"The 2023 SaaS Funding Napkin" with Christoph Janz GP Point Nine Capital | SaaStr Annual

Hello everybody. My name is Christoph Jans. I'm one of the partners at Point Nine Capital. We're an early stage VC firm focused on SaaS investments all over Europe and beyond. It's great to be back here at the SASTR conference. I know it's the third day here, the conference is coming to an end, so thank you so much for coming here to listen to my talk. A couple of words about.9 I already mentioned we're focused on early stage investments in SaaS companies. We've invested in more than 25 countries, so we're very geo agnostic. And if you haven't heard about Point 9, you might have heard about some of the companies that we've been fortunate to have invested in at their very early stages, such as Algolia, Contentful, Typeform, Zendesk, or maybe some of the more recent ones like Incidentio or Intensa. 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 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 others. 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 around 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, well, probably difficult. I think there is something to that, but the actual results definitely have a bit more nuance. So let's. As the 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 over the last 18 months to two 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 B's and series C's, it's kind of similar. Valuations. No, sorry, the number of rounds. We'll come back to valuations in a second. The number of rounds, rounds and the amount of Capital is down 50 to 75% from the peak, depending on what you're looking at. 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 from our survey and, and each of these blue bars is one data point. It represents one financing round here, starting with precede. We also. What you can also see here is the median round size and valuation, as well as the median round size and 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 financing rounds. That's why we're showing all of this here. As you can see, there is a very large range, 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. 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's 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 not that helpful. Valuations were mostly roughly in the 20 to 60 million range. And again, that'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 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 raise their Series A will 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 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's 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 two years ago, the Series A's 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 compressed, so you have somewhat higher levels in, err, 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 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. 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, as 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 one or two 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 down at least a little bit. Now, what we also asked, and what I think is maybe even more interesting than the numbers, is 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 ask 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, 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 was previously. Maybe as an aside, you can see that there 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 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. 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 on the valuations and round sizes there will be some updates, but it's not, 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 napkin. If you'd like to get a copy of it once it's done, please feel free to send me an email@christophoint9.com you'll also find me online and then we'll happy to send you the real napkin once it's done. Now let's talk a bit about those three 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 Saster a year ago. So we can't cover all of this now, but I 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 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 manage 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 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're not adding so much net new revenue yet. But you already have costs for your product, 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 dangerously short and you think your burn multiple is too high and you're trying to think about 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 six 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 CARC payback period on one axis and the burn multiple on the other axis. And depending on where you find yourself 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. 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 and series A because the rationale for early stage investors is somewhat different, but it definitely has a big impact on the logic of a Series B or a 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 and 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. Is 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, 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 your unique differentiation and like what is the feedback loop? What is it that allows you to sustainably have better model performance than others? 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 on. Anybody, any questions or is everybody keen to get to lunch? Okay. Okay. If anyone has any questions or wants to discuss something like one on one, I'm happy to do that as well, but I see there is one brave person. Thanks Christoph. So very interesting presentation. I do have a question. So you mentioned the AI being a key feature of future rounds that you raise. Expect to be asked about that. Do you think there is a difference between earlier stage companies versus later stage companies? Because for us we are basically past a seed state right now for us and we are starting to sprinkle in some AI into our product but a full blown AI integration maybe isn't really feasible for us. So maybe you could explain if there is a difference between earlier stage and later stage companies. Great question. I think you'll be asked that question at every stage. Right. Because AI is so much top of mind for everybody now. And I think the general consensus is that this is so important in B2B SaaS. That is it has to be a topic that you discuss with every potential investment. I think the quality of the answers or especially the quality of the like. The evidence will differ for different company stages. Right. So if an investor is talking to a series B or series C companies, they expect a lot of proof in the data and they will like, if there's a series B company, they will mostly value this based on like the numbers and what they've done. And if they sprinkle some AI on it, they will discount that quite heavily unless there is really quite some evidence that this is working. At the seed stage, everything is so much more about like the idea and the vision and it's, it should be convincing. But I think you'll be like, the expectation is that you don't have all the answers and that there is much proof of what you're doing. Thank you. Thank you. Thank you, Christopher, for the data. Really good to have this napkin data that you provide. Last year you mentioned that because of the economical downturn, investors were moving their focus from usage growth to revenue. Is it still available this year or it's capital efficiency that took the main focus of investors. Thank you for your question. Yeah, I think everything is more about revenue now than it was a year ago and then it was a year before that. So I think at this point, at the seed stage, or maybe even pre seed stage, I think you don't have to have a lot of revenue. Right. Like and usage. Like for us as a seed investor, happy customers are actually more important than revenue because sometimes it's easier to get revenue by selling some proof of concept or some trials. But what actually matters is if customers actually love it and if they use it. So I think at the seed stage it's different from later stages. But at later stages people definitely care a lot about revenue.

