SaaStr 734: The Latest in Series A Rounds, AI Growth Rates and More with SaaStr CEO and Founder Jason Lemkin

This episode features Jason Lemkin discussing the latest trends in Series A funding rounds and AI growth rates, informed by recent data from Redpoint.

1. AI technology is significantly impacting large tech companies, driving their market valuations to new heights.
2. Series A funding rounds have become more challenging, with a focus on AI-first companies.
3. Startups need to manage capital efficiently, planning for longer periods between funding rounds.
4. Market dynamics have shifted from startups to established companies, which are currently seeing the most growth.
5. Founders must adapt to a market that increasingly values efficiency and high growth, particularly in AI sectors.

1. Market Overview

Jason Lemkin discusses the paradox of current market conditions, where despite high valuations, many startups face markdowns. Jason Lemkin: "It's an interesting dichotomy here."

2. AI's Impact

Lemkin explains how AI has led to massive valuation increases for tech giants, altering investment and growth landscapes. Jason Lemkin: "AI has just boosted Amazon and Microsoft and others."

3. Funding Realities

The complexities and increased timelines associated with raising Series A and subsequent rounds are detailed. Jason Lemkin: "It's going to take two years to raise a Series B and C."

4. The Startup Environment

Discussion on the challenges startups face in a competitive market and the importance of managing resources and expectations. Jason Lemkin: "That means when you raise an A or B or C, you got to plan on it being your last round."

5. Future Outlook

Reflections on the future of startups and technology, emphasizing the cyclical nature of growth and investment. Jason Lemkin: "Startups ultimately are where the highest growth is, but it ain't this year."

1. Plan for longer fundraising cycles: Ensure you have sufficient runway for 28 months between rounds.
2. Focus on core growth: Prioritize efficiency and strong unit economics over rapid scale.
3. Embrace AI cautiously: Integrate AI where it adds clear value, but be wary of overcommitment to trends.
4. Optimize sales processes: Aim for higher quota attainment to maintain team morale and performance.
5. Monitor market cycles: Stay informed about shifts in investment trends to better position your company.

SaaStr 734: The Latest in Series A Rounds, AI Growth Rates and More with SaaStr CEO and Founder Jason Lemkin

So Redpoint Ventures published some of the slides they recently presented to their Limited Partners (their own investors) here.

There’s a ton of good data there, but this one slide stood out to me, because it was put together in a really clear fashion, better than other data sources I’ve seen.

And what it says is that even though Seed stage investing remains arguably as strong as ever … Series A hasn’t bounced back. Not at all.

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Welcome to the official SAsTr podcast, where you can hear some of the best SASTR speakers. This is where the cloud meets.

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Up today Sastr CEO and founder Jason Lemkin on the latest in series A rounds, AI growth rates and more from Redpoint's latest data.

Jason Lemkin

Hey everybody, Redpoint is one of the largest cloud and SaaS VC's out there. Particularly strong on the infrastructure side, Snowflake stripe and others but plenty of SaaS B, two B leaders owner where im also on the board with Redpoint and many others and they just put out a set of slides that they did at their own shareholder meeting. If you dont know this VC's themselves, yes they invest in startups but they actually have their own investors, theyre limited partners or LP's and theyve got to collect a whole bunch of those to give the money to give to startups and they have these LP meetings sometimes called AGMs and others and where they present their industry knowledge and trends. And I liked a lot of things that were in this one from Redpoint and it's pretty rare that a VC fund will publish it. So I thought I'd go over this because I think these slides I can provide maybe a little bit of color and feedback illustrates some of the odd times we're in right now.

Odd times. Some things are great, some things are good, some things are, some things are really hard and it's a, it's almost a paradox in some cases and I think red point framed it well here. Nasdaq's at an all time high period. It is at an all time high. And it is funny.

I think a lot of VC's best investment the last twelve months may have been the S and P 500 or VTI or more likely Nasdaq qqq. They're all up 20 or 30% when a lot of VC portfolios are actually down from markdowns. What a lot of founders dont realize is how markdowns work for VC's. Lets say you did a unicorn investment two years ago. If nothing really happens, your auditors often will allow you to keep holding it at a billion dollar value up to a point.

But after two years investments startups that dont raise more rounds are considered stale. It doesnt mean literally that their valuation has gone down. Hopefully guys dont over dilute, dont raise too much capital, but you have to justify evaluation VC's to their own auditors. If there hasn't been around in two years, and particularly if revenue hasn't grown substantially, the auditors are going to push you to mark it down. And so what happened is a lot of unicorns got into trouble in 2022 or so, but the VC's didn't have to really take a markdown until the end of last year, until the end of 2023 and then boom.

