What does it take to raise capital, in SaaS, in 2019?

Jun 25 · 6 min read

👈🏼In case you like the napkin … upvoting is free. :-)

Two weeks ago we released the 2019 edition of our (in)famous SaaS Funding Napkin. If you were in Paris to attend SaaStr Europa, went to our CTO meetup, or joined us for our Café Hours, you might be holding one in your hands already (unless you’ve used it to dry your tears). Everyone else can download a free digital copy or request the real thing on www.saasnapkin.com.

If you’re wondering what napkin I’m talking about, here’s the backstory. In 2016 I thought about the question of what it takes to raise capital, in SaaS, in 2016 and tried to give an answer that would fit on the proverbial back of a napkin. At first, it was just a virtual napkin, but since the idea resonated so well with SaaS founders and investors, we eventually produced a real napkin.

In this post, I’ll take a look at the results of our 2019 SaaS funding survey, how they compare to the results of last year, and will provide some details on the methodology of the survey.

What’s changed in 2019?

If we compare the 2018 napkin with the 2019 version that we released in Paris, we can observe a couple of things:

1. Round sizes have increased, especially for the hottest deals

In 2018, we pegged the typical range for seed, Series A, and Series B rounds at $1–2M, $5–10M, and $10–30M, respectively. In 2019 those ranges have increased to $1–4M, $5–14M, and $15–40M, respectively.

It’s important to point out that all these numbers are based on a fairly small dataset and that we’ve made some methodological changes in 2019 (which I’ll describe further down). So these numbers are by no means comprehensive or precise, but I’m pretty sure that they are directionally right.

2. Valuations have increased … especially for the hottest deals (duh)

The 2018 napkin states $5–7M, $15–25M, and $40–100M for seed, Series A, and Series B valuations. In 2019 these ranges have changed to $4–11M, $15–40M, and $50–140M, so it’s mostly the upper end of the range (AKA the hottest deals) that has been pushed up further.

3. No significant change in ARR and growth expectations

We didn’t observe clear changes in terms of investors’ expectations for ARR levels and growth rates. It seems like most VCs are still in love with the “T2D3 path” (which is awesome if you can pull it off, but IMO not great generalizable advice).

4. Team, PMF, user love, TAM, CAC payback, retention, and moats are still the name of the game

As far as the qualitative answers go, there are no clear differences between the 2018 and the 2019 surveys. As you’ll see on the napkin, VCs are (not surprisingly) still looking for outstanding teams that build great, differentiated products that solve a big pain for a large number of target customers, and in later rounds of financing they want to see increasing evidence of the founders’ ability to build a world-class team, to find scalable and profitable distribution channels, and to create moats around the business. For a lot more color on all of the non-quantitative factors, I’d encourage you to study the detailed results of our 2018 survey (part 1, part 2, part 3) which are still as relevant in 2019 as they were in 2018.

Seed is no longer a round, it’s a phase

One thing I’ve noticed is that in contrast to last year, this year several seed investors mentioned user engagement and stickiness as something they’re looking for. This might suggest that the bar for raising an institutional seed round is increasing, but because of the small sample size, it’s too early to draw that conclusion. Also, as Hunter Walk pointed out, seed is no longer a round, it’s a phase. Many startups raise several million dollars in 2–3 rounds until they are ready for a strong Series A, which makes it even harder to pinpoint the characteristics of a typical seed round.

By the way, in case you’re wondering where on that (seed) spectrum Point Nine falls, the answer is that we’re covering the entire phase. Traditionally, we’ve been investing mostly in typical seed rounds — what we call the “0.9 stage” — but more than half of the investments that we did in the last 18 months were pre-monetization. On the other end of the spectrum we’re currently closing an “early Series A” investment, so maybe we should rename ourselves to “Point Seven to One Point O”. ;-)

The data behind the napkin

A few notes for those of you who are interested in where the data on the napkins comes from. The inaugural napkin from 2016 as well as the 2017 version were based on deals that we had seen and on feedback from a small number of investors. In 2018 we stepped up our game and surveyed more than 60 VCs to get more reliable data. This year, only 35 investors completed the survey but there were more mandatory questions this time (and we sent fewer follow-ups ;-) ).

What follows are the results of the survey in nine charts, but first, a few notes on the methodology:

We asked everyone “What was the lowest (pre-money) valuation that you’ve invested at?” and “What was the highest (pre-money) valuation that you’ve invested at?” (in the last 12 months). Using these data points (two per respondent) I created candlestick charts using this logic: The bottom end and the top end of the thin line represent the lowest and the highest valuation from the dataset, while the bottom and the top of the wide bar correspond with the 1st and the 3rd quartile. This way you can quickly see the valuation range that most investments fell into — the thick bars — while also showing the outliers. The numbers on the napkins are also based on the 1st-to-3rd-quartile range.
The charts showing round sizes were done exactly the same way.
The ARR and y/y growth charts were done like this as well, the only difference being that in this case, we asked people for the approximate average numbers (instead of asking for the low and the high).
The Series A data is based on the answers from 22 VCs, while we only had 8 and 5 respondents for seed and Series B, respectively. So especially the seed and Series B data needs to be taken with a grain of salt. We’ll get more respondents next time. :)