Hi Christophe, big fan of your writings and thought. I'm a VC from India. One challenge I find is with a lot of the data, whether it's state of the cloud, the napkin that you put out, what's an appropriate sizing that we should look at for markets outside the US and Europe, which are predominantly developed markets where markets like India, Africa, Sea, we don't have as much depth. That's one. The second one is I predominantly invest in like vertical SaaS, not horizontal SaaS or dev tool sample SaaS. What's a. I mean in. You typically invest far more in horizontal SaaS. Not necessary.

Not necessary. Happy to, happy to talk about that.

Yeah. So how do you distinguish between. Do two. Do you have higher metrics revenue needed? Because many vertical market SaaS, because they're country specific, may not have as much Tam as horizontal SaaS. So just these two country wise and different SaaS, markets wise. How do you break this up?

Sure. Thank you. So on, like, if I think about like what would a napkin look like for European country, for European companies or in India? I think in Europe we probably have a bit of a sense for it and I think it's not hugely different from the US. Maybe valuations are 20 to 30% lower at the seed or series A stage. At later stages there's probably not a big difference because European companies can raise from US investors. So it becomes very global then for India. I have no idea. I would love to work with you on this. It would be very fun to see if we can get some data there. Maybe let's catch up on that later on the horizontal versus vertical question. So we've actually been super excited about vertical SaaS for a long time and I think most people disagreed for a long time. I think it's becoming a bit more obvious now. But like one of our very first Investments was in 2009 in a company called Clio out of Vancouver, which was one of the first cloud based practice management solutions for lawyers. It's one of my favorite companies. We're still happy shareholders. What that maybe also tells you is that it's a very, very long journey. Right. Like we've been in this company for 14 years and we'll probably be in this company for another 14 years. Those companies typically don't triple or double for many consecutive years. But what we've seen and what's really so great about them is that they have a higher growth persistence. So a company like Clio has been growing, let's say 30 to 50% for years, many years still at a very high level of ARR. And they keep going. So they might look a bit less exciting on the surface, but they are very, very durable. I think the TAM is definitely why it hasn't become why maybe a lot of investors have historically passed on these companies. I think the good news is that a lot of markets have become much bigger than everybody thought a decade ago because more people use software than previously. And those companies can also get a higher market share because they tend to be less competitive. So we're an investor in a company for like called amenities. It's a SaaS solution, kind of like an operating system for Airbnbs or bed and breakfast, small hotels. Maybe a market that you would have thought is not big enough, but we actually think it's, it's big enough. And so I think there will be Many, many more vertical, vertical companies that eventually will become very. Guten Tag Christo. What's different in the metrics that investors are looking for in AI companies than the previous generation of traditional SaaS companies? That's a great question. I think if you have a very compelling pitch, you can probably get away with some somewhat less substance in terms of the metrics. If you have a really compelling product and product vision and if you can explain why everything that you're doing in AI will eventually pay off. And I think to some extent there is some crypto style craziness happening. Some companies raising huge amounts of money at very early stage stages, sometimes without anything. So that's maybe like the extreme version of that. But to a certain extent, if you're an AI startup, you can also use that excitement to your advantage.

Thanks a lot for the presentation. I had a chance to have a meeting with you in February 2020 and it was about the first days of the COVID and after that it seems like everything was going to go to crisis with budget cuts. The COVID started unknown amount of area. It was a survival period for startups. So we thought that in 2021 it.

Was going to be still a survival.

Period of such startups. But suddenly when I look back and see that it was the time the most amount of investments are made with the best valuations. What happened there that we, let's say we couldn't see the point of the vc.