The Markdowns came really hard last year. So a lot of VC's at least paper value plummeted at 1231 23, even as Nasdaq kind of rocketed to record highs recently. It's an interesting dichotomy there. So here's the point that they make, and here's why it is confusing to founders and startups and VC's that in 2021 the boost came from new ipos, new cloud leaders, exploding Datadog IPO and Hashicorp. Bill so many leaders just went on great runs.

But right now it's the big guys. It has the magnificent seven, and Nvidia has become part of this, leaped into a trillion dollar plus valuation and AI has just boosted Amazon and Microsoft and others. It's crazy. The big guys, and in some cases that almost the moldy oldies have led the explosion. They're up 71%.

So it's important to understand that there are, it ebbs and flows and there are times when it is the startups that drive big returns. That was certainly to a maximum true in 2021. There are other times when it's big companies that drive the return. And this year is that to an extreme. And not only is it true in the public markets, it's true for end customers.

If you look at Snowflake, Hashicorp, Zoom info and others we've written up on the SAS for five interesting learning series. You'll see it's the big customers that are the ones that are growing faster and it is the tech and SMBs that in many cases are struggling. It's not a surprise, but again, it goes back and forth at ebbs and flows. And if you ideally you have both in your portfolio, here's an interesting slide. And there's different ways to slice this data, but are multiples up and per red point here for and people define this differently, but for high growth cloud software multiples for the top ones, the top public companies multiples peaked at 25 x in late 2021, probably not a surprise, and then plummeted right after December 31, 2021, but hit a low point in the beginning of 2023.

A low point that the top performers traded it 7.2 times next twelve months revenue that has grown to 10.8 x. That's a lot of growth. 30% growth for the top ones. For the top ones, it is not evenly distributed. Public SaaS companies that have not gotten hyper efficient, that have not seen rule of 40 or better growth have seen their multiples plateau and stay stuck at four x, five x, six x.

But the best ones have seen multiple expansion of 30%. And that does get VC's excited because VC's are looking for outliers. There really aren't that. Not only the ones that IPO the best of the best, but the high growth ones are the best of the best. They're the LeBron James and Steph Curry's of startups.

It's hard enough to get into IPO and it's like get into the NBA, but then obviously it's not that simple. But VC's gain confidence when the multiples for the top ones grow and they have grown 30% and to some extent we see that in some reflation in growth rounds. Interesting slide here and jammin ball from altimeter has a very similar one. Have we bottomed out in net new ARR bookings? And what you can see, this is a helpful slide.

You can see that as we all know, cloud buying, SaaS buying went on a tear in 2020 to 21 and it actually peaked in Q two of 2021. It peaked with insane 71% growth. If you look back at the old saster posts in 2021, it was just incredible how everybody was growing, everybody was growing and then it went to a decline. It went into a decline quarter after quarter through 2021 and 2022 and hit rock bottom in Q one of 23, but it is back in Q two and Q three, and now into Q four. Early signs of 2024.

This is a compelling chart, and certainly it does seem like most folks bounced off lows at the beginning of 2023. We also tracked that on Saster.com data. Having said that, it's room for, I would say metered optimism, cautious optimism, because at the same time, at the same time, for the first time ever, the average public SaaS company is guiding to less than 20% growth for the coming twelve months for the first time ever. Now, maybe some of them are conservative and maybe some of them are setting and beating what you want to do. You want to underperform and over deliver as a public company, for sure.

But never in the history of public SaaS companies has the average growth been lower than 20%. And that's what they're committing to the street. So they are committing to the slowest growth ever. So on the one hand, yes. Have we bounced off bottoms in terms of contractions?

It certainly seems so. The data supports that. But boy, the public companies are sure cautious on growth for the future. Interesting slide here on quota attainment. I hope this is true.

I think I see this in my portfolio as well, which is quota attainment has bounced back for sales reps. It's getting better for selling software. So quota attainment hit a high according to red point of 53% in 2021. And personally, I would challenge everyone to aim better. I think sales teams are really only happy.

They're really only truly functional when 70% or the more of the team is hitting quota tame, and then everyone believes they can do it. Everyone becomes this great team when it's even 53%. That's 47% of folks that are negative, are dour, are complaining you really want 70%. But in any event, 53% was the average in Q four and then, boy, it fell off a cliff. In one year, we went from 53% quota attainment in Q 420 21 to only 23% in 2022.

