pivot 3 months after we invested. So there are no absolute truths, but we are looking for some unique insight, which usually comes from founders having been— like having experienced the problem themselves or having been close to people who experienced the problem, as opposed to, jumping on a bandwagon or jumping on something that's, that's cool and which will certainly attract a lot of competition.

Success. Thank you very much.

Thank you.

Thank you, Chris and Christoph. We do have a raised hand here. Shadra, do you want to share your question?

Yes, I want to ask a question. Am I audible, please?

You're talking. You're unmuted. Okay.

I'm in Africa, Nigeria, and in terms of startups, the ecosystem is really not that vibrant here, and many of the teams I spoke to, they still feel like I'm still in the ideation stage. So what are the advice in building a reliable and a very active founding team if everybody decides to work remotely? They won't have the boundaries, challenges of boundary by continent and by time.

And Shadrach, you were breaking— Sorry, I'm not sure. I only got about half of the audio. Caitlin, did you hear— get a better audio? And can you repeat the question, or should we ask Shadrach to repeat the question?

Shadrach, we couldn't hear you completely. Could you type it in the Q&A by chance so we could get it completely?

Okay.

Thank you. We'll circle back, definitely.

I think the gist was about how fundraising has flattened, right? Maybe since post-COVID, Christoph, would you— is it easier for you to invest all across? You've obviously invested in the US and across Europe, but has it gotten even flatter? Will you invest— would you invest anywhere in the world across any continent today? And how do folks that aren't in the hottest areas, how do they reach you today?

Got it. Okay. Understood. Thank you. I think it has become flatter, flattened, flatter or flattener. I don't know what the name is for sure. And we've seen this. I mean, there was, I think there was a, when COVID-19 hit about 10 months ago, I think for a couple of weeks, everybody was really nervous and uncertain about their next round. And will US investors still invest in Europe because they can't fly? But that pretty quickly everybody just started to meet over Zoom or whereby and do deals over the distance. And we've seen many founders, especially European ones, who actually have experienced the fundraising process as much more efficient because they could meet VCs from London, Berlin, Paris, the US, like both the West Coast and the East coast and just save all the traveling and the coffee meetings. So we've seen some incredibly efficient fundraising process because everybody was forced to do everything over video. We have always been super open to investing pretty much anywhere. We have invested in places such as New Zealand and and Peru. We have not yet invested in Africa. I think that's still very new for probably almost all VCs, especially in SaaS. I think there have been more investments in consumer and e-commerce, but I think it's very new for SaaS investors. I would be super interested in learning more and would love to have a follow-up chat after this session. But I think this is still considered to be a very far away place and with an immature startup and funding ecosystem. So I think the world has become flatter, but unfortunately not— that doesn't span to all continents yet.

Awesome, thank you, Christoph. We do have more raised hands and some more questions in the chat, so I definitely— we will get to those. But Sebastian, you have your hand raised, so I will let you take it away here.

Hi there, thanks. Can everyone hear me through the— Yes.

Brilliant.

Hi Christoph. So in terms of your own fundraising, have you seen recently maybe a shift in the type of LPs that are interested in having allocations to venture capital assets as yield from maybe other asset classes has become harder to find? And how has that impacted your investment requirements for the companies you invest in? Maybe if you have larger amounts of institutional investors, are they keener to see higher amounts of recurring revenue?

So I— thank you, Sebastian. I can't speak about it from a lot of our own experience because we've raised our latest fund about a year ago. So like, we haven't been like in fundraising mode in the last 6 to 12 months or so. I think maybe it's more somewhat more generally, probably been— there's never been as much money in the market as today for technology startups and therefore also like by proxy VCs that invest in startups. And you see this in the public markets obviously too, right? So I think the value of— you mentioned like the value of recurring revenue. I think it's— it probably wasn't until a couple of years ago that the public markets truly understood the value of more than 100% dollar net retention. If you remember like the valuations at which companies like Zendesk or Box went public, pretty low because they had— especially Box was criticized for having huge sales and marketing spend. And maybe Wall Street analysts, they didn't quite get that even if they reduced their marketing spend to zero, they would still keep generating more, more and more revenue. And I think that has now fully been realized by everybody. And probably it has been amplified now in the last few years by the fact that interest rates globally are like at zero or even negative. So the relative attractiveness of recurring revenue has gone up further if basically you have to pay money to your bank for them to store your cash. So that's all I think that— that's, I think, I guess, all I can say to that question.

Okay, thank you very much.

Awesome. Thank you, Sebastian. Fred, you have your hand raised, so I'm going to throw it over to you. You want to unmute yourself?

Didn't realize I had to do that. Christophe, we've worked together at Contentful together quite a bit, and also Jason M. Lemkin. I've read everything you've ever done, so thank you. I owe you many dinners, many times over. When we're looking at your average sale price of around, say, $50K, and it quickly starts ramping up into things that are closer to 6 figures, and you really want to gun for that Series A, how do you measure velocity? How important is it that, you know, yeah, you hit your $1 million relatively quickly? Should you still wait for that $2.5?

You mean for—

because you're showing that it's just much higher than before. So far internally, we've been saying, hey, let's just aim for that $1 million, if the average has really gone up, is this just a matter of just waiting it out? Or if you're— is your velocity— how do you measure the velocity and how important is it?

Yeah, I think it depends on too many factors for me to have an answer to that. Like, I think I don't have a simple answer to say you should go out for your Series A at the million or $2 million or $2.5 million. I think it depends on various other factors, including how much you've raised and how much runway you have. And if you think that if you wait another 3 to 6 months and you reach some, some major new milestones or proof points, um, I mean, if you can show like some repeatable sales and marketing process and some velocity, as you said, for for 1 or 2 quarters, that might be— that is probably enough to get interest from Series A investors if there is a lot of consistency and obviously if everything else looks good too, right? So it's always about the entire package and there is no, like, no checklist for this yet. I think the— the consistency at which you're growing and your understanding of growth channels is as important, if not more important, than the absolute level of ARR. So if you already have all these answers at a million or 1.5 million ARR, totally possible that you can have a great Series A, even though the averages that I presented here indicate that most companies raise later.

Thank you.

Thank you.

Thank you, Fred. Um, one question in here because we're running a little bit short on time, and guys, um, if your questions are in here, I will still share them with Christoph if we didn't get them answered, and hopefully he can circle back. But, um, one of them we have, are solo founders considered a red flag to investors?

No, I don't think so. I think if we have invested in several companies with solo founders, it just increases the bar because that founder, as an investor, you really bet on that one individual, and he or she needs to have even more superpowers. I mean, all founders need to have superpowers, right? But if it's a single founder and the entire thing rests on her or his shoulders, then the bar for that individual is just even higher because we have to assume that the founder CEO is able to hire like experienced, good people earlier than would otherwise be necessary. Like if you have 2 or 3 people, you can push out your first VP hire until a somewhat later date because you can cover everything from product, technology, sales, marketing, customer success, finance, maybe for a couple of years if you have 3 founders. Whereas if you are a solo founder, you are probably forced to bring on senior talent earlier, and that is extremely hard, like convincing experienced people to to join your early-stage company. So it means that the founder just needs to be extremely convincing.

For sure, for sure. And we're gonna loop back to some questions, and I know you have a bonus fundraising tip slide.