Mike Cardamone
There is no question that 2023 was a tough year for the venture and tech ecosystem. Carta revealed a dramatic decline in funding rounds and total investment, showing the total number of rounds in Q1 2023 dropping 64% and the total dollars invested dropping 86% from the peak in Q4 2021. Forum Ventures has seen firsthand how difficult the fundraising environment is for founders at all stages of this market, having invested in 100+ B2B SaaS companies this year across their accelerator and seed funds. Michael Cardamone, CEO and managing partner at Forum Ventures, spoke to emerging managers about the state of this market and reflected that “this is the hardest it has been to raise a fund in a long time.”
In a recent report, Forum Ventures surveyed 70 funds and analyzed data from 167 closed pre-seed and seed rounds between January and October 2023 to provide a comprehensive overview of the current state of the early-stage B2B SaaS investment landscape.
A few key findings from that report:
- 75% of respondents noted a decrease in valuations since 2022 and the data across these rounds showed a 10% decrease from the same survey conducted last year.
- Mean valuations at pre-seed were $9 million post and that held true for pre-revenue through $250,000 in ARR (annual recurring revenue) across the rounds data was collected from.
- Companies with $250,000 in ARR or higher raised at a mean valuation cap of $15 million.
Seed rounds
Seed valuations have remained steady through 2022 and 2023, yet achieving the necessary traction for these rounds has become more challenging, which can create misaligned expectations for founders. In 2020–2021, it was relatively common for $3 million to $5 million seed rounds to get done with very little, if any, traction, and they were typically getting done at $12 million to $25 million valuations, depending on the space and the founders’ background.
There are exceptions, but today’s market demands substantial early traction where companies typically need $250,000 to $1 million in ARR to raise a $3 million+ seed round and these rounds are usually getting done at approximately 20% to 25% dilution (i.e., $3 million at $12 million to $15 million post or $4 million at $16 million to $20 million post). The bar is much higher to raise an institutional seed round, and a founder/company often needs to prove a lot more in today’s market than they used to. This dynamic means that many founders have to first raise a pre-seed round to get to those milestones and therefore raise multiple rounds to get to a Series A.
Series A
The bar for Series A continues to rise too. Funds deploying Series A capital in 2023 and 2024 have raised larger funds than they ever have in the past and therefore need larger exits to return their fund. In a market where Series B and later investors are pulling back and public multiples are way down, it makes sense that Series A investors would also pull back and be more discerning in how they evaluate opportunities. This will lead to companies increasingly raising pre-seed or seed extensions to get to Series A milestones, and the time from the first round to Series A is reverting back to 2+ years.
Additionally, the graduation rate from seed to Series A is going to be much lower in 2023 and 2024 than in the past. Companies will have to get to cash-flow positive if the growth isn’t there to stay alive. Funds will have to explain to their LPs why they went from a 50%+ graduation rate in 2020–2021 to something much lower in 2023–2024. At the same time, many of the 2020 and 2021 vintages will have companies that raised on very high valuations relative to traction and will likely need to be written down based on where the market is today. This will make fundraising for emerging managers even harder as all of this plays out.
The market in perspective
To put into perspective how high the bar is for Series A rounds for most SaaS companies (outside of some hot AI sectors and repeat founders), in 2020 and 2021, a lot of Series A rounds were getting done with companies sub $1 million in ARR, and those rounds were often $15 million to $20 million rounds at $75 million to $100 million post-money. Even in the years leading up to 2020–2021, companies with good growth and about $1 million in ARR could usually raise a Series A. Today, you often need $1.5 million+ in ARR and well over 100% year-over-year growth. There are always exceptions, but this is roughly what the data shows, especially for first-time founders. In addition to the bar going up from a traction standpoint, Series A rounds are also quite a bit smaller and getting done at lower valuations. Most Series A rounds for SaaS companies are now $7 million to $15 million and are getting done at more like $35 million to $75 million.
What to expect in 2024?
There are early signs of funding activity picking up, but there is a real risk that the first half of 2024 is going to be even worse than 2023. With that said, there is hope that we will start to turn a corner in the second half of the year. Many of the late-stage companies that raised large, mispriced rounds in late 2021 won’t be able to break even and have not been able to grow into their valuation. These companies are going to be forced to go back to market in the first half of 2024. and some of these once-high-flying startups will either raise big down rounds, shut down, or do a fire sale. This will create a lot of angst in the market for funds and LPs. Additionally, many fund managers will likely have to continue to keep their deployment pace slower than usual while they wait out this bad market before going out to raise their next fund. Founders should anticipate prolonged fundraising processes in the first half of 2024 and be prepared for more competition for capital.
When surveying LPs in our network, Winter Mead, founder and CEO of Coolwater Capital, noted, “I’ve noticed rounds staying open much longer, by many weeks, than what was true in 2021 and even early 2022. This has enabled emerging managers to focus more time, attention, and investment skill on diligence, hopefully leading to a period of higher discretion, which could potentially result in 2023 and 2024 as being very strong vintages in terms of returns to LPs.”
Adrianna Samaniego, partner at Female Founders Fund, advised founders at all stages to “cut burn and manage spending in order to survive the coming quarters. Increase focus on fundamentals and profitability.”
Founders need to adapt to a market that favors strategic, well-grounded startups. Lower seed-stage valuations present opportunities for investors and startups alike. However, startups also face delayed liquidity, fewer M&A opportunities, and lower exit valuations. Success in this environment demands resilience, strategic planning, and an emphasis on core fundamentals and profitability. The landscape of 2024 demands agility, strategic foresight, and a strong focus on fundamentals from tech founders. Those who navigate these turbulent waters with prudence and vision are likely to emerge stronger in the ensuing market upturn.
As a founder, all of this data can certainly be discouraging but the silver lining is that rounds are still getting done and companies that find product-market fit should benefit from scaling into what will likely be the next bull market over the coming years. As a founder, control what you can control. Be smart in managing your cash flow, convince great people to join your company, get excited about your vision, and focus on building a product that your customers crave.
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