What to Expect from SaaS in 2024 with Founder & General Partner of Craft Ventures David Sacks and SaaStr Founder Jason Lemkin (Video + Podcast)

Founder and General Partner of Craft Ventures, David Sacks, shares his perspective on what to expect from SaaS in 2024. Is everything going to be focused on AI? Can you raise a Series A if you’re not “AI SaaS?”

These are some of the questions Sacks and SaaStr Founder Jason Lemkin discuss at this year’s SaaStr Annual.

Can You Raise A Series A If You’re Not AI SaaS?

Craft Ventures is very B2B-focused, with around $3.3B in assets, so how much of that is focused on AI?

In terms of looking for new ideas, 70-80% is spent looking at AI.

With that being said, if you have the world’s best payroll app, you can absolutely still talk to Craft.

One of the questions all VCs ask is, “Why now?”

Sacks suggests thinking of every major platform shift as a pond.

That pond is stocked with new opportunities that will get fished out over time. The best opportunities will get taken.

Before AI came on the scene, it was roughly a dozen years before a really big platform shift — Cloud and mobile were big, but it was time for something new to come along to reset and restock the pond with new opportunities.

That’s AI.

So, can you raise a Series A if you’re not “AI SaaS?”

Of course, you can. And, people are watching AI intently.

The Three AI Buckets

There have been a lot of impressive demos in AI, although they’re more prototype-y.

AI is typically divided into three buckets:

• Infrastructure
• Co-pilots
• Pre-AI SaaS

Infrastructure —

Infrastructure will be owned by big tech companies and paced for a big M&A exit. Infrastructure is hot right now, with massive rounds at super-high valuations.

Co-pilots —

Co-pilots are where startups and founders can do new things that big companies won’t go after. Sacks believes there will be a co-pilot for every professional job category and also horizontal job functions like marketing and sales.

Pre-AI SaaS —

Pre-AI SaaS apps get turbo-charged in value by adding AI functionality. These companies get to exploit new AI APIs to make their products better.

Seed Is No Longer A Bargain

Two years ago, every seed round looked good because the graduation rate of Series A was so high.

It almost felt like getting a discount for every seed round you did.

But the mortality rate on seed rounds is high right now — like 80%. As a founder, if you plan on 80% success, that’s crazy.

Seed is no longer a bargain. It’s tough for investors.

Sacks believes Series A or B is a better place to invest right now. But it’s always a trade-off between proof vs. the extra valuation that you have to pay up for that.

A couple of years ago, you’d have to pay up a ton for that incremental proof because valuations would hockey stick as soon as anything was working.

Investors are more skeptical now.

“The lesson I was taught is from seed to A, the valuation needs to double or triple to justify the risk,” says Sacks. If you have enough money, wait so that there is less risk.

Has A Cautious Recovery Begun?

Sacks believes we’ve bottomed out in the last few months, and certainly from a public markets valuation perspective.

From a public market standpoint, there has been a recovery, which tends to trickle down to private valuations.

Most folks with a good business aren’t saying anything is getting worse. They’re fine.

But there are a lot of companies where there’s still deferred pain — the ones who raised huge rounds in 2021 especially and have been burning too much.

Bottoming out doesn’t mean those companies are right, though. We’ll still see many companies run out of money over the next year or two and die or take down rounds or restructure.

“Things Sucked For The Past Year”

“My view based on casual empiricism of board meetings was that things sucked for the past year,” says Sacks.

A lot of startups that sell to other startups and big tech companies were going through layoffs and reducing the amount of seats to buy.

So even startups good at getting renewals were getting seat contractions. That’s still happening.

Buyers are also more discerning.

A lot of categories are emerging, like sales enablement. You might see five or six categories here, but they’re all trying to get into each other’s business, and buyers only want one of them.

So, it’s a tough period. Sacks calls it a software recession.

But that’s only a specific area of startups selling to other B2B SaaS startups.

Companies like Monday and Toast are selling to real-world companies and small businesses, and the impact of the “downturn” is minimal or nonexistent.

Escalator On The Way Up, Elevator On The Way Down

For the last five quarters, every board meeting has been re-forecasting down.

But the last few weeks have seen a little turn up. If you’re still re-forecasting down five quarters from now, you’re screwed.

Think of it like an escalator on the way up and an elevator on the way down.

Things won’t bounce back to where they were in late 2021, but the sawtooth pattern of things going up with little corrections and then down with a big correction will continue.

Software isn’t going away. If you’re a founder with a great idea for a company, do it.

Building a company during a downturn is a great time because the war for talent is less intense. There’s also less competition for funding.

If you look at history, great venture returns happened when we weren’t in a bubble.

Low-Margins SaaS Sounds Like An Oxymoron

It’s confusing when meeting a founder of a 30-40% margin business.

In 2021, it seemed perfect to bolt on a low-margin payment business, but when a VC hears low-margins SaaS, it sounds like an oxymoron.

Software is supposed to be high margin. You can mass-produce software for a low cost.

All expenses go into producing that first instance, and there are no incremental cogs to producing more copies.

That’s what is so special about software.

All the tech-enabled businesses that were software but had a major physical world component got clobbered.

Having a physical world component is difficult, and any founder attempting it needs to be a 10x operator to make it work.

In pure SaaS, there’s a lot of forgiveness for being sloppy.

But, as soon as you add a physical component or cog, if you do something like misattribute a true cog to overhead, that could be fatal.

Founders Are Burning Too Much Thinking Their Multiple Is OK

How should we think about burn multiples today?

Sacks wrote about the burn multiple in early 2020. It was when there was a few-week COVID swoon period in the market. Everyone thought the world was ending, so the Fed started air-dropping money.

And so the super bubble began.

Sacks wrote the article because he knew it would become important for startups to think about capital efficiency.

Now, that message really matters, and public SaaS companies like Monday have gone from -15 to 20% efficiency, and Salesforce is approaching the rule of 50.

So there are two points for the need for the burn multiple…

#1 Why come up with this new metric as opposed to CAC and CAC payback?

• If a finance team misattributed certain expenses, it made CAC look great. No one could calculate it accurately.
• So, with a burn multiple, you take the entire burn in a given quarter or year and divide it by net new ARR.
• There was nowhere to hide. It captures everything and measures efficiency.

#2 Creating these rules of thumb makes it easier for founders to quickly diagnose.

• In 30 seconds or less, you can figure out if you’re good or bad.
• If you’re very early stage, pre-Series A, your burn multiple has to be bad if you’re funded. That’s OK.
• But it should be going down over time.

Ideally, when you go public, your burn is zero, and net new is big.

SaaSGrid — A Dashboarding Tool For SaaS Startups

Sacks announced the launch of another company at SaaStr Annual — SaaSGrid. It started as a free tool for his portfolio company before realizing it was something much bigger.

This dashboarding tool spits out around 70 essential metrics from your startup’s various data sources and is custom-built for SaaS companies.

By verticalizing a business intelligence tool for this particular industry, you get a level of convenience and value that wasn’t possible before.

It’s free for any SaaS company under $1M ARR, and you’ll find that it’ll simplify your life, help during fundraising, and function as a highly useful reporting tool.

Key Takeaways

There are plenty of predictions about SaaS in 2024. Some of them include:

• The rise of the AI category
• Investor rounds looking different from the super bubble of 2021.
• A cautious recovery in 2024
• The importance of burn multiples and accurate metric