Cracking the code for successful Series A fundraising — empirical proof for B2B SaaS companies

The dynamics behind closing a Series A financing round changed during the past years — especially in the DACH region, where liquidity increased and new investment hypotheses of VCs emerge. One of the major areas many new and established VC firms chose is B2B SaaS. So the question arises what does it take to successfully close a Series A as B2B SaaS company? To find the key drivers behind the likelihood of closing an A round (and the associated company valuation), we conducted an empirical analysis based on >400 B2B SaaS deals.

We retrieved relevant information from each company and enriched the data set with information from public sources, e.g. Pitchbook, Crunchbase and LinkedIn. Not only the values of the key drivers were considered, but also to what extent startups disclosed relevant information. In this analysis, only startups offering software solutions for businesses were considered — roughly 50% of the data matched and could be included in the regression analysis.

39% of the analyzed fundraising attempts were successful and achieved a median pre-money valuation of €6m. But what are the key drivers to determine the fundraising probability and to derive a valuation?

1) The defensibility of technology drives the valuation in early-stages

Building a business in the software industry that is not easy to be replicated by competitors requires outstanding technology. The development of cutting-edge technology with the ability to substantially outperform current solutions is very time-consuming and costly. Hence, startups that validated their defensibility by having patents granted are valued more by investors.

So what: SaaS-investors highly value signals about the defensibility of a company’s technology (e.g. a technical foundation leveraging unique and deep industry know-how).

2) Venture Capitalists want to minimize risk associated with technology

Technical expertise in the founding team (e.g. filling the role of a CTO) is a distinct advantage in early stages. It signals the attractiveness of the business opportunity and the ability to develop a defensible technology. VCs focused on B2B SaaS are really risk-averse when it comes to technology skills in software startups. Hence, it’s harder for non-tech founders to raise a round. Based on the data set, over 80% of the analyzed SaaS- startups had a technical co-founder.

So what: Having a techie in the founding team is crucial when it comes to fundraising. These people are very rare and highly coveted, so it’s a great signal to VCs. Tech-startups that do not have a CTO in early stages should definitely consider hiring one.

3) ARR is one of the most valid KPIs to show validation of the business

To reduce the risk of missing product-market fit, VCs are highly focused on KPIs about traction. SaaS-investors are obsessed with recurring revenues. For startups, it should be the key KPI in the very beginning as it has a positive impact on the fundraising and valuation. In this data set, the SaaS-startups achieved an ARR of €360k on the median (>400 deals, all companies were facing a follow-on round after their Seed financing).

So what: Lacking the product-market fit is one of the biggest fears of VCs. ARR is a key KPI to signal investors the demand from the market and a validation of the business model. Hence, it is the key metric to derive a valuation. However, for non-monetized products, the weighted pipeline of potential recurring revenue has to be huge.

4) The pitch deck is one of the key documents in the fundraising process, but VCs only care about a few KPIs

When it comes to the preparation of the pitch deck, many entrepreneurs spend hours and days to come up with numbers about the size and growth expectations of the market and to calculate the customer lifetime value and the customer acquisition costs of their business. The empirical finding was that VCs only focus on very few KPIs. What really makes a difference in the data set is the disclosure of financials (revenue and burn rate) as it really reduces the information asymmetry between the startup and investors.

So what: VCs are very skeptical about startups not disclosing financial information. They assume that startups hide bad information about the revenue and burn rate.

Conclusion: B2B SaaS-investors are highly attracted by startups that show the ability to develop a defensible technology and first traction with customers. Regarding Series A fundraising the data underlined investor’s concerns about technology risk and a lack of demand by customers. On the other hand, we could not find proof for significant influence of profitability of the business model, market sizes, growth rates or other more detailed metrics.