#17 – SaaS Primer – Part 3

In this, the third and final episode of our SaaS Primer - or “everything you wanted to know about SaaS” - we look into Financing/Fundraising, share findings on Benchmarking/KPIs, as well as end the discussion on Lessons Learnt and Predictions. Do listen to episodes 15 and 16, in which we had a SaaS Overview, looked at Business Models, as well as Sales and Pricing. Navigation: Introduction (01:24) Section 1 - Financing/Fundraising (02:01) Section 2 - Benchmarking/KPIs (16:08) Section 3 - Lessons Learnt (29:07) Section 4 - Predictions and Conclusion (46:19) Conclusion Resources Please check below to download our SaaS Primer PDF deck, serving as reference for our episodes 15-16-17 Our co-hosts: Bertrand Schmitt, Tech Entrepreneur, co-founder and Chairman at App Annie, @bschmitt Nuno Goncalves Pedro, Investor, co-Founder and Managing Partner of Strive Capital, @ngpedro Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news. Download Tech Deciphered SaaS Primer PDF Deck Subscribe To Our Podcast Intro (01:24) Bertrand: Welcome to Episode 17 of Tech Deciphered . In this episode 17, our third and last episode of our SaaS Primer, we're going to talk about financing, benchmarking, lessons learned, and our predictions, to conclude, about where is going the SaaS Industry. For further reference, please have a listen to our previous episodes, episode 15 and episode 16, where we started this SaaS Primer . Nuno, let's start today with financing. Section 1 - Financing / Fundraising (02:01) Nuno: In financing, our first analysis is around equity capital raised by ARR. So Annual Recurring Revenue that has been achieved by the company. Not a huge amount of surprises, but maybe the sole surprise is that companies are raising more equity capital at earlier stages. Definitely, it seems pretty capital intensive that we have, for example, companies generating less than 1 million in ARR, 10% of those companies having raised $5 to $10 million. 6% of the company's raising 10 to $20 million. That seems like a very hefty bar to start generating such little ARR, in companies that are generating a lot more ARR, so above $50 million, 65% of companies unshockingly or not very shockingly will have raised more than $50 million by then. And then very few, I'd say 12%, 12%, 12% will have just raised anywhere from below $5 million, $10 to $20 million, and $20 to $50 million. It seems to be no man's land for above 50 million, seems to be 5 to 10 million. So no companies that are raising more than 50 million will have raised only 5 to 10 million, which is again, an interesting counter-intuitive realization. We will come back to the point around how much money do you need to raise, to actually generate significant ARR. The reality is, the later you are in the ARR curve, the more ARR you're generating, the likelier you are to be in the midst of basically blitz-scaling your organization in particular sales and marketing organization, we've talked about it in previous episodes. And if that's the case, then at that point, it's the time where you raise a lot of capital. So it seems a little bit counter intuitive. A lot of people would say, once I get to 2.5, 10 million in ARR, I need less to get to the next level. Actually that's, in many cases, when you need more to get the next level, cause you actually need to buy yourself into the next wave and that way to buy into the next wave is to hire a lot of people around sales and marketing. Bertrand: Yeah, I think that, as we discussed in the previous episodes, there are big expectations from a lot of investors, in term of how fast you're growing the business. And definitely, one way to grow fast is to invest cash, so that you can grow faster. There is definitely a race if your space is considered hot enough and by hot I mean , that's the right time to scale this industry, the right technologies, then definitely, you won't be the only one, as a company trying to win that market, you will have competition. And one way to outpace your competition, or even with less competition, to just generate the type of pace, investors have been expecting for now a decade, then you have to get some financing. Obviously, if your space is smaller, if there is less competition, you might be in a situation where you might be needing less cash. And actually, you should be careful, about burning too much cash in these situations. But definitely, when companies tell you they're going to get at break-even at some point relatively quickly. No that's rarely what's happening, if your space is hot, and if you can keep growing the market pretty fast, there will be a premium to that. Nuno: On the activity around B2B funding, this is a really interesting analysis. If you look at the numbers and the 2020 numbers, just to be clear, our numbers as of end of first half of the year, so June 