Yeah, that is very unintuitive. Right. Like you have a global pandemic hitting and a lot of like tragedies and impact on economies and then you see all these tech stocks fly, Right. I think during the very first days or maybe weeks, the valuations went down, understandably. But I think what happened then is that people started to buy and use more software because they were sitting at home and they needed collaboration software to make the work at home work. Right. So everybody like Dropbox Zoom or like Loom from our portfolio got a huge boost. Like everything that was helping companies to stay functioning during these times. It also boosted like E commerce revenues for example, because the alternative of buying in a physical shop was no longer there. And, and I think everything, like all kinds of economic activities moved from the real world to the online world and that drove revenue to everybody doing business online and it trickled down to SaaS companies as well. And then a lot of people probably made the mistake of assuming it's going to stay like this and extrapolated the charts and that led to things like hopping, which you might have heard about like we are a company that was in the virtual event space, raised billions of dollars and it's pretty much dead now because, well, turns out the world has come back to the physical world and we enjoy events like this more than sitting at our desks and listening to each other. Hi Christoph, great presentation.

Can you talk a bit more about.

How capital efficiency has affected the growth expectation for startups? Is it still the same? Do they still expect you to hit the same growth expectation but be more capital efficient? And in terms of capital efficiency itself, like what does that really mean for.

Say, for a C stage startup?

For growth stage startup, what are the key expectations there? Yeah. Thank you. Thank you. That's a great question. When we did this survey last year, it looked like investors demand more capital efficiency without lowering their growth expectations. So kind of telling people we want more for less, which is easy to say, hard to do. I think now the growth expectations have come down a little bit and I've seen, I think we've seen some signs of this in the data that I presented. So I think the expectation is to be a lot more capital efficient and then maybe grow a little bit less than previously. But it's definitely still more difficult to meet these expectations than two or three years ago when growth at almost any cost was sort of okay. And I think the second part of your question was like, what is an, maybe an acceptable CAC payback or sales efficiency across different stages? I would say at the seed maybe to series A stage you really don't have enough data to really calculate these metrics because there is usually not enough repeatability. So you can maybe get some indications. But if mostly the founders are doing the sales and you are leveraging your network, all of this is not really that repeatable and scalable enough. And as you move to later stages, you'll have more and more solid data and investors will pay more and more attention to that. Then what is acceptable as a CAC payback period depends on things like churn and how competitive is your market and how much capital have you raised? As a, as a very rough rule of thumb, 6 to 12 months is great if you are in enterprise. If you have long contracts, you might be willing to accept much more. If you have high churn, then obviously you have to recoup your customer acquisition costs in a shorter amount of time. Thank you.

Hi Christopher, thank you for your presentation.

Could you please share your your thoughts about capital efficiency and the relation with net retention, especially in the seed stage? Oh, that's an interesting question. I don't know if at the seed stage you can really expect to have reliable data on net retention. Right. Like it usually takes several quarters if not years to really get a sense for what is the expansion, what's the contraction, and then as a result of that, what is the net retention? I think it becomes more relevant at series A, B and in later stages. And obviously every percentage point in your net retention has a super positive impact. Right. It's really what makes the most successful SaaS companies so amazing and so profitable businesses is that if you have, let's say 120% net dollar retention, then even if you don't sell anything for a year, you're still growing. This is amazing. And so that allows you to be much more capital efficient. Whereas if you lose a lot of your business in a year and you have to reacquire that, that's expensive. So everything else being equal, a company with high NDR will be a lot more capital efficient than one with high churn. Hi Chris. A great presentation. How do you believe that AI will disrupt and help vertical SaaS business to grow? Thank you. That's something we've been thinking about and discussing about a lot. I think it's still really early in the journey to figure this out. Obviously AI has been around for many years or decades depending on when you count, but it's only been a couple of years that it's comparably easy to plug in without building a large machine learning team. And so what we are seeing is that almost every SaaS company is experimenting, trying to find out what makes most sense for their users, for their category, for their use cases. I think it's a bit too early to tell what really works and the answer is probably different for different companies or it's for sure different. I think there is a lot of potential to make onboarding easier, to give users a much better user experience. And I think this might, and I actually just published an article about this a few days ago, I think this might accelerate adoption of SaaS in verticals where users aren't that tech savvy. Like imagine a vertical with, I know you could pick like legal or health or construction, where maybe the, the average worker isn't that tech savvy. And that is probably one of the reasons why some of these industries have been laggards in terms of adoption. If the next generation of vertical SaaS software just makes everything like super easy, like you just tell the software what to do, you don't have to go through a tree of options and learn a complicated user interface. I think that can be really, really powerful. But I think it's quite early and very keen to hear if you're working in this area and if you have some insights and experience.