The Odds of Raising a Series A, The Latest in Venture Valuations, The AI Premium and More!

Hey everybody. Redpoint is one of the largest cloud and SaaS VCs out there. Particularly strong on the infrastructure side. Snowflake Stripe and others, but plenty of SaaS B2B leaders owner, where I'm also on the board with Redpoint and many others. And they just put out a set of slides that they did at their own shareholder meeting. If you don't know this. VCs themselves, yes they invest in startups, but they actually have their own investors. Their limited partners are LPs and they've got to collect a whole bunch of those to give the money to give to startups. And they have these LP meetings sometimes called AGMs and others and where they present their industry knowledge and trends. And I liked a lot of things that were in this one from redpoint and it's pretty rare that a VC fund will publish it. So I thought I'd go over this because I think these slides I can provide maybe a little bit of color and feedback. Sort of illustrates some of the odd times we're in right now. Odd times. Some things are great, some things are good, some things are so. So. And some things are really hard. And it's, it's a, it's a, it's a, it's almost a paradox in some cases. And I think Redpoint framed it well here. Nasdaq's at an all time high period. It is at an all time high. And it is funny. I think a lot of VCs best investment per the last 12 months may have been the S&P 500 or VTI or more likely NASDAQ QQQ. They're all up 20 or 30%. When a lot of VC portfolios are actually down from markdowns. What a lot of founders don't realize is how markdowns work for VCs. Let's say you did a unicorn investment two years ago. If nothing really happens, your auditors often will allow you to keep holding it at a billion dollar value up to a point. But after two years it's investments. Startups that don't raise more rounds are considered stale. It doesn't mean literally that their valuation has gone down. Hopefully guys don't over dilute, don't raise too much capital, but you kind of have to justify evaluation VCs to their own auditors. If there hasn't been around in two years and particularly if revenue hasn't grown substantially, the auditors are going to kind of push you to mark it down. And so what happened is a lot of, a lot of unicorns got into trouble in 2022 or so, but the VCs didn't have to really take a markdown until the end of last year, until the end of 2023 and then boom, the markdowns came really hard last year. So a lot of VCs at least paper value plummeted at 123123 even as NASDAQ kind of rocketed to record highs recently. It's an, it's an interesting, it's an interesting dichotomy there. So here's the point that they make and here's why it is confusing to founders and startups and VCs that the, you know, in 2021 the boost came from new IPOs, new cloud leaders, exploding Datadog, IPO and HashiCorp bill. So many leaders just went on great runs. But right now it's the big guys. It is the Magnificent seven and Nvidia has become part of this and leaped into a trillion dollar plus valuation and AI has just boosted Amazon and Microsoft and others. It's crazy. The big guys and in some cases the almost the moldy oldies have led the explosion. They're up up 71%. So it's important to understand that there are it ebbs and flows and there are times when it is the startups that drive big returns. That was certainly to a maximum true in 2021. There are other times when it's big companies that drive the return. And this year is that to an extreme. And not only is it true in the public markets, it's true for end customers. If you look at Snowflake, Hashicorp, Zoom Info and others we've written up on the Saster 5 Interesting Learning Series. You'll see it's the big customers that are, are the ones that are that are growing faster and it is the tech and SMBs that in many cases are struggling. It's not a surprise but again it goes back and forth at ebbs and flows and if you, ideally you have, you have both in your portfolio. Here's an interesting slide and there's, there's, there's different ways to slice this data but our multiples up and per Redpoint here for and, and people define this differently but for high growth cloud software multiples for the, for the top, the top ones, the top public companies multiples peaked at 25x in late 2021. Probably not a surprise and then plummeted. Plummeted right after December 31, 2021, but hit a low point in the beginning of 2023. A low point that, that the top performers traded it 7.2 times next 12 months revenue that has grown to 10.8x. That's a lot of growth. 30% growth for the top ones. For the top ones it is not evenly distributed. Public SaaS companies that have not gotten hyper efficient, that have not seen rule of 40 or better growth, have seen their multiples plateau and stay stuck at 4x5x6x. But the best ones have seen multiple expansion of 30%. And that does get VCs excited because VCs are looking for outliers. There really aren't that many, only the ones that IPO the best of the best. But the, the, the high growth ones are the best of the best of the best. They're, they're the, they're the LeBron James and, and Steph Currys of, of startups. It's hard enough to get into ipo. It's like get into the NBA, but then, then obviously it's not that simple. But, but VCs gain confidence when the multiples for the top ones grow and they have grown 30%. And to some extent we see that in some reflation in growth rounds, in growth rounds. Interesting slide here. And Jam and Ball from Altimeter has a very similar one. Have we bottomed out in net new ARR bookings? And what you can see, this is a helpful slide. You can see that as we all know, cloud buying, SaaS buying went on a tear in 202021 and it actually peaked in Q2 of 2021. It peaked with insane 71% growth. If you look back at the old saster posts in 2021, it was just incredible how everybody was growing. Everybody was growing. And then it went into a decline. It went into a client quarter after quarter through 2021 