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A Decade of SaaS
In 500 Global’s “The Future of SaaS” report (available here), we discussed key venture financing trends in the SaaS industry. As 500 recently surpassed its 10-year anniversary, we thought it would be interesting to take a closer look at round sizes and valuations in the SaaS sector, and how they have evolved in the past decade. If you are new to private market investing into SaaS companies, this report hopes to provide an overview on how we got to valuations and financing rounds in SaaS today.
Funding and Deal Volume
Over the past 10 years, SaaS funding has grown by 6.6x, which slightly outpaced the growth of overall venture capital funding of 5.9x1. We recently observed that SaaS funding at 15% of overall global venture activity has hit a decade low signifying maturation within the space2. SaaS funding share rose between 2010-2014 and peaked at 22.71% of overall VC in 20143.
Deal counts also saw an early acceleration from 2010-2013, but peaked in 2013 with SaaS contributing 22.63% of overall VC deals. A trend that would continue in venture overall, 2016 was the first year that the number of SaaS deals outside the US exceeded those in the US, a split that remains true today. However, the majority of VC dollars in SaaS are still being deployed into US companies given slightly larger round sizes and mega deals.
Round Size and Valuation
Rewind to 2010, the world of SaaS looked very different. As with many new platforms, the name SaaS was in early infancy and often was included in a broader category of “Business Intelligence.” Companies most likely to adopt were those not ready to commit to a technical support organization that could implement and manage an on-premise solution. However, because security, service uptime and latency were improving, SaaS revenue was predicted to reach $9B, up from $7.9B in 2009 (compared to a prediction of $258B ten years later)5.
As other signs of the times, cloud native Salesforce in 2010 was a $17.3B public company on $1.3B in revenue6. Twilio, Cloudflare, and Atlassian were not yet public. Snowflake, Databricks, and Crowdstrike had not even been formed. 2010 was also the year that Microsoft Azure became generally available and catered to niche developer communities.
In addition to its investments in Twilio and Sendgrid, 500 began to establish its presence in SaaS by investing in startups like Talkdesk, Canva and GitLab from 500’s Global Funds I, II and III, respectively. Against this backdrop, founders in SaaS fundraising in 2010 would expect the following outcomes in the US and around the world (note that the metrics are based on the median, and valuations are pre-money):
Fast forward to 2021, and Salesforce is now worth $270B on $26B in revenue⁷8. 500 portfolio companies appear to have become category leaders with Gitlab pricing its IPO at an $11B valuation9, and Lucidchart10, Talkdesk11 and Canva12 have reached private market valuations of $3B, $10B and $40B, respectively. Certain other SaaS companies in 500’s portfolio like Accrue13 and Userpilot14 are at the size of these decacorns when 500 first invested in them many years ago.
These benchmarks are helpful to have as a reference point to show directional trends, but keep in mind these numbers are based on medians in order to smooth out the effect outliers can have on averages. Because venture is a power law business, however, these numbers are likely to under-represent some of the out-performers that can return an exceptional fund multiple times.
With that being said, here are a few observations that we can make based on a decade of financing data.
Round Size and Valuation Acceleration
People generally accept that round sizes and valuations have grown over the past decade, and the data confirms that the size and valuation growth occurred at every round. An additional nuance, however, is that valuations generally grew faster than round size. For example, while the size of a Series C round grew by 3.8x over the last decade, valuation at the same stage grew by 5.7x. This is consistent with financing trends becoming more founder-favorable and allowing founders to raise more with less dilution (more on dilution and cost of capital below).
Interestingly, only at the angel and seed stage did round sizes grow faster than valuation, suggesting more willingness of founders to take on more capital earlier. This is also consistent with needing to fund post product-market fit traction expected of companies at seed stage that would normally be reserved for Series A.
Compounding the effect of larger rounds and valuations is that markups (growth from post-money of the previous round to pre-money of the next round) have also grown in the last decade. The biggest change in markups occurred at the late stage. In 2010, for example, median pre-money valuations of Series D and later companies were not that far from the post-money valuations of the previous Series C round, which suggests the frequency of flat and down rounds. A decade later, Series D and later stage companies experienced a much higher markup (2.4x compared to 1.0x) reflecting their realized growth or recognized opportunity.
While the changes over the last decade appeared most pronounced at the late stage, the smallest changes both on an absolute and relative basis seemed to occur at the angel and seed stage. This suggests that investors were able to maintain price discipline more easily in earlier rounds. The seeming rise of multi-stage funds with plenty of capital to deploy appeared to have caused speculation that investors were reducing price sensitivity across the board. However, the data from the last ten years suggests that the competition of capital to get into the best companies had a smaller relative effect on early stage rounds than seen in the later stages.
One commonly perceived development in the last ten years is that financing rounds have shifted earlier by a whole series. “What used to be a Series A is now a seed,” the saying goes, or “a Series B is the new Series C.” The characteristics at each round is now expected one round earlier, but what does the data say about this? We can see below just how accurate this perception is based upon the last ten years of financing data:
As you can see, round promotion is remarkably accurate with respect to the earlier stages in the US for both valuation and round size. The Series A round that raised $2.5M on a $7M pre-money valuation in 2010 would easily fit as a seed round a decade later. Later stage rounds, however, do not fit the round promotion pattern as the growth in both same-round size and valuation outpaced even the subsequent markups from those rounds from the previous decade. Unlike the consistent and tight bands at the earlier stages, the later stage round size and valuations reached unprecedented levels.
