I quickly discovered expectations for a B2B Series A were $1.5M in annual revenue run rate
That's a great news-you-can-use for many people on HN, so I thought I'd excerpt it.
It feels... I don't know. Markets are made where buyers and sellers feel that the offer is mutually acceptable, so I don't want to say "That is too high." I'd say, as somebody who spends a lot of time in B2B SaaS (though only with a toe dipped in the funded sides of that pond), that if you're waiting for $1.5 million in revenue you lose all standing to whinge about how darned pricey SaaS companies are these days. You're attempting to buy a very different thing than was historically bought in a transaction called Series A.
If the requirement for VC investment is $1.5m in AAR and fast growth rate, there does not seem to be much of a "venture" in that. This sounds like what a bank would require to loan you money, an almost certainty that you can pay it back.
Banks will not loan you $5~10+ million on $1.5 million in revenue [+], which is what the Series A will likely be. They'd be happy to offer you $150k to $300k or so, depending on the officer. You can get a higher percentage when you graduate to a more stringent vetting process, which banks will typically start making available after you have $10M+ in revenue, significant hard assets, etc. (Business underwriting is hard and expensive, and there isn't enough money on the table to justify much underwriter attention for a $200k loan or line of credit.)
[+] In hindsight: I'm playing fast and loose with the interchangeability of revenue and run rate. They're two very different things. Not terribly relevant to the general thrust of this comment, but if you ever hear someone conflate the two in an investment conversation, make sure you nail down which you're talking about.
Agreed. I was more commenting on the more recent trend of "risk averse VC investment". As the OP states at $1.5 ARR, they would be profitable. It feels like VC investment in B2B space has become highly risk averse, only funding expansions of proven business models (we'll give you money if you can prove that you don't need it). This is a fine investment model but not sure it qualifies as "venture" investment. Can you really expect 10x returns if you're also looking for essentially proven, almost profitable businesses?
To a degree I think in B2B you have every right to be quite a bit more risk averse as an investor, and demand to see a solid revenue stream coming in. In B2C you can bet on the idea of "explosive" growth, but that's much less likely in B2B. The flip side of that of course is that you should be seeing a lot more revenue per customer in B2B, but the quantity of customers isn't ever going to hockey stick in the same way you might hope for in the number of users in a B2C product.
I think SaaS companies are massively under-valued because most investors still do not understand how powerful a low churn recurring revenue stream is for a) predictable sales process/outcomes b) self-funding growth c) ability to take risk on new products because you can test and sell to existing customers.
I think there is a very good chance that VCs will miss HUNDREDS of $100M+ SaaS opportunities due to this risk aversion over the next 1-7 years. If I were to start a fund I would focus 100% on this asymmetry.
"because most investors still do not understand how powerful a low churn recurring revenue stream is"
Isn't this a problem then with educated them and selling them? If it fits with the rest of your strategy maybe you could do something in this area. [1]
"If I were to start a fund I would focus 100% on this asymmetry."
Are you sure that it is a lack of knowledge and understanding or there is some other reason that makes what they do the low hanging fruit?
Along the lines of [1] why don't you package and present the data and charge for it to make this case then?
I've seen this happen in other businesses (real estate investment) but that was some time ago and only with certain types of properties when it was done.
[1] Sorry to be so quick to give you something else to do. But maybe there is opportunity here that would justify the effort.
Too much focus on revenue and not customers can lead to missing out on great companies. For example, NetSuite was charging barely $20/mo when it launched. Today they don't take customers for less than five figures. A similar story exists for salesforce. In b2b it's common to start out downstream where you pick up smaller customers(and more of them) and over time to go upstream(so you are doing million dollar deals).
The heart of any b2b business is repeatable business. The problem is that the higher your pricing point, the fewer customers you will have. This makes it harder to know if you have a repeatable sales process. So given an option, in the early days I'd rather sign up 100 customers paying $1000/yr than 1 customer paying $100,0000/yr.
As a bootstrapper with 100% equity in company that just passed $1M YOY revenue and should hit $2M this year, I read these articles on HN and cringe. To me, it would be a special kind of hell to have 40 investors to answer to, no less in a company under $1M revenue. Seems to work for some founders to get rich quick but for god sakes I don't envy that position.
I think 'answer to' is probably looking at it wrong, at least for good investors. They are there to help you when needed, to give you advice. They are not the hall monitor.
However I've never had investors either, so perhaps I'm wrong. Given that she says she communicates with 75% of them at least once a month - that would indeed suck if the relationship was as you described.
In any case, would be much better to be answering to 40 paying B2B customers. I'd imagine if founder is not able to get focused on that, there won't be another round.
20 years of experience with startups, investors forcing bad decisions on the startup caused the majority of failures (about %60). Founder conflicts, and market timing caused the rest.
There a lot of pressure when you have 40+ people expecting you making them a 10x + return. But raising money is something that startups think they must do these days.
40 investors where "50% are in touch 1x per month, and 25% are in touch 1x per week." That's 60 emails a month (2 a day). Do you find this helpful? Can you keep them all so well-informed? Can you actionably react to all that communication and advice?
We have 20 something investors and on a given month there are ~2 that send more than one e-mail, 5 that send 1 e-mail, and basically nothing from all of the rest. I don't feel a burden, tbh. I like it, when I need help I get it - and I have a few really solid mentors in the group.
The only pain is at series A when I'm going to have to go get all of them to sign the closing docs. That'll be hard.
If I were looking for a new startup job, I would check out Mattermark first to develop a list of startups I thought looked like they were doing financially well / had strong employee growth etc and could succeed before then looking into which I was interested in the work at. I think Mattermark could have some other uses for their data that could prove valuable (I'd pay for that).