Only 23%? That was rock bottom, probably due to layoffs. We bounced back a bit to 29% in 2023, but now in 2024 we're at 41%. Could be a bunch of reasons for this. Could be tighter teams, could be adjustments to quotas and even definitions.

But at least we're getting closer to the 50% and up number, where it is more fun to sell in SaaS. Ultimately, that's a good sign, although I would challenge everyone to aim for 70 if you possibly can. This slide is really interesting for founders fundraising. Its really interesting. And the next couple of slides are worth just thinking about.

How long does it take to raise a growth round? And red point has a big growth fund. So they focus as much on growth as seen a. But its taking 22 months to raise a, b and c. And that is way up.

That is way up from a record low of nine months in 2021 in the peak. But were coming on. Its going to take two years to raise a series b and c. And thats something to reflect on. First of all, it means many folks of course, wont be able to raise one or its even longer.

These are average numbers or rather a median number. So thats a long median 22 months. But think about how long that means you need your capital to raise. You cant run the gas tank down to empty before you fundraise. You need six months of Runway.

You need six months of time to calmly fundraise. You need to have enough money in the bank that new investors dont smell panic. They dont smell something thats about to run out of money tomorrow. So traditionally you need six more months of Runway to comfortably raise your next round. So 22 plus six is 28 months.

You need to plan on 28 months to raise a b or a c. Today, that's two and a half years. That really means your capital has to stretch almost forever after the a round. That's the takeaway to go from a to b if it's going to take you 28 months or longer, or b to c to 28 months or longer. To me that's infinity.

That means when you raise an a or A B or a c, you got to plan on it being your last round, you got to plan it being less. Ive said this multiple times at Saster, but this red point data supports if its going to take you 22 months to raise the next round, and that means you need to have 28 months of capital as a buffer. Whatever you raise, thats your allowance, folks. Thats your allowance to get there to get to the next level, period. Next data.

Slightly interesting. I think some of this data on down rounds is skewed. I wouldnt worry too much about down rounds. Get the round done. Still, its interesting to see, red point, that we are now at 15% of rounds are down rounds, 15% of down rounds.

I don't think this is a huge deal, but it is important to note that it has doubled since 2022. We reached a low point in 2022 2021 of seven to 8% of rounds being down rounds. Now that's doubled. And look, there are two types of down rounds there is disastrous ones. Recaps.

We did the last round at 50 valuation. We got nowhere. There's no revenue and we're wiping out everybody. And we're doing a net new round at 5 million. Okay, that's a wipeout.

That's terrible. I know some folks will do those investments. I won't. I've never seen those companies recover. There's a different scenario that is happening where just the last round was too high priced.

Reddit just ipo'd. They ipo'd at a $6 billion plus valuation, which is very impressive. But the crazy 2021 round was at 10 billion. So yeah, it's a down round. It's a down IPO.

We are seeing tons of startups that raised at 100 x 50 x rounds at the peak that now are raising rounds at good valuations. Ten x 15 x, maybe even 20 x arrows. But that may be down a smidge. It may be down 1015 20%, it may be down 40% like Reddit was. If your last round was at an insane valuation, almost ignore it mentally, almost put it aside, it almost doesn't count.

It's real. And you've got to deal with the ramifications potentially for any dilution and others for doing another round at a lower price. But don't let the last round price get you down. Do a market correct round price today and that's what's happening. That's what's happening.

Down rounds used to be a stigma to some extent. They used to be a bad sign. They're not a bad sign today because we're seeing round adjustments for companies that are growing a very healthy rate, 60 8100 percent or more. They're just doing rounds at lower prices than 2021. So if that's you, don't stress it, don't overanalyze it, get the money in and live to fight another day.

This slide is super interesting. This is my favorite slide in the Redpoint tech series. A's have stayed muted. And what's going on here? I find that founders are way too optimistic about a rounds in particular.

And why are they optimistic? No matter what some data says, no matter what carta or pitchbook or data, others says, seed rounds remain on fire today. Maybe they took a brief pause when the knife was falling in public markets in 2022, but they are back. Everyone wants to fund every YC company. There are hundreds and hundreds of new seed funds that can write seven figure checks.

They are sprouting up all the time. Founders are having exits and building their own venture funds left and right. Three or four of the founders I've invested in now have their own venture funds. There is an explosion in seed funds and overall that's great. It is great for founders that it means there are more folks to help you get off the ground.

