People keep asking when we’ll get out of this downturn in venture. The truth is: It’s not a downturn—only a reset. For the people who haven’t been raising capital or haven’t seen this side of things since, say, 2018, they’ll probably think this is a terrible time.
In an AMA at SaaStr APAC 2023, Black Mangroves Founder and Managing Director Arnaud Bonzom, and SaaStr Founder and CEO, Jason Lemkin answered some of the bigger questions about venture investing in 2023.
The Boom Didn’t Prepare Us For This
Us, as in new founders. 2021 was a wild time. Everything peaked, and there was a ton of capital. Then things plummeted in November of 2022, and now things are leveling out in 2023.
We’re still somewhat lower than in 2018 but consistent with what SaaS VC was then. The times before 2021 were the norm. 2021 was the exception. Instead of being more difficult to raise money in later rounds, each round got easier. So it’s understandable that folks feel like it’s a dire time.
What VCs Are Looking For In 2023
Some VCs look for trends, and others, like Lemkin, aren’t following the trends. Lemkin recently asked what percent of public SaaS companies are new versions of existing categories. The answer? About 80%.
Instead of looking for trends, many VCs are looking for founders who see white space in a category because these categories will be re-invented again and again.
What every investor is looking for is hyper growth.
You can’t make money in venture unless you have companies that get to $100M or $200M in revenue within seven to ten years.
Understanding what venture capital firms are looking for helps you make the best decisions for your specific company.
The Takeaway — Once you get to $1-$2M in revenue, you have seven years to get to $100-$200M. If you’re frustrated with VCs, you have to understand their business models. They don’t make money unless you double or triple. That’s the mathematical rate it takes.
Do Multiples Matter?
Historically, many founders didn’t know what multiples were, and they didn’t have to care. For the past decade in Saas, multiples were always the same and always crappy.
They’d try to get to $100M in revenue if they were lucky, and that was 8x. And startups up until 2018 were valued at 10x if they were growing quickly and 5x if they were doing ok.
Then the world exploded with covid, and Zoom went from $1B to $4B in revenue in a single year. The multiples got crazy.
Today’s founders need to be very savvy. We don’t know where multiples will settle at the end of this year, but they aren’t all-time lows.
While seed valuations haven’t changed much in the Bay Area, growth is almost frozen. But it’s warming. VCs are doing triage on their portfolios and getting ready to deploy capital again.
Multiples aren’t the only factor for VCs.
Sure, they have to be monitored to give you a pulse of where venture is, but speed of growth and other factors are also important to VCs. You need to do discovery by yourself and talk to investors to see what they’re willing to give you as a multiple.
If you’ve only been a founder for the past few years, and that’s your frame of reference, assume you’ll be able to raise half as much money at half the price, and that money will have to go twice as far and be twice as efficient.
The last two years were insane. Being able to raise 4x the money and be half as efficient isn’t the norm. It’s also not a great practice in general — being inefficient — and companies are feeling the reset of having to burn half as much money.
The Takeaway — While multiples aren’t the end-all-be-all metric to VC behavior, they are a good indicator of the health of the market.
Venture is a hard business to make money in, and everything is frozen when multiples are low because they’ve run out of oxygen.
When Will We Be Back To Normal?
How do we know when we’re back to “normal?” Not the normal of 2021, but the normal where everything is priced as it should be.
When the top public companies are trading at 10x on average or above average, that’s normal for venture.
Building a 3x venture fund in SaaS is hard if you don’t have 10x multiples. We’re not there today, but a handful are.
You’ll know that nature has healed once all good companies are 10x or above.
Ask VCs Questions
Most founders don’t do enough due diligence. There are all types of investors, so you can ask this one question to help find the right one for you.
What is your end goal?
You can ask what their average exit size is. In the U.S., the average exit goal is $2B. Investors want some at $10B and $20B but ask what their model is at $2B.
To invest, investors have to believe achieving a $2B or higher exit is possible.
The Takeaway — Many founders feel privileged to get a VCs money and terms, but it doesn’t mean you should throw due diligence out the window. Do your homework. Get to know their business model. You can take them out to lunch and ask them off the cuff, “What happens if we sell the company for $100M?” It doesn’t mean you plan to do that, but their answer will be telling.
Most VCs will make your company successful, but some can destroy it.
The more founders understand about venture capital, the better they can utilize it to grow their company efficiently.
The key takeaways for venture capital in 2023 are:
- To figure out how you’ll go from $1M-$2M in revenue to $200M in 7-10 years.
- Pay attention to multiples to get a pulse on venture capital.
- Find ways to make less money go further.
- Always ask VCs, “What is your end goal?”
- Do your homework. Make sure it’s a good fit.