Right now if I were in that situation, it looks like I could get a 30 day trial for free but I wouldn't continue it at $499 a month. I wonder what other monetization opportunities there are for the data Mattermark has.
Version One, Felicis, etc (Q1 14): $1M+ investment at $5-$7M valuation at most? Another 20%
Flybridge, A16Z, Gramercy, etc (Q2 14): $1M investment at $6-$9M valuation at most? Another 20%
Between just these 4 groups, they own 60%+ of the company. I'm not accounting for angels. In addition to this, with an option pool, cofounder, COO, and a handful of employees, I wonder how much Danielle owns.
On a less pessimistic note, I wonder if there are acquisition routes. If so, who?
We have taken nowhere near as much dilution as you are suggesting.
I want to clarify this, because I don't want anyone else to think they should take 60% dilution before they take their real first equity round. Without revealing our entire cap table and terms (I'm transparent as I can be, but I think this would upset some of my investors) I can tell you the rule of thumb is to give up no more than 25% dilution on convertible notes before an equity round.
Generally you will sell 20% of the company in the Series A (read as: first equity round), 15% in the 2nd (Series B), another 15% in the 3rd (Series C). Our dilution position from these early rounds is still slightly TBD depending on the valuation we get in our next round, but we are sticking pretty close to this rule. Additionally, we maybe we able to hit the milestones required to sell less than 20%... so that optionality is there.
Unless your valuation is $10M+ and your notes' caps were $6M+, I don't see how investors won't own ~55%+ after Series A (before accounting for 20% option pool).
Those numbers multiply, they don't add. Also, some of your numbers are wrong if you look at her post, and others are pretty high: Danielle was a known quantity for VCs from her Twilio days and you can expect she raised her rounds at a premium.
I do the numbers as: .93 (YC) * .95 (500S) * .85 (option pool) * 0.83 (seed1) * .92 (seed2) * 0.86 (seed3) = 0.49
This doesn't account for the Referly->mattermark pivot, which may have led to some restructuring.
The math might not be quite right here. Depending on how earlier investors are diluted by later investors, if at all, the 4 groups could own as little as 49% of the company.
Congratulations, seems like a great way to thread the needle. Perhaps another good metric might be ratio of fund raising to non-fundraising time. In many ways startups are like rockets and that ratio is their mass fraction, money consumed relative to value delivered into stable 'orbit.' :-)
In fact, if our run rate had been that high we would have been massively profitable.
with mad respect to dmor, this doesn't fit. even at 1.5m ARR, with 21 employees, office space, AWS bills and the 'etc', you aren't "massively profitable". i don't feel the need to go through the math since it's obvious. maybe there'd have been a few bucks to spare, but there are no "massive profits" there.
That comment needs to be kept in the context of my blog post -- it is based on the company in January when we went out to raise. We had 14 people on the team at that time, had reached ramen profitability and then decided to spend conservatively to grow. At that point in time, increasing our ARR 3x would absolutely have made us hugely profitable percentage-wise to how much we were spending to generate that income.
i hear you. however my b2b saas business does 2M+ arr with 12 employees and still i would not consider us "massively profitable". no doubt there's a big difference between our cost structures and the biggest is probably employees. i'm assuming you must be paying below market for your technical employees in exchange for more equity.
I think a big difference might be cash flow - we are getting paid up front for annual contracts. So our ARR doesn't fully represent our cash position. We pay market rate salaries, benefits, etc.
> Fun Fact: 95% of money in the round came from investors who were already paying customers — including VCs, angel investors, family offices, hedge fund managers, founders and executives
This is good, as customers who are paying do tend to believe in the product offering and direction.
For our startup ( https://microco.sm/ ) we have a similar story, our first £150k of investment came from users of our software, people already using forums and who believe deeply in the story we're telling about where we want to take forums. It was also quick... the first £50k took 15 hours to raise, the £100k follow-on took 180 minutes.
Unfortunately for us, our customers aren't VCs and angels. So this is extremely unlikely to continue to scale. Oh well, time to find angels and early-stage investors in London who will help us reach the next set of product and revenue milestones and the ones after.
How much did market size impact fundraising for Mattermark? My sense is a lot. Like Danielle, I see institutional fundraising changing for startups (http://goo.gl/R0zH4M), but I still think that the Series A is available to the right team, market, and product. See recent blog post on this by Rob Go @ nextview http://goo.gl/tmWhZB. Danielle has got a great team and product, but is the market really multi-billion? How many businesses can she really sell to and at what price point?
This is a bridge round led by an outside investor. Not uncommon, especially between Series A and B. I don't get much of the hard decision here, seems pretty common. I do appreciate her honesty though.
Danielle explains this clearly in the article. Mattermark "couldn’t raise a traditional Series A on acceptable terms."
"I quickly discovered expectations for a B2B Series A were $1.5M in annual revenue run rate — we were growing fast, but still only 1/3 of the way there at the time."
They don't have enough revenue so they went for another seed round instead. It's not questionable; it's logical and helped her to keep the company moving forward.
That's a great news-you-can-use for many people on HN, so I thought I'd excerpt it.
It feels... I don't know. Markets are made where buyers and sellers feel that the offer is mutually acceptable, so I don't want to say "That is too high." I'd say, as somebody who spends a lot of time in B2B SaaS (though only with a toe dipped in the funded sides of that pond), that if you're waiting for $1.5 million in revenue you lose all standing to whinge about how darned pricey SaaS companies are these days. You're attempting to buy a very different thing than was historically bought in a transaction called Series A.