What does it take to raise capital, in SaaS, in 2022?
We’re excited to share the new version of the SaaS Funding Napkin.
SaaS Funding Napkin?! If you have no idea what we’re talking about, it means one of two things: either you are pretty new to SaaS, or it’s been way too long since we published the last version of the napkin. Either way, if this is the first time you’ve heard about the SaaS napkin, here’s some background to get you up to speed: In 2016, I thought about what it takes to raise capital in SaaS and tried to fit the answer on the proverbial back of a napkin. At first, it was a virtual napkin, but we soon produced a real napkin, became the unofficial napkin supplier of SaaStr and SaaStock, and kept updating it once a year.
Given the drastic change in the funding environment that started in February, creating the 2022 version of the napkin was particularly interesting. It was also tricky because the market has changed so much in the last few months and may continue to do so. In times like this, measuring the market’s temperature by looking at historical data comes with the risk of being embarrassingly wrong just a few months later. In fact, that’s why we hesitated to get a printed version of the napkin out throughout 2020/2021. Valuations of 100x ARR weren’t unusual, especially in the second half of 2021, but I guess we didn’t want to eternalize them by printing them on a napkin.
Before we unveil the napkin and talk about some of our observations, here are a few words about the methodology.
- The analysis is based on a total of 95 funding rounds that took place from January to July 2022, including 13 follow-on rounds in P9 companies, five new investments by ourselves, and 77 financings in companies outside of our portfolio. The data for companies outside of our portfolio mostly comes from investors in these companies. Many thanks to everyone who contributed to the survey!
- Ninety-five funding rounds are not a huge dataset. We believe the data is directionally correct, but please keep in mind that our sample may not represent the market as a whole.
- This caveat is even more important when we slice and dice the data to look at, for example, the valuations of Series B rounds from May to July. For some of these segments, we only have a couple of data points, so you’ll need to take these analyses with an extra big grain of salt.
- The breakdown by stage is done based on the round labels we got from participants, but the lines can be blurry since there’s no universally accepted definition of what e.g. a seed round is compared to a pre-seed round.
- The question we try to answer with the napkin has always been, “What does it take to raise capital in SaaS, currently”. In choosing the headline numbers that we’ve put on the napkin, we therefore decided to give more weight to the numbers from May until July. That means the numbers are heavily influenced by a smaller number of data points, but if you take a look at how the market has changed from April to May, I think you’ll agree that the January-April numbers are likely to be misleading for anyone trying to raise capital in the next few months. However, we’re also publishing the full data so you can look at the raw data and draw your own conclusions.
- We didn’t ask all of the original napkin survey questions regarding team, market, product, etc. in this year’s survey. Our notes in these sections are based on survey answers from the last years, our own experience, feedback from other investors, and the answers to the “What’s become more important in 2022?” question that we asked this time.
SaaS Funding Napkin 2022
And now, without further ado, here’s the 2022 SaaS Funding Napkin.
Digging in deeper
If you’d like to dig in deeper, here’s the summarized data from the survey.
(1) Round sizes, valuations, ARR levels
The charts below show round sizes, pre-money valuations, and ARR levels broken down by company stage. Each of the blue bars/columns represents one funding round. The green lines show the average values, the yellow one the medians.
We wanted to know:
“Quite roughly, how fast has the company been growing ARR in the 6–12 months before the investment?”
Here are the results, again broken down by stage:
“n/a” means that the company didn’t have meaningful revenue 6–12 months before the investment. For pre-seed, it’s almost always “n/a,” so we didn’t add a chart for pre-seed. For Series C, we only got three data points for this question, so no point in showing you a doughnut chart for that either. :)
(3) What matters in 2022?
In addition to requesting the data above, we asked investors the following question:
“When you consider a new investment today, are there any factors that you care more (or less) about compared to last year?”
We provided seven factors and asked participants to tell us which of them have become more important, less important, or if there hasn’t been a change in importance.
1) If we look at how valuations have developed throughout the January to June timeframe, we can see a significant drop in April/May:
The impact of the public markets tends to cascade downwards, so later-stage valuations should take a bigger hit faster than earlier-stage, but we can’t see this in our data. It’s worth pointing out again that our dataset is small for Series B, so don’t take the Series B valuation chart too seriously.
2) The charts below show the valuation ranges and round size ranges that we had put on previous versions of the napkin. We didn’t do a survey in the second half of 2021, but we’ve added some dotted lines based on what we’ve seen in the market at that time.
Despite the drop a few months ago, there’s no significant decrease in round sizes and valuations compared to 2020 and previous years, at least not yet. It’s well possible that this will change in the coming months. But for now, it looks like it’s mostly the end-of-2021 peak (indicated with the dotted lines) that got erased, so we’re back to 2019/2020 levels, but we’re not much lower than that.
3) For us, the clearest takeaway from this year’s survey is that investors pay more attention to capital efficiency and valuation, so let me paste that chart again here:
This isn’t surprising, of course, but it’s another confirmation that investor sentiment has indeed shifted from “growth at all costs” towards a more balanced view of growth and efficiency (which was also the topic of my SaaStr talk a few weeks ago).
In a way, investors are saying, “do more with less” (or rather, do the same, with less). This is 100x easier said than done, which might explain why 43% of investors said that the quality of the team is even more important in 2022. No pressure! :-)
A big thank-you to David Ola for helping me with the number crunching and the creation of the charts!