I’ve been in SaaS from ‘05-‘22
From ‘05-‘20, it was clear as a VC, you could only truly make money from the very, very, very best investments
Then in 2H’20-‘21 it seemed like everyone could be a unicorn, and somehow, the rules had changed
Now we know the rules didn’t change
— Jason ✨Be Kind✨ Lemkin (@jasonlk) May 14, 2022
So despite what you might see on Twitter, venture capital isn’t in a tailspin. Good deals are still getting done every day. It takes a little longer now, and valuations are lower, but the best ones will still get funded. There is plenty of capital out there.
With one big exception: The Unicorn Round.
Why? There just isn’t enough room at that valuation — at least not right now. Not enough room for the deal to grow a solid 3x-5x in valuation (which is really 4x-6x after IPO and other dilution) from there, not when so many top public SaaS companies are worth “just” $2B or so.
Take a look at epic SaaS and Cloud companies that are hovering around a $2B market cap today:
- Amplitude is at $200m ARR, growing a stunning 62%, and is worth just around $2B.
- PagerDuty is at $320m ARR, growing 32%, and is worth just $2.5B.
- Sprinklr is at $560m ARR, growing 30%, and is worth just $3.5B.
These are epic SaaS companies, and they aren’t trading at 3x the net price of a $1B round (after dilution).
There are plenty of other examples. And perhaps unicorn creation won’t slow down as much one might expect.
But even a $400m-$500m round can do 5x in today’s tougher public markets, if it goes on to a strong IPO. That’s good enough for a growth investor. But that’s just harder to feel as confident about at a $1B valuation. It really has to end up better than GitLab, HashiCorp and more to justify at $1B+ valuation. And that’s — pretty darn rare.
It just makes sense unicorn creation will slow down for a while. At least until multiples hopefully rebound a bit. And a lot of the Unicorn deals you are seeing on TechCrunch, Forbes, etc. right now were still inked before this downturn. So tune those out, to some extent.
Doug Pepper, GP at Unicorn investor Iconiq, made the same point the other day here:
No matter what, if you’ve raised venture capital in the past 12 months, it’s probably best to make it last 6 months longer than planned. We’re likely all going to need that time and more to grow into many valuations.