What Does It Take to Raise Capital, in SaaS, in 2023?
Unveiling the 2023 SaaS Funding Napkin
At the annual SaaStr conference in San Mateo three weeks ago, I delved into fundraising trends in 2023, discussing the implications of investors’ new-found love for efficiency vs. growth at all costs for founders, and why you should expect AI to come up in (almost) every pitch meeting. Here’s a recording of the talk for those interested.
I also gave a sneak preview of the 2023 SaaS Funding Napkin during my presentation. Since then, a few people have reconstructed the napkin using footage from the conference and shared it on social media:
I think “napkin leaks” are a first, which might be further evidence that 2023 isn’t just any normal year when it comes to fundraising for software companies. Across the board, funding activity is down 50–75% from its peak, so founders are understandably anxious and want to know:
What *the heck* does it take to raise capital, in SaaS, in 2023?!
As with previous posts of this type (see the one from last year here), I will first share some data from our annual survey with SaaS investors. This data offers important context (and some caveats) for interpreting the napkin, but if you prefer to skip straight to the napkin, that’s OK too!
A few words about the methodology.
- We collected data on 86 funding rounds occurring at the end of 2022 and in 2023, including 10 follow-on rounds in P9 companies, 8 new investments by ourselves, and 68 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!
- Additionally, we’ve utilized Carta’s dataset, comprising more than 3,300 financing rounds in US-based SaaS companies in 2023.
- For valuation and round sizes, we show the median from Carta’s data alongside the data points from our own research. For ARR and growth rates, we, unfortunately, didn’t find any third-party data providers, which is why this part is based on our own, much smaller dataset only, so you’ll have to take that with a grain of salt.
- In addition to the quantitative data, we got answers from more than 30 investors on 2–3 qualitative answers, the most important one being “What matters in 2023”.
- Remember that while the charts below are based strictly on the data we’ve collected, the napkin itself is and has always been a mix of art and science. It’s based on the data we’ve collected, previous versions of the napkin, and conversations with other investors. Consider it our best guess for what investors are looking for in 2023.
OK — enough caveats, here we go!
(1) Round sizes and valuations
The charts below show round sizes and pre-money valuations, broken down by company stage, with each blue bar symbolizing one funding round from our dataset, sorted from lowest to highest. Green and yellow lines denote the median values from our data and the extensive Carta dataset, respectively.
Pre-seed:
Seed:
Series A:
Series B:
(2) ARR and growth rates
The charts below show the answers to the following questions:
- Quite roughly, what was the company’s ARR at the time of the investment?
- Quite roughly, how fast was the company growing ARR-wise in the 6–12 months before the investment?
Seed:
Series A:
Series B:
(3) What matters in 2023?
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 eight factors and asked participants to tell us which have become more important, less important, or if there hasn’t been a change in importance.
(4) Observations and takeaways
1) Although the number and total volume of financing rounds are down 50–75% from the 2021 peak, the impact of the downturn on early-stage valuations and round sizes seems to be lower than one might think. According to Carta, the median seed valuation has been hovering around $13.5 million in Q2/2023, lower than the $15 million peak in the first nine months of 2021 but still clearly trending up if you look back a bit more. The same is true for Series As, while Series B and later valuations have dropped much more significantly.
There seems to be a bifurcation in the market: significantly fewer startups raise an early-stage round, but those that do still do it on good terms. Of course, it’s also possible that the market hasn’t fully reset yet.
Another potentially more interesting and more actionable interpretation is that companies tend to raise a bit later than during the 2019–2021 heydays. So, the median valuation and round size of a seed or Series A round hasn’t changed much, but most companies are somewhat further ahead when they raise their seed or Series A. We don’t have enough data points to be sure about this conclusion, but we’ve seen some indications of it in the data above. For example, seven of the 27 seed companies from our dataset had more than $500k of ARR, and the majority of Series A companies had several million in ARR. It’s a small dataset, so we have to take it with a grain of salt, but it’s consistent with what we see in the market. If this turns out to be true (e.g., that most Series A investors expect $2.5–3M or more in ARR vs. the $1–2M from previous years), this, of course, has profound implications on how founders need to look at burn, runway, and their fundraising strategy.
2) The other (by now quite obvious) takeaway is that almost every investor cares much more about capital efficiency than before, and half of the respondents told us that a convincing AI strategy has become more important. Balancing growth and efficiency is something I wrote and spoke about extensively before, so I won’t go into that now. The right AI strategy, of course, depends on the company, product, and market, and getting into this would go way beyond the scope of this post, so I’ll just list a few questions that I think you should think about:
- How well do you understand your customers, the problems you’re trying to solve, and how to solve them better with AI?
- Are you just “sprinkling AI onto a deck or product”?
- How deeply are your AI features integrated with your product?
- What makes you win vs. OpenAI and other foundational models, as well as incumbents in your space?
- Do you have access to proprietary customer data that others don’t have and that improves your model performance? Does that give you a sustainable competitive advantage?
- Is there a feedback loop that helps you improve performance?
- Have you thought about the impact of your AI features/roadmap on CoGS and pricing?
- Do you consider AI to be a core part of your differentiation and moat, or just as a building block?
If you’ve come this far, thank you, and check out the napkin! 🙂