Seed used to be one of the hardest places to raise capital. It's never easy, folks. It's never easy. But I think statistically it's probably the easiest phase to raise capital. If you have something at the early phase, if you've got a great team or you've got early traction, if you're ten, twenty k a month growing triple digits, it is not easy to raise seed capital, but it is easier than it had ever been in my entire career in SAS and cloud today.

But if you look at this red point data, series A rounds have plummeted since Q four of 2022 and they have not recovered in 2024. 2024 is not any better. It has stayed muted. So look at the hard data. Look at this chart.

In fact, 2024 and 2023 are harder than 2019 and 2018. This has been the hardest two years, almost two years to raise a series A in our collective history. Just be cognizant of that. Founders maybe make the seed round last a little longer, maybe raise a few extra nickels, but don't spend it. I love raising a little bit of extra money in your seed round, but somehow committing to not spending it almost put it in another bank account.

Don't spend it. Because that a. If nothing else, realized that no matter how it looks in the media or TechCrunch on Twitter or LinkedIn or X series A still really hard, folks. It's really hard. And it's even harder, I think than this chart looks because so much of the appetite in venture in SaaS and cloud is into AI first companies.

If you listen to the interview I did with David Sachs last year at SAS annual, the one we did with Byron Dieter from Bessemer, 80% of Bessemers of crafts, redpoints and others energy is going into true AI startups and A's haven't gotten any easier, but they've actually gotten even harder because the ones that are being done, if possible, SaaS and cloud folks want to do it into AI companies. So it's no easier. A is no easier. Two last slides which are interesting on AI, two last slides and it's important that this is super helpful sale they tie together for the best companies, the very best companies doing series B and C. And these are the very best folks.

Don't read too much into these numbers. These are the elite of elite. But these elite are still able to command 29 x ARR valuations. That is crazy. That is super high.

We'll see next with the growth rate. That takes triple digit growth to command that valuation. But the top AI ones are 88 x. This is the return of the hundred X ARR deals. And there's going to be a lot of tiers out there.

There's a lot of folks that are going to have a relatively small amount of revenue. They're going to raise at a billion dollars in AI and it's all going to crash and burn. But here's the numbers. Basically AI, all things being equal that ARR, it's a three x premium. But wait for it, they have to be growing two and a half times faster.

So what is elite? This is a really interesting slide and let's slow down. According to red point, what is a truly elite series b and C round? Not great, but elite today whiz are better for security. For the BNC it's 197% growth.

Guys, that's crazy. At the b or C rate, 100% is elite. At that rate, let's be clear. If you can grow 100% at the growth stage, you will get, and you take your time, you will get multiple offers to fund your startup at a good valuation. If you can grow 100% with not a crazy burn, but 197% is elite.

But for AI, we're looking for crazy stuff. VC's are looking for almost 500% growth, 464% growth. So those super crazy AI valuations and they are crazy. They have that goes of 2021. Like 2021, they're expecting insanely high growth.

So be careful what contract, not just legal but social, you enter into investors here, all the energy is into AI. 80% of the capital in cloud and SaaS is into AI. But people are expecting utterly insane growth for those high prices, right? Everybody go forth and conquer. Be careful about the a, be cognizant of AI and realize it's crazy times.

This is the time of the big guys. This is the area of the Nvidia's and the Microsoft's and the Googles that roam the earth. They're back. The dinosaurs are back. This is Jurassic SAS, jurassic cloud.

They're back. They're the winners. But startups are going to come back. Startups ultimately are where in the long run are where the highest growth is. But it ain't this year.

This year it's the year of Jurassic Sassy. Talk to everybody soon. Get more. When a registered agent starts your business, Northwest will form your company fast and give you a domain, website, business email, business address and phone service for just $39, plus state fees. Visit northwestregisteredagent.com sastr to start your business today.

Speaker A

Are you ready to take the next step in your SAS job journey? Join us at Sastir annual 2024, the world's largest non vendor SAS conference on the planet. With over 13,000 attendees, 200 plus world class speakers and networking opportunities galore, you'll be in the perfect place to share, scale and learn. Join us on September 10 through 12th in the SF Bay area, the heart of SaaS innovation. Podcast listeners can save 20% on tickets with code fave 20.

That's fave 20 by visiting sasterannual.com. We'll see you there. Feeling stuck in your talent search? Remote talent is the leading job board for remote first companies and startups. Visit remote.com jobs today to start building your dream team anywhere in the world.

Jason Lemkin

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