30th, 2020. It seems like there's very little slow down, I mean if you extrapolate the numbers, maybe we're going to have a slight decrease on deal count. Although we know ends of year actually increase deal counts. So maybe we will come closer to the deal counts of the previous year. But in terms of deal values and what has been deployed, we're more than past half of last year. So last year, $61.3 billion were raised for B2B companies. And this year we're talking about 34.2 billion dollars already raised in half a year. This for me is very surprising. We will come back to that in the next few charts, because there's a couple more surprising findings. What it leads me to believe is that Software as a Service and B2B enterprise software, actually in some cases, it has been positive correlated to what's happening with COVID. With more remote work, companies that had very strong on prem IT functions might actually need to move more and more to the cloud and actually more rapidly than they had estimated. So somehow, it seems like we're seeing a relatively positive effect, at least that's how I would read most of the financing analysis that we see on this in the section. What are your thoughts, Bertrand? Bertrand: Yeah, I think that, definitely, at least on the late stage side, there has been some positives: one is, businesses moving even faster to a more efficient solution / cost pressure. And of course, SaaS is a great answer to optimizing your cost, buying different SaaS software. Two, it's a question of also helping you transition to this new world. And again, you will find some great SaaS solution. If it's time to move from regular commerce to M-commerce, or E-commerce, you will have to buy some new SaaS products. And the last point is that, definitely, the stock market has been doing pretty great. Actually, amazingly great, surprisingly enough. I think that does help, close, larger late stage deals. And maybe one last point is that, I guess a lot of VCs have tried to either provide bridge financing or pre-empt the next round. Because, during that situation of COVID, obviously, there is a premium to investing in companies you already know, while you're already an investor, versus trying to invest more early stage in companies you don't know as well and where you have not even be able to meet face-to -face the founders and the exec team. Nuno: Very interesting indeed. And maybe the next chart starts giving us a few hints on what's actually going on and why there is a higher volume of capital deployed versus deal count and why we're seeing some interesting dynamics around the space. The next chart basically states and rightfully so that's early stage B2B deals, receiving smaller portion of VC dollars, and not only that, but actually if we look at it, late VC is for the first time, it's having its highest percentage of deals that were done in late stage, is happening now in 2020 and we're going back as far back as 2006. So there's a tremendous amount of capital being deployed in late stage rather than early stage or angel and seed, which justifies some of the numbers we're seeing around investment in B2B deals here. Also interesting is, as you were mentioning Bertrand, how much of this is existing investors preempting the next round, doing bridge? So doing what we would call classically follow ons versus investors are coming in with new investments. We don't have that analysis, but that would be interesting. My hypothesis would be, that a lot of these investments are actually still being driven by follow ons. So a lot of inside deals being done at this stage and maybe some larger rounds with new investors coming along the way, but maybe a much higher percentage of follow ons being done right now than ever before versus what we've seen in previous years. And if we look at, maybe the most fascinating number of all these charts is actually in this analysis, which is the medium following recent growth trend analysis, that shows that basically the median in terms of US VC B2B tech deal sizes, slightly increased this year versus last year to 3.8 million. But if we look at the average, it's gonna up by a lot, it's now 18.7 million versus 14.6 million last year. And again, this resonates very much with the previous analysis we were just discussing, that there's a lot more late stage venture capital going into these markets. So while the median staying more or less around the same number, the average is being dramatically skewed because it's a late stage market versus an early stage or angel market right now that we are observing. So this 18.7 number again, linking really well with the fact that we're seeing a lot more late stage VC investments, rather than anything else. One other thing that I've observed in the market as a venture capitalist, we are seeing a lot of companies that are probably on th