How Revenue Multiples Really Fall After Each VC Round

So Michael Ho did an analysis here of Carta valuation data in a way that IMHO visualizes in a way so many founders miss.  And misunderstand.

At the end of the day, the top SaaS companies IPO and end up trading at “standard” ARR multiples.  

Today, on average that’s about 6x.

Not great, but it is what it is. But they don’t start there.  

Pre-seed and Seed rounds can’t really be done at 6x ARR typically.  A startup doing $300k in ARR is rarely valued at $1.8m post-money these days.  If they raised $2m, that would be a – $200k pre-money valuation!

So ARR multiples are in a sense inflated in the earlier stages.  This is justified both by the fact they are higher growing (or should be) than public SaaS companies.  And also by the fact they are really a bet on the future, and not the present.

But many founders sort of thing those high ARR multiples will play out into all the future rounds.

OK, but how does this look in practice?  Here’s the chart, and it really visualized the point (and issue) well.

Generative AI is a platform shift where models can take inputs such as text, image, audio, video, and code and generate new content into any of the modalities mentioned. TJ Nahigian, co-founder and Managing Partner of Base10 Partners, and Luci Fonseca, Partner, deep dive into the current GenAI landscape, incumbents vs. startups, and the six questions founders should ask themselves to drive value from GenAI.

For some context, Base10 is a research-driven investment firm focusing on companies automating the largest sectors of the real economy. They’re trying to figure out what will happen with GenAI and share what they’re observing today so startups and incumbents can take advantage of it to build significant value.

Base10 is interested in mega-trends that change how people live and work in the next ten years. We’re at the beginning of a platform shift, and for the first time, GenAI has become accessible to more than just the mega businesses of the world.

This edition of the SaaStr Daily is sponsored in part by Cisco

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In SaaS, once you have even a few million in ARR, the #1 challenge is recruiting top-tier VPs and building a truly top-tier management team:

• SaaS products mostly don’t sell themselves. You can hack managing and finding 1–3 reps yourself, but after that, you really need a VP of Sales.
• SaaS products get too complex to hack a product roadmap too long. You will need a VP of Product to scale your roadmap. You can wing this in the early days, but you’ll have too many workflows, too many integrations, too many partners, too much of everything to maintain this.
• Upsell and retention is an art, science and craft. You can smother customers with love alone in the early days, but as you scale, you need a seasoned customer success team and VP that has done this before. Or churn will increase, NPS will stagnate and decline, and upsell and revenue retention will be a fraction of what it could be.
• You’ll need more than 5–10 engineers to go big. You will need a VP of Engineering to manage these processes, recruit and build the team, and make your product more secure and enterprise-ready. 95% of the time, your super-smart hacker co-founder is not that person. She can be your CTO forever. But you won’t scale past $4m-$5m without a true, seasoned VP of Engineering. That’s a different, and critical, job than CTO.
• Marketing is also an art and science. You’ll find a way to be decent at some aspect of marketing in the early days on your own (PR, virtality, growth hacking, outbound, cold calling, who knows). But to get past that, and to manage 100s and 1000s of leads — not just a handful — you’ll need a seasoned team and a true VP of Marketing to lead it.

Finding, hiring and retaining these VPs is challenge #1 for scaling up. It’s the people.  With the best people, you beat the competition. With nice but mediocre VPs, the competition beats you. WIth the best people, you get ahead of changes in the markets.  With no VPs or mediocre ones, changes in the market get the best of you.

So I remember years ago I went to hire my first VP — ever.  To make it even tougher, I’d never hired anyone for this role at all (a VP of Ops).  I went to reach out to the best candidate I could find by a cold email.

I went to my ex-boss and mentor and asked him how I’d know if he was interested.

“Oh you’ll know. He’ll respond ASAP.”

Now as the years have gone by, I’ve learned that’s not 100% true when you outbound to candidates. Many of them aren’t in market, or may take 3-4 reach outs to take a meeting.

But for in-bound candidates? Or folks that have reached out to you?

MARCH 6, 2024 / WYNWOOD

SaaStr is coming (back) to Miami for an epic evening of networking and community to kick-off a year of events. Join 300 SaaS execs, founders + VCs. 
Grab your ticket to join us on Wednesday, March 6, and get ready to meet some incredible SaaStr speakers and talk about all things SaaS!

Featuring Amazing content! with:

• Jason Lemkin, CEO and Founder of SaaStr
• Sam Blond, Partner at Founders Fund and Host of CRO Confidential,
• and Adam Gross, CEO of Vimeo

This edition of the SaaStr Daily is sponsored in part by Cisco

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Quit today if you don’t want it bad enough.

But … never quit if you truly do.

…

Now, by “quit” I don’t literally mean leave the keys on your desk and quit today.

Not if you have investors, customers, and employees at least.  If you’re pre-everything, then sure, sure call it a day.  But not immediately if you have any customers or investors.

But what I do mean it’s this stuff is hard. Being a founder is hard — harder than almost every non-founder realizes. And everyone, or at least almost everyone, has moments when they want to throw in the towel, at least sort of. That thought still crosses my mind from time to time, even now.

If you’re truly done, if you really don’t believe, if you can’t see it — first take a vacation for 2 weeks.  See if you can get back to it.  Maybe even take a few months.  But eventually, “quit” if you can’t do it anymore.

That may mean:

• Find a CEO to replace you, if you’re far enough along for that to make sense
• Sell the company, if you can.  This takes time, but worth a shot.
• Merge with a competitor, if you can.
• Support your co-founder 110%, if they want to keep going.
• Take care of your customers.

It’s doesn’t mean yell “I’m Out of Here” and walk out.

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