The 2023 SaaS Fundraising Napkin

What did it take to raise a round in 2023?

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You can download the 2023 SaaS napkin in PDF format here.

What did it take to raise a round in 2023?

The concept of the “SaaS Napkin” has been around for, well, probably as long as SaaS.

The gist is to summarize the themes that defined tech funding rounds during a given calendar year, all on one page.

Some themes stay the same - like demonstrating a solid financial profile when you are on the pre-IPO track - while other details change from year to year - like the average valuation for of a Series A.

TL;DR:

• The AI Premium is Real

• Net Dollar Retention is down across the board

• Burn multiple adjustments were needed

• Really good growth is now considered great

• Series A is the new Series B

(And here’s 2022’s SaaS Napkin for reference….)

Author’s note: This is all meant to be directional. Do not get your panties in a bunch because you managed to raise a Series A at a bajillion dollars. Good for you. I don’t care. We are painting in broad brush strokes here and talking thematically.

The AI premium is real

This theme rings incredibly true at the Seed level. While valuations for “typical” B2B SaaS founders came down to earth ($5M to MAYBE $15M or $20M), if you were an early firm building with AI AND had a second time founder at the helm, you could easily double that valuation in 2023. The same goes for the amount of cash you could raise - instead of $1M to $5M checks, you could make $10M look easy.

Speaking of that, remember when pop punk powerhouse All Time Low raised $113M at a $260M valuation?

France’s Mistral AI raised $113M at a $260M valuation.

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Net Dollar Retention is down across the board

With headcount growth going in the wrong direction, license expansion evaporated.

As I said in a previous issue:

Since tech companies are also the biggest buyers of tech, Net Dollar Retention Rates are getting worse as headcounts decrease

NDR was down substantially across the board, and way below prior targets. In the public markets you are seeing a decrease of 10% to 15% compared to the historical median. 115% is the new 130%.

It’s safe to say we saw the same trend in private markets. Why?

Less HC = Less Seats = Less Expansion Opportunities = Lower NDR

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Burn Multiple adjustments

There’s less room for Series C and D companies to burn cash. Previously a burn multiple of around ~2 was good enough. Now you need to be 1 or less, and show up with a plan to get to breakeven.

As a reminder, in previous years this is how we thought about the Burn Multiple:

Based on what we saw last year, companies are expected to be at least a half turn better to garner the same pat on the back.

Good is now 1.0 to 2.0. Great is now .5x to 1.0x. Amazing is you ain’t burning no cash.

But to perhaps give those same companies some breathing room, growth expectations fell, too.

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Really good growth is now great

Companies took some heat off their fastball, going to work with a nasty knuckleball.

RIP Tim Wakefield. Absolute legend.

As you’d expect, as NDR falls, so do topline growth rates.

Topline growth expectations for Series B, C, and D came down by by more than 40% on average.

• Series B: 175% —> 125% (down ~50%)

• Series C: 150% —> 100% (down ~50%)

• Series D: 115% —> 75% (down ~40%)

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Series A is the new Series B

Series A is the only round that went up in median valuation y/y. My hunch is that founders waited longer to raise than in previous years, and had more traction to show for it when they showed up to the table. Founders may also be raising with the intention to run their companies to need less cash down the road.

Over the last few years Series E+ rounds were the norm. I’m pretty sure DataBricks fucked around and actually ran out of letters.

From talking to founders in my network, there’s a real desire to “control our own destiny.” Many don’t want to go past Series C or D after seeing the carnage that was 2022.

Optionality, in and of itself, is an asset. And once you get to a pref stack of a certain height, your end destination becomes IPO or bust.

As a reminder - only going to Series C or D used to be the norm. Here’s a snapshot from 2019. As Sammy Abdullah points out, most companies exit by Series D.

A few companies caught my eye as getting to their IPO faster than I remembered:

• Series A

  • Amazon

  • Apple

  • Alibaba

• Series B

  • Atlassian

  • OpenTable

  • Zynga

• Series C

  • Dropbox

  • Shopify

  • Spotify

• Series D

  • ServiceNow

  • Zendesk

  • Zscaler

It’s fun to look back at datasets pre COVID. It puts the world before that shift into perspective, and informs what we should think is historically normal.

I find it ironic that as VCs, who are quite literally in the business of providing capital, push Series B and Series C companies to get to profitability, those same companies have a reduced need for their product.

Companies getting a higher valuation for efficient growth and reduced burn plays out in less of a need for capital. The two are, in some ways, at odds with one another.

From one corner of their mouth VCs espouse the need to get to profitability in the short term, and demonstrate single digit CAC Payback periods. But then they do this scrambled robotic switch over and ask how to get capital into the business.

As companies start to look just like VCs are asking for them to look, their only real needs for capital in later stages will be for M&A. Otherwise, if they are doing what was asked, the business should fund itself.

Afterall:

High CAC Payback period = VCs fund your business …

Low CAC Payback period, customers fund your business.

Companies who control their own destinies are in many ways a VCs enemy (except for the VCs who got on the wagon earlier - dilution sucks!)

Sources and thank you’s

I relied upon data from Carta, Pitchbook, TechCrunch, and anecdotal observations from friends in the VC community for this piece.

A special thank you to

Shomik Ghosh

of BoldStart and Sebastian Duesterhoeft of Lightspeed Ventures.

See ya in 2024!

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A word from our sponsor - Tropic

True story - I was on the horn with Tropics VP of Marketing last week, talking newsletter stuff and shooting the breeze. It came up that Q4 is a busy season for more than just sales teams - as a CFO, I find myself buying a lot of software. And at that moment I had a proposal from Gong on the table.

The next thing you know, we were running a price check together on the deal. Fast forward and a few drop downs later (like literally under 90 seconds), I was looking at benchmarks for what someone like me should be paying for the tool, given the package and number of licenses that we wanted.

I’ve always said that he or she who holds the data holds the power. So I went back to Gong and got another 15% chopped off.

Don’t buy before you run a check - you can run one for free today.

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Run the Numbers

Gusto is a company that’s long intrigued me for the way they serve small businesses for their HR and payroll needs. Luckily my friend Rohit Divate leads Corporate Finance there and has been instrumental in helping the company literally 10x (they’re now north of $500M in revenue).

I learned a lot from Rohit Divate on this episode of Run the Numbers:

• Budgeting in hypergrowth as your company 10x's in size

• Doing “Tours of Duty” within the finance department

• Why Gusto has no titles

Spotify: 

Apple: 

YouTube: 

Quote I’ve Been Pondering

“I once heard someone say that if Thomas Edison had gone to business school we would all be reading by larger candles.”

-What They Don’t Teach You At Harvard Business School, by Mark McCormack