After several years of booming business in SaaS, the world of fundraising nearly gave everyone whiplash when capital stopped flowing as freely in 2022 as it did in 2021. So, what exactly is happening in the venture capital world, and what do startup founders need to know?
In a candid discussion hosted by 20VC Founder Harry Stebbings, SaaS Founder Jason Lemkin shares his thoughts on the current state of fundraising and what founders should expect in 2023.
Getting Deals is Possible, But It’s Harder Now
How active were VCs last year? Is there hope for founders to get a deal this year?
Jason Lemkin believes there is, but he doesn’t shy away from the dip that happened in 2022: “I will say I think it’s harder to find good deals…We all just have to reset; we all took so much risk for two years, and the markets were so strong. We’re resetting to a day where we’re looking for so much more out of an investment. The bar has gone up, and [good deals] are harder to find.”
He cautions founders that they should approach claims on social media on booming deals with skepticism –– the days of the pandemic-era tech boom are gone. Now, founders need to focus on proving their success through growth and responsible capital management.
What Has Changed For VCs?
Historically, SaaS investors tended to look for the undisputed top dog competitor in every category, and would pour huge amounts of money into those companies. Now, in certain cases, it’s recognized that there can be multiple players in a vertical, and they can all perform very well. For example, think about a company like Postmates with successful competitors like GrubHub, Uber Eats, and DoorDash.
Now founders must prove not that they will be the only leader in the category, but that they can differentiate enough to win and yield incredible growth. This approach changes the size of outcomes and how a VC might invest.
Furthermore, when you are part of a populated category, sometimes your angle can lessen the intensity of the competition. For example, one B2B SaaS company might target SMBs, while a competitor targets the enterprise segment of the market.
Ultimately, investors are looking for high-performing companies that grow fast and spend wisely. Lemkin says, “The key to success in SaaS and B2B investing…it actually hasn’t changed that much. It’s that somehow, in seven to ten years, you’ve got to $100 plus million in revenue.” He continues, “The only thing that’s changed is the amount of capital you’re able to spend…[VCs] are looking for top-tier growth, but also some top-quartile capital efficiency.”
Customer Patterns, Sales & Marketing, and Leadership Roles
So how are consumer habits in 2023? Are customers spending enough money to support high growth? For Lemkin, the answer is yes and no. Some customer segments might be spending less, but there are others that continue to buy. There is a subset of categories that are fine, some that are in trouble, and some doing even better.
Lemkin doesn’t believe that the economic outlook is as bad as some people claim. For example, after a slight dip,eCommerce is performing well, and the healthcare category is also going strong. It is hard out there, but founders need to find the segment of your customer base that is winning and pursue those leads.
As companies tend to have less capital to work with, some companies have heavily cut marketing budgets, some to zero, or close to it. Marketing has become miopic, often operating on a quarter-to-quarter basis. This means that CEOs are often only approving initiatives that instantly generate revenue.
While this might seem like a wise decision, it may not yield the best outcome over time. Lemkin believes that many CEOs are cutting too much marketing. By the end of the year, he predicts that severe marketing cuts will lead to insufficient pipelines.
Instead of cutting all the marketing budgets, stay hyper-focused on data with your budget. Give a specific budget for marketers, then allow marketing leaders to decide how to optimize. Lemkin explains, “Most of us have to extend runway right now, we have to extend it. But I think we’re overcutting in marketing by not empowering people to have budgets, and we’re doing the same in sales.”
Regarding hiring leaders, beware of those who attained hype and power during the tech boom but may have little substance to back that success up. Lemkin calls these types “bulls*%! artists.” They thrived from a lack of scrutiny in recent years, but every leader needs to really pull their weight and contribute.
Key Takeaways: Final Thoughts From Jason Lemkin
- Be Cautious, But Don’t Get Caught Up in Strategic Retreat: “I think we have to be careful in tougher times of what we take comfort in; it’s like taking comfort in a low burn rate. Hooray. I call this a strategic retreat. If you do a brief strategic retreat as a startup, it’s fine –– take a quarter, get your house in order, get rid of that terrible VP, cut your burn rate. But if you stay in strategic retreat for a year, you’ll never pull out of it.”
- Take An Honest Look at Your Performance And Adjust When Needed: You need to look at your trailing average of growth and burn rates over recent months in a transparent way. Then, if you want to improve, build a realistic strategy to get there. Don’t make impossible demands of the sales team.
- Don’t Waste Time Hoping For Another 2021: “There’s a lot of advice saying, ‘wait until the markets thaw.’ It’s not that simple. They’re not coming back; they’re not bouncing back to 2021; they’re not bouncing back to good times. They’re just going to get a little bit better.”