Inc - It’s Now Year 3 of the Venture Downturn

So folks in venture are back to business. 2022 was a year of dealing with the fallout of fallen unicorns, terrible deals, and slashed valuations.  2023 was a year of capitulation, markdowns, and more.  But also — a year of AI excitement. The epic growth of OpenAI, Databricks and more have enticed VCs at the Series A and later stage back to work.

It was 2 years with a lot of pausing in venture. Now, venture is back to work. The seed markets remain vibrant, and later-stage investors are looking at more deals.  Redpoint in our recent Workshop Wednesday noted 2024 is sort of back to normal for growth investing now … and that we may be reaching the end of the bottom in net new VC investing.

But … but … here’s the thing.  A reality has set in.  It’s Year 3 of the Venture Downturn in SaaS.  That’s OK, everyone has adjusted.

Getting acquired seems like the goal for most.  Perhaps it is.  No exit at all isn’t that fun for most of us.  Liquidity matters, and is important, and is important to talk about.

But getting acquired isn’t as simple as just signing some paperwork and getting some cash or shares.

A few more existential thoughts and learnings:

1. The “quality”/brand of the acquirer is less important than we tend to think

Selling is selling. It’s not yours anymore. I know it may sound appealing to “Continue Your Vision Inside of Google” or “Go 1000x Bigger Inside of Apple” or say “We Were Acquired by OpenAI!” or whatever narrative, but even if it’s true at some level, it doesn’t matter in the end, 2-3-4 years down the road. Selling to Google in the end isn’t more glamorous or better than selling to Waste Management, Inc. for the same amount of money, not in the end, not really. 

For most founders, the rewarding part ends about 90 days after you sell, no matter to whom. No doubt it is better to see it flourish in the hands of a leading tech company. But still, this will matter less over time than you think. Google and OpenAI 10 years from now will have very different tactics (if not strategy) than Google and Open AI today.

Generally speaking, there are two paradigms:

• Buy them out at Common Stock price (which is what they in fact own), based on the lastest option pricing / 409a valuation; or
• Buty them out at the Preferred Stock price (what VCs have bought the stock at, or are now buying it at), or some discount thereto (often 10%-25%)

Depending on timing, the difference, or “spread”, can be material. Or in some cases, if the common stock value has grown but the company hasn’t raised a venture round in some time … the spread may be minor.

Using the Common Stock Valuation paradigm is “easy”. You take the lastest 409a valuation (or go get one), and use that. Or at least, as a basis for discussion.

If instead you are going to use the often higher price any VCs or others invested in at the Latest Preferred Stock Valuation … then the question comes in, what should the “discount” be because it’s not in fact Preferred Stock?

That will depend in part on how the purchase is being done. If the company is directly buying and retiring the shares, some technical issues aside (talk to your lawyers) … it’s whatever the parties agree.

If existing VCs are buying common stock from the founders (not uncommon) … they’ll often want at least a material discount for buying common stock instead of preferred.

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

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Year after year, VCs show up to SaaStr Annual locked and loaded, term sheets in hands, on the hunt for soon-to-be Unicorns to add to their portfolios.

From the Founding Partners, Managing Directors and big name SaaS VCs who grace the stage. to the firms that send over a dozen of their Partners and Associates — everyone who invests in SaaS has a presence at SaaStr Annual.

We also see the top private equity firms registering early, and the list of publicly traded companies sending Corporate Development teams is at least 2Xing year over year.

Whether you’re in it for the long haul and need cash to scale, or you’re looking for a speedy exit — or even if your dream is to become part of something bigger, where you can watch your product live on as part of a legacy brand — the folks who can make it happen will be here. And they want to meet YOU.

Well, for sure.  But … it almost always takes longer than you think than direct sales:

• Salesforce announced a little ways back that its partners were the #1 source of its new bookings.
• 40% of HubSpot’s and Shopify’s and Gorgias’ customers come from agencies and other partners

You can see in our deep dive with HubSpot co-founder and chairman Brian Halligan how their revenue from partners isn’t just critical … but a moat.

Key takeaways:

• Market Dynamics and Challenges: The SaaS market is experiencing significant fluctