At SaaStr Europa, 20VC founder Harry Stebbings and Visionaries Club Founding Partner Robert Lacher share the ins and outs of fundraising and the VC landscape in 2024. Keep reading to hear their perspectives on:
- Multi-stage investing
- Platform partner or not
- Investor incentive mechanisms driving decisions for who to invest in
- When is pricing too high or low for investors, and much more
Should You Partner with Multi-Stage Investors
As a founder, there’s no right or wrong when it comes to who you want to partner with. It all depends on how you want to build your company. Do you want to be more aggressive and risk-taking, or do you want to be more organic?
Over the last three years, many multi-stage funds have entered Europe. Suddenly, there are 5x the amount of multi-stage funds in London. How do you decide if you want to partner with a multi-stage fund?
First, you want to find out about the DNA of who you want to work with. Series A has become such a red ocean for VCs competing to enter the rounds, so winning deals has become difficult. Five years ago, a multi-stage fund had a 50% chance of winning a term sheet with a great founder. Today that might be down to 10%.
For a seed round, you’re trying to buy optionality to preempt the A rounds if things are going well. If things don’t go well, it’s more difficult for founders because they become “orphaned” by that multi-stage fund in a future round. The biggest way companies get killed is when you’re doing ok, or sometimes really good, but the principal in the multi-stage fund leaves. You no longer have a champion in that fund.
You need to determine if the multi-stage fund cares about you enough and if you’re meaningful enough in proportion to their fund size. Sub 2-3% is a total optionality bet.
If you do a $3M round and a big fund says they’ll do $200k, the founder might want that big brand name even though it means nothing to that big brand. Don’t take that money.
At a seed fund with $165M, doing $5M investments is a lot of money. Those people will die to make the company a fundraising success in the Series A round because it’s a meaningful check they won’t want to lose.
Should You Give Investors Pro Rata Rights
A few funds and founders ask why you should have the right to do pro rata. You need to deserve it. Harry never does it. “When you look at the data, 78% of the time, those reserves are misallocated, which can be a serious opportunity cost of capital.”
Instead, investors should be incentivized to get founders the next best round. If you have a very heavy skew towards reserves, you might not be aligned because investors like Harry don’t want the round to be that high. They want to double down and put more in.
Pro rata rights create a perverse incentive mechanism where you can’t be that honest with investors because you’re always waiting for the next check. If you have a multi-stage fund that does seed, you can’t come to them that easily saying, “We missed the quarter, our Head of Sales sucks, and we don’t have product market fit. See you in three months for the next round.” That doesn’t work.
Why would you give someone pro-rata rights? Either that investor needs to earn it and show they’re doing great work to deliver on their promise, or you have signaling that puts you in a negative situation.
Venture Platforms vs. GP
Venture investors essentially sell cash, and venture value-add platforms are popular. There’s no right or wrong when it comes to platform vs. partners. Again, it depends on what you’re looking for as a founder.
On one extreme side, they just give you money and don’t take a board seat. Fair enough. Conversely, some platforms and early-stage funds try to be super involved. Among that second category, you could have a team of partners only focusing on platform support. And others do it as a GP.
As a founder, if you have GP support when hiring a VP of Sales or tapping into a new market, that’s more of an ownership perspective because that person is aligned with your interests to make your company a success no matter what.
If the GP delegates to a platform partner, it becomes more of a service business because they’re ticking the box. Platform people often scale the GP time of a fund to make more investments vs. scaling a founder’s time.
But then you have some founders who really love those platforms. Generally, the founders who outperform can be pretty independent, looking for 10/10 highly strategic or on-point advice to answer a specific question.
You get closer to 10/10 advice if the GP is giving the support. Both models can work well, though. Andreessen is a perfect example of that. They’re a well-oiled machine.
At the end of the day, you want to build a cap table like you do a sports team. Everyone has a specific position for each thing, so you need to be tactical in how you build it.
The Top 10% vs. the Other 90%
Companies that get hot have exceptionally quick, successful rounds at extremely high prices. While this is great for those companies, what about the rest? Let’s look at it from the 2021 bubble-boom time perspective. If you imagine a left and right door, the left door is the top 10% of companies, and the right is the other 90% who might still be amazing.
During the bubble, funds seemed to go through both doors, regardless of whether the metrics were there yet. Plenty of capital has been in the market in the last couple of years, but investors seem to be focused on that left door. Many investors are looking for wild outliers, making it difficult for the top 25% of amazing SaaS companies who happen to be on the right side.
“I think investors are incredibly lazy in how they define attractive markets,” Harry shares. His investments are in the world’s best founders in the world’s most unpopular VC markets.
So, you have to think about investors’ incentive mechanisms. If you work for a firm and don’t own it, getting a hot deal means you get that promotion. Doing an off-the-beaten-track deal with an amazing company that might take some time to find product market fit or is deep in the infrastructure build won’t get the promotion.
Working with founders of firms means they aren’t leaving the firm, and they’re not afraid to take courageous bets.
UiPath is a great example of this. They received so many rejections because they’d been at it for ten years and didn’t scale. But look at them now. Miro is another great example of the best software company to ever come out of Europe.
The takeaway is that both doors are fine to go through. You can follow the heat or try to identify your own alpha.
When Does Price Stop an Investor From Doing a Deal
Let’s look through two lenses from an investment perspective. At Visionaries, the seed fund does a deal and never negotiates the price. There’s a mutual understanding with a founder on what game they want to play and if they’re aligned around building the company and being a good partner.
At later stages, it’s a little trickier. You might think something is too expensive, pass on it, and watch it grow into a giant. Sometimes, you have to pay specific price points for great companies. At Visionaries Club, they’re not value investors. They’re upside investors.
The worst thing that happens is paying a high valuation in a deal that is doing average. You build a portfolio of average companies.
Dilution is another mistake in constructing rounds. If you come to a venture market with a 10% dilution round, you won’t get the best venture investors to partner with because you’re giving away 8% max.
At the early stage, you want to go for the best partner and not that much optimization. You’re building a $10B+ company, so you want any ingredient to make that happen.
Rob shares that he’s completely against aggressive pricing or raising massive rounds because it might feel nice for a couple of days as a founder, having seven years of runway, but it comes with downsides.
- You’re sitting on a high valuation, so you’re constantly working against proving you can grow into it.
- It’s a daily pressure and takes away your optionality. Optionality is the best situation you can be in. If things go well, you can raise another round. If things go poorly, you have the flexibility to do a bridge round.
- People will leave if growth isn’t great and you’re sitting on a high valuation.
- If you have more money as a founder, you’ll likely be less diligent with the first employees and hires that you do, which compromises quality and culture over the long term.
In later stages, for every billion in valuation you add, if you take a generous 10x multiple, you need to add $100M ARR to justify that valuation increase. If you don’t do that and the market isn’t nice, you’ll struggle.
According to data at 20VC, the worst-performing companies raised $5M or more in a seed round. It slows down all urgency. When you do five on 25, you take away the ability to do the next round at 25. The best is to do three on 12 or three on 15, and if it doesn’t go that well, you can still raise four on 20.
The Key Takeaway for Founders
You want people who get their hands dirty and build a great company. There’s too much hype about what VCs expect and how to raise money. You can find a thousand ways to build a great SaaS company, and some of them don’t raise much money at all. So, build the company you want to build.
- It is the best time ever to be a founder
- There is more than enough capital in the market for strong SaaS founders across stages
- Choose your investors wisely across stages and with skin in the game
- There is no right or wrong. Different investors have different value propositions