and 2022 and hit rock bottom in Q1 of 23. But it is back, it is back in Q2 and Q3 and now into Q4, early signs of 2024. So this is a compelling chart and certainly it does seem like most folks bounced off lows at the beginning of 2023. We've, we've also tracked that on saster.com data. Having said that, having said that, it's room for, I would say metered optimism, cautious optimism. Because at the same time, at the same time, for the first time ever, the average public SaaS company is guiding to less than 20% growth for the coming 12 months. For the first time ever. Now, maybe some of them are conservative and maybe some of them are sort of setting and beating what you want to do. You want to underperform and over deliver as a public company for sure. But never in the history of public SaaS companies has the average growth been lower than 20%. And that's, that's what they're committing to the street. So they are committing to the slowest growth ever. So on the one hand, yes. Have we bounced off bottoms in terms of contractions? It certainly seems so. The, the data supports that. But boy, the public companies are sure cautious on growth for the future. Interesting slide here on quota attainment. I, I hope this is true. I think I see this in my portfolio as well, which is quota attainment has bounced back for sales reps. It's getting better for selling software. So quota attainment hit a high according to redpoint of 53% in 2021. And personally I would challenge everyone to aim better. I think sales teams are really only happy, they're really only truly functional when, when 70% of the more of the team is hitting quota tame and then everyone believes they can do it. Everyone becomes this great team when it, when it's even 53% there's, there's, that's 47% of folks that are negative, are dour, are complaining, you know, you really want 70%. But in any event, 53% was the average in Q4 and then boy, it fell off a cliff. In one year we went from 53% quote attainment in Q4, 2021 to only 23% in 2022. Only 23%. That was rock bottom. Probably due to layoffs. We bounced back a bit to 29% in 2023. But now in 2024 we're at 41%. Could be a bunch of reasons for this. Could be tighter teams, could be adjustments to quotas and even definitions. But at least we're getting closer to the 50% and up number where it is more fun to sell in SaaS. Ultimately that's a good sign. Although I would challenge everyone to aim for 70 if you possibly can. This slide is really interesting for founders fundraising. It's really interesting and the next couple slides are worth just, just thinking about how long does it take to raise a growth round. And Redpoint has a big growth fund so they focus as much on growth as seed and A. But it's taking 22 months to raise A, B and C. And that is way up. That is way up from a record low of nine months in 2021 in the peak. But we're coming on, it's going to Take two years to raise a series B and C. And that's something to reflect on. First of all, it means many folks, of course, won't be able to raise one or it's even longer. These are, these are, these are sort of average numbers or rather a median number. So that's a long median, 22 months. But think about how that long that means you need your capital to raise. I mean, you can't run the gas tank down to, to empty before you fundraise. You need six months of Runway. You need six months of time to commonly fundraise. You need to have enough money in the bank that, that new investors don't smell panic. They don't smell something that's about to run out of money tomorrow. So traditionally you need six more months of Runway to comfortably raise your next round. So 22 plus 6 is 28 months. You need 28. You need to plan on 28 months to raise a B or a C today. I mean, we're. That's two and a half years. That really means your capital has to stretch almost forever after the A round. That's the takeaway. You to go from A to B. If it's going to take you 28 months or longer or B2C to 28 months longer, that's. That to me, that's infinity. That means when you raise an A or a B or a C, you got to plan on it being your last round. You've got to plan it being less. And I've said this multiple times at Saster, but this Redpoint data supports it. It's going to take you 22 months to raise the next round. And that means you need to have 28 months of capital as a buffer. Whatever you raise, that's your allowance, folks. That's your allowance to get there, to get to the next level. Period. Next data. Slightly interesting. I think some of this data on down rounds is skewed. I wouldn't worry too much about down rounds. Get the round done. Still, it's interesting to see very red point that we are now at. 15% of rounds are down rounds. 15% of down rounds. I don't think this is a huge deal, but it is important to note that it has doubled since 2022. We reached a low point in 2022, 2021 of 7 to 8% of rounds being down rounds. Now that's doubled. And look, there are. There are two types of down rounds. There is disastrous ones. Recaps. You know, we did the last round at 50 valuation. We got nowhere there's no revenue and we're wiping out everybody and we're doing a new round at 5 million. Okay, that's a wipeout. That's terrible. I know some folks will do those investments. I won't. I've never seen those companies recover. There's a different scenario that is happening where just the last round was too high price. Red Reddit just IPO'd. They IPO'd at a $6 billion plus valuation, which is very. But the crazy 2021 round was at 10 billion. So yeah, it's a down round. It's a down IPO. We are seeing tons of startups that raised at 100x50x rounds at the peak that now are raising rounds at good valuations. 