Cost of Capital (dilution)
Interestingly, dilution–or the cost of capital–also seemed to have followed a similar round promotion pattern. In 2010, the most dilutive round was at Series B with about 31% dilution for both US and global SaaS companies. A decade later, the most dilutive round was at Series A, which remained at a dilution of about 25% equivalent to a decade ago. The later stages saw an extraordinary drop in the cost of later stage financings going from 19% dilution in 2010 to 9% dilution in 2020 for both US and global founders. This is consistent with an increased competition of capital looking to invest in the best companies having a greater effect on later stage rounds. In general, over the past decade, the financing environment around the world seems to have provided founders the ability to grow their companies through exit at a much lower cost of capital.
As mentioned earlier, markups between rounds increased compared to 10 years ago. Here, we see round promotion in the US but the opposite globally. In 2010, the biggest markup happened at Series B for US SaaS founders at 1.8x, and now the biggest markup happens at Series A at 2.6x. For global SaaS founders, the opposite occurred: the previous decade saw Series A with the highest markup at 1.9x but now the highest markup occurs at Series B with 2.7x.
Themes and Takeaways
The last decade witnessed acceleration both in terms of expectations and performance. In other words, more appears to be demanded of SaaS founders earlier, and they appear to be delivering. Innovations in go-to-market approaches, e.g. with bottoms-up SaaS and product-led growth, seem to have expedited product-market fit and unlocked revenue traction earlier in the life cycle of a company. In 2010, the median annualized revenue of a SaaS company coming into the Series A was $1.3M in the US and $700K globally. A decade later, annualized revenue for Series A companies hit $4.5M and $3.2M respectively. For all the attention given to rising valuations, these companies are actually more valuable.
As founders were able to show product-market fit and get revenue traction earlier, round promotion seems to have followed. With revenue de-risked, Series A became the new growth round. In the US, Series A became the most dilutive round, and investors were willing to give the highest markup at Series A. Founders used this capital to invest in higher cost customer acquisition approaches like field sales, events marketing and channel partnerships. The resulting growth drove the median Series B valuation to $80.0M, higher even than valuations at Series D a decade earlier.
The growing supply of high quality SaaS companies at the later stages appears to have provided fertile conditions for the surge in interest from late stage capital competing to have a stake in future category leaders. At Series D and later, founders would raise the largest amounts with the lowest dilution. If the growth of available capital outpaces the number of fundable companies, we may see valuation growth that characterizes later stage rounds which may create pressure to drive valuations further at the earlier stage.
At the moment, however, the early stages look to have maintained modest growth from a decade ago compared to the later stages. One rationale for this may be that early stage SaaS metrics and criteria for evaluating SaaS companies have matured in the last ten years. There is a great deal of accumulated knowledge around performance metrics, e.g. monthly recurring revenue, churn, net revenue retention, etc., so investors and founders may know what “good” looks like. These benchmarks presumably keep early stage valuation inflation in check.
On the other hand, a separate interpretation could be that the well-developed metrics actually caused valuations to climb over the years because of more reliable data informing valuation decisions. That may also explain why later stage valuations rose more than early stage valuations over the last decade. Whereas the early stage has larger samples of both success cases and ultimate failures, sample bias toward success at the later stages due to natural attrition could have led to faster valuation increases at the late stage.
As early SaaS investors for the past decade, 500 seeks to follow the developments in SaaS investing in the decade to come. We will be closely watching, for example, how growing capital at earlier stages will affect relative price discipline and valuations at the earlier stages. In addition, as global investors, 500 will continue to explore the comparisons between the US and global markets, with special attention to whether learnings from one can translate to opportunities in another.
While SaaS as a sector seems to have matured considerably in the past decade, 500 is firm in our belief that we are still early in the megatrend that is cloud, and that uncovered opportunities in the US and around the world remain to be discovered.
The views expressed here are those of the individual 500 Global personnel, or other individuals quoted and are not the views of 500 Global or its affiliates. Certain information contained herein may have been obtained from third-party sources, including from portfolio companies of funds managed by 500 Startups Management Company, L.L.C. While taken from sources believed to be reliable, 500 Global has not independently verified such information and makes no representations or warranties as to the accuracy of the information in this post or its appropriateness for a given situation. In addition, this content may include third-party advertisements or links; 500 Global has not reviewed such advertisements and does not endorse any advertising content contained therein. Market trend and investment-related metrics and statistics reported within but not separately cited are sourced from an Industry Brief dataset analyzing Venture Capital deals from 2010 to 2020 prepared by Pitchbook. Such external data has not been independently verified by 500 Global. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, tax or accounting advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation, offer to sell or solicitation to purchase any investment securities, or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 500 Startups Management Company, L.L.C.. (An offering to invest in a 500 Global fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 500 Startups Management Company, L.L.C., and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. Charts and graphs provided herein are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Unless otherwise expressly stated, figures are based on internal estimates and have not been independently verified. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. All logos and trademarks of third parties referenced herein are the logos and trademarks of their respective owners and any inclusion of such trademarks or logos does not imply or constitute any approval, endorsement or sponsorship of 500 Global by such owners.
1 500 Startups The Future of SaaS May 2021.
3 Pitchbook, Industry Brief dataset – VC Deals, 2010 – 2020. Such external data has not been verified.
US Cross Decade Comparison
Round size is based on median and valuation is based on pre-money
Global Cross Decade Comparison
Round size is based on median and valuation is based on pre-money