If you haven’t followed Elizabeth Yin’s newish blog, it’s really great and here. She’s an investing partner at 500 Startups and I got to know her back when she was a SaaS founder herself.
We touched on some of the changing bars to getting funded with Christoph Janz’s prior posts … this is a great follow-up and also goes into the changing landscape. New players, new names, new stages, and new strategies.
— Jason, ed.
Whom should you raise capital from as an early stage SaaS company?
With so many different stages of seed these days — pre-seed, seed, post-seed, series A — it’s tough to know whom to approach about your seed round.
All too often, an entrepreneur will approach a VC, and a conversation will go something like this:
VC: This is going to be too early. But we would love to keep in touch.
Entrepreneur: What type of numbers are you looking for? And at what point do you invest?
VC: Well, there’s no rule. We’ve even invested in people pre-revenue. So, just keep us up-to-date with your progress.
You don’t even know what to shoot for as an entrepreneur. You don’t even know what you’re being benchmarked against.
So I’m just going to tell you what VCs are looking from a traction perspective in B2B SaaS companies.
Although traction isn’t everything a VC looks at, in the old days (4 years ago), if you got to $1m ARR and had pretty decent growth (20% MoM), you had a fair shot at raising a series A round. These days, this is definitely not the case. The bar for the series A has moved up — in many cases you need more than $1m ARR to successfully raise. But simultaneously, it’s now acceptable and even common to raise a couple of tranches of seed these days.
So, how does this all come together?
As of this writing, you should think of seed funding in four traction stages with these rough traction guidelines:
- Pre-seed: Pre-significant revenue
- Seed: $100k-$500k ARR
- Post-seed: $500k-$2m ARR
- Series A: $2m ARR+
Note: these benchmarks could change (and likely will)!
There are also a LOT of caveats, including growth rate, how crowded your space is, how notable your team is, how high touch your business is, how many data points you have, etc. So just because you have traction in a particular category doesn’t mean that you will necessarily be able to raise easily. These are just GUIDELINES to help you think about how investors are seeing the seed investing landscape, not hard and fast rules.
So what type of investors fall into these categories?
Pre-seed: Friends and family primarily. New, not-notable angels. Lots of incubators. There are also a few seed funds that are willing to make a bet at this level for the right founders who are typically sourced within their strong networks.
Seed: Notable angels. Notable accelerators (e.g. TechStars, YC, AngelPad, 500 Startups).
Post-seed: New-age microfunds. [ed – see, e.g., SaaStrFund.com]
Series A: Traditional VCs.
Here’s the tricky part: a lot of investors will move in and out of categories. For example, at 500 Startups, we previously invested at the pre-seed level. We still do some pre-seed investments for some categories that require a lot of upfront infrastructure (i.e. healthtech, fintech, etc), but for a typical B2B SaaS company, we would not make a bet at this level anymore. Two years ago, though, we would have.
So you can’t look at historical investing data to figure out if an investor is investing at your stage, because this changes all the time.
The flip side is that there are a lot of new angels who are always popping up here and there, and some later stage funds have started investing in seed. So, it’s really hard to know who is investing in your category.
That being said, sites like AngelList can help. You can see what deals were done recently and try to read up on those deals to guess at what stage the investor joined the round.
Why do investors move investment stages?
Investors change investment stages for a few reasons:
If you were a non-famous investor before, you may have been willing to invest in earlier stage deals with quality, vetted founders. This is what 500 Startups did in the beginning. However, as you build a brand and get access to a lot more dealflow, what happens is that you tend to prefer later stage deals, because there’s a lot more that’s been proven out. You get access to companies who may have product-market fit or may be close. And as an investor you would prefer that, especially if the price of the deal is the same.
2) Bigger funds.
Some of the microfunds that started 5-10 years ago are now on their 3rd fund or thereabouts. And these funds tend to be bigger. When a fund gets bigger, typically a VC will write larger checks, which means that they generally need to move upstream to become a later stage investor.
Why the benchmarks move?
Additionally, the traction ranges also are a moving target. It is now easier than ever to start a business, and so it gets more and more competitive for investment dollars at each stage. This forces the traction bar at each stage to increase. I.e. $2m runrate is what you currently need to raise a series A when just a few years ago, it was $1m runrate.
However, revenue is not the only criteria that an investor will look at. Growth matters — A LOT. If you have super fast growth, you can fall short of revenue benchmarks and still get a deal done. The converse is true, too — if you’re stagnant, you may not be able to close a round.
Team, product idea, market, etc are all also important factors that unfortunately cannot be quantified that also matter a lot.
So, I can’t guarantee you that you will get funded if you get to a certain benchmark. But, hopefully you now have a better sense of what traction VCs are generally looking for at each stage.
Elizabeth Yin is a Partner at 500 Startups, where she invests in seed-stage companies. To learn more secrets and tips on fundraising, check out her blog: blog.elizabethyin.com or to get over your fear of rejection, check out her side project hustleathon.com.