10x15x maybe even 20x ARR. But that may be down a smidge. It may be down 10, 15, 20%. It may be down 40% like Reddit was. If your last round was at an insane valuation, almost ignore it mentally almost put it aside. It almost doesn't count. It's real. And you've got to deal with the ramifications potentially for any dilution and others for doing another round at a lower price. But don't let the last round price get you down. Do a market correct round price day and that's what's happening. That's what's happening. Down rounds used to be a stigma to some extent. They used to be a bad sign. They're not a bad sign today because we're seeing round adjustments for companies that are growing a very healthy rate. 60, 80, 100% or more. They're just doing rounds at lower prices than 2021. So if that's you, don't stress it, don't over overanalyze it. Get the get the money in and live to fight another day. This slide is super interesting. This is my favorite slide in the Redpoint deck series Ace have stayed muted. And what what's going on here? I find that founders are way too optimistic about a rounds in particular. And why are they optimistic? No matter what some data says, no matter what Carta or Pitchbook or data other says, seed rounds remain on fire today. Maybe they took a brief pause when the knife was falling in public markets in 2022, but they are back. Everyone wants to fund every YC company. There are hundreds and hundreds and hundreds of new C funds that can write seven figure checks. They are sprouting up all the time. Founders are having exits and building their own venture funds left and right. Three or four of the Founders I've invested in now have their own venture funds. There is an explosion in seed funds and overall that's great. It is great for founders and it means there are more folks to help you get off the ground. Seed used to be one of the hardest places to raise capital. It's never easy, folks. It's never easy. But I think statistically it's probably the easiest phase to raise capital if you have something at the early phase, if you've got a great team or you've got early traction if you're 10, 20k a month growing triple digits. It is not easy to raise seed capital, but it is easier than it had ever been in my entire career in SaaS and Cloud today. But if you look at this Redpoint data, Series A rounds have plummeted since Q4 of 2022 and they have not recovered in 2024. 2024 is not any better. It has stayed muted. So look at the hard data. Look at this chart. In fact, 2024 and 2023 are harder than 2019 and 2018. This has been the hardest two years, almost two years to raise a Series A in sort of our collective history. So just be cognizant of that. Founders maybe, maybe make the seed round last a little longer, maybe raise a few extra nickels, but don't spend it. I love raising a little bit of extra money in your seed round, but somehow committing to not spending it, almost put it in another bank account, don't spend it because that a, if nothing else realized that no matter how it looks in the Media or TechCrunch, on Twitter or LinkedIn or X series A still really hard, folks. It's really, really hard. And it's even harder, I think, than this chart looks because so much of the appetite and venture in SaaS and Cloud is into AI first companies. You know, it's. If you listen to the interview I did with David Sachs last year at Sasser Annual, the one we did with Byron dieter from Bessemer, 80% of Bessemers of Crafts, Redpoints and others energy is going into true AI startups. And A's haven't gotten any easier, but actually they've gotten even harder because the ones that are being done, if possible, SaaS and cloud folks want to do it into AI companies. So it's no easier. A is no easier. Two last slides, which are sort of interesting on AI two last slides and it's important, this is super helpful, see how they tie together for the best companies, the very best companies doing series B And C. And these are the very best folks. Don't read too much into these numbers. These are the elite of the elite. But the elite and elite are still able to command 29x ARR valuations. That is crazy. That is super high. We'll see next with the growth rate that takes triple digit growth to command that valuation. But the top AI AI ones are 88x. This is the return of the hundred x ARR deals and there's going to be a lot of tiers out there. There's going to. There's a lot of folks that are going to have a relatively small amount of revenue. They're going to raise at a billion dollars in AI and it's all going to crash and burn. But here's the numbers basically. AI, all things being equal, that ARR is it's a 3x premium. But. But wait for it. They have to be growing two and a half times faster. So what is elite? This is a really interesting slide. And let's slow down. According to Red Point, what is a truly elite series B and C round, not great. But Elite, Elite today sort of whiz or better for security. For the B and C. It's 197% growth. Guys. That's crazy at the B or C rate. A hundred percent is elite at that rate. Let's be clear. If you can grow a hundred percent at the growth stage you will get and you take your time. You will get multiple offers to fund your startup at a good valuation. If you can grow a hundred percent with, with not a crazy burn. But 197% is elite. But for AI we're looking for crazy stuff. VCs are looking for almost 500% growth. 464% growth. So those super crazy AI valuations and they are crazy. They have echoes of 2021. Like 2021 they're expecting insanely high growth. So be careful. Be careful what contract not just legal but social you enter into investors here. All the energy is into AI. 80% of the capital in cloud and SaaS is into AI. But people are expecting utterly insane growth for those high prices. All right everybody go forth and conquer. Be careful about the A. Be cognizant of AI and realize it's crazy times. This is, this is, this is the time of the big guys. This is the, this is the area of the Nvidias and the Microsofts and the Googles that roam the earth. The. They're back. The dinosaurs are back. This is Jurassic Sas, Jurassic Cloud. They're back. They're the winners. But startups are going to come back. Startups ultimately are where in the long run, are where the highest growth is. But it ain't this year. This year it's. It's year of Jurassic sas. Talk to everybody soon.