In the wake of a turbulent 2023, how is SaaS VC fundraising shaping up in 2024?

Last year saw arguably the first SaaS recession but early signs look like, this year, we’re moving into calmer waters. 

It’s a cautious optimism but it looks like those December prediction posts were right and capital will return to the market – the companies that secure it, however, might look a bit different to before. 

In this post, we’ll discuss what VCs think about the current landscape, what’s changed compared to previous periods, and what SaaS founders can expect from the VC fundraising process in the current climate.

2024: The story so far

Growth rates for subscription businesses processing up to $100M might have dropped to 14% in Q4 ’23 but all is not lost. The findings of this Maxio report actually suggest that 2023’s slower growth rates mark a return to ‘normal’ levels. That is, more sustainable growth rates seen prior to pandemic.

Of course, it wasn’t just growth that slowed in 2023, inflation and high interest rates made access to capital more challenging too. Now both are settling, the impact on SaaS funding remains to be seen but investors are cautiously optimistic. 

Jean-Laurent Pelissier, MD and Head of Enterprise Software at HSBC Innovation Banking, sees resilience in the market and hopes that capital will come back over the next twelve months. 

He explained that Pre-Seed through Series A businesses are the most resilient right now because they’re less likely to have been impacted by previously inflated valuations and aren’t reliant on exit through IPO.

Hear more from Jean-Laurent on his episode of the SaaS Revolution Show.

Once you move into Series B and beyond, fewer deals are being done and they’re taking longer. Creandum found that: 

  • Funding into growth rounds is down roughly 80%.
  • Valuations for growth rounds are down about 60%. 

In the spirit of SaaS though there, of course, are outliers:

In March, Amsterdam based hotel property management software Mews raised $101.3M at $1.1B valuation. (Read more about the journey to unicorn status from CEO Matthijs Welle’s appearance on the SaaS Revolution Show).

Elsewhere, Paris based accounting software Pennylane raised a €40M Series C at a €1B valuation. 

(Not to mention AI SaaS – an outlier in itself – but that’s a whole other post.) 

For the most part though, it’s an early stage market.

So, what’s changed? And how can growth stage companies join these outliers? 

VC expectations in 2024

Speaking on the SaaS Revolution Show, Carl Fritjofsson, General Partner at Creandum, shed some light on this. Like Jean-Laurent, he identified 2021 and 2022 as the real anomaly. A time when there was arguably too much money invested in the private market, resulting in inflated valuations and somewhat risky investments. 

Now, in the aftermath, the bar for due diligence has become much higher than we’re used to. While not a bad thing, it’s had a very real impact on what founders can expect when they come to pitch:

Company maturity for specific rounds has changed 

  • Seed rounds are now companies doing serious revenue. Creandum is seeing companies with at least $0.5-1M ARR.
  • Series A is now rare for companies doing under $1M ARR. It’s usually $2M but can be up to $6M. 
  • Series B rounds are with companies approaching $10M ARR, rather than $4-5M. 

This, in turn, also has an impact on the fundraising processes that founders can expect to go through at each stage. While the due diligence process and expectations from investors adjust as you scale, one thing remains consistent: it’s difficult and deals aren’t done overnight.  

Last year, Trumpet Co-Founder Nick Telson-Sillett shared this honest account of the process to secure the company’s $1.6M Pre-Seed funding. It included: 

  • 97 first meetings
  • 80 second meetings
  • 7 weeks from cold outreach to commits
  • 3-5 weeks from signing term sheet to completion

Growth expectations remain high

Despite market conditions, Carl Fritjofsson went on to explain that growth expectations for SaaS businesses are still high. 

The benchmarks he discussed were at least 2x YOY for series A and 4-5x YOY for bigger rounds.

All eyes on capital efficiency

Expectations on growth rate haven’t changed but expectations on how you grow certainly have. It’s almost a cliche but SaaS companies can’t grow at all costs any more. 

Instead, all eyes are on capital efficiency as cash burn becomes a core part of any board meeting. In particular, burn multiple, which accounts for dollars burnt in order to create a dollar back in revenue. For Series A this should be 1.5 to 3.  For Series B it’s 1 to 2.

So, the ask from VCs then is to “grow at the same rate but be more efficient while you do it”. When you look at it through this lens, it’s easy to see why fewer companies get backing. At this bar, they aren’t venture backable.

How to balance fast growth and capital efficiency

Many of the strategies that powered SaaS growth in 2021 won’t cut it in the boardroom three years on.

You can’t rush prospects over the line, discount at all costs, or make promises about product features before checking in with the product team. Growth needs to be more considered and, most importantly, more sustainable. 

Here are some steps you can take towards efficient growth:

Targeted acquisition

Of course, acquiring new customers will always be important. But in this market, rather than casting the net wide and seeing what comes in, take care to really understand your ICP, their problems, and where they are looking for solutions. 

This way, you can run sales and marketing campaigns that target the right people, on channels where they are already looking for a solution like yours. 

Targeting the right type of customer more effectively will help to keep customer acquisition cost (CAC) down. It’ll also mean they’re likely to get value from the product more quickly and stay with you for longer, keeping your CAC to lifetime value (LTV) ratio nice and healthy.

Which brings us on to customer retention…

A focus on retention

Retention-driven growth should be top of mind for SaaS leaders looking to get ahead. Having more consistent recurring revenue and reducing reliance on net new revenue is a solid step towards sustainability. 

Focus on increasing average revenue per user (ARPU) by streamlining your customer experience and reducing the time it takes to get value from your product.

Of course, this is heavily reliant on having product market fit and understanding your customers but there are operational tactics too: 

  • Reduce friction in your onboarding flows to get customers up and running quickly. 
  • Implement cancellation flows and win back campaigns that counter voluntary churn. 
  • Review payments and billing processes, close any leaks, and reduce involuntary churn.

Strategic upsells

Focus on customer success and look for opportunities to grow with your existing customers. For example: 

  • Review your product and pricing packages, identify upsell and cross sell opportunities. 
  • Look at your customer base and target those most likely to convert (e.g. those reaching their package limits each month).

Operational efficiency

Look internally at your business’ operational efficiency. Review where your cash is being spent and find places where you can keep internal costs down.  

Here are some places to start: 

  • Review and consolidate app usage and subscriptions across the company.
  • Review what tasks can be automated, freeing your team up to focus on growth. 
  • Review expense policies and benefits packages.
  • Scale back hiring and focus on critical roles that support growth.

Getting back to basics

In fact, this year poses an opportunity for SaaS leaders. It’s a chance to adapt to something more sustainable, focus on core SaaS metrics, and get your business trending towards profitability.

The metrics that matter most right now? 

  • Monthly and Annual recurring revenue (MRR/ARR): The amount of predictable recurring revenue measured on a monthly or annual basis.
  • Burn multiple: No. of dollars burnt in order to create a dollar back in revenue.
  • CAC:LTV ratio: The total value of a customer during their time with you compared to the cost you incurred to acquire them.
  • Customer retention rate and churn: The percentage of customers that stay with you or leave during a given period of time.
  • Net dollar retention (NDR): The revenue you grow, keep, or lose with your existing customer base.
  • Net promoter score (NPS) and customer satisfaction (CSAT) scores: NPS to tell you how likely your customers are to recommend you. Customer satisfaction scores for general feedback about their experience with you.

Meet your next VC investor at SaaStock

Of course, part of securing investment is meeting the right investors, and building relationships with them.

SaaStock events connect Pre-Seed through Series C startups with global VCs and angel investors. Whether through one of our dedicated networking opportunities, an accidental meeting on the show floor, or via our global pitch competition, we aim to break down the barriers between founders and investors and provide a space for new opportunities. 

Find out more about who’ll be joining us at SaaStock USA.

 

This post was originally published in the SaaStock Blueprint newsletter. Subscribe now to get insights like this, straight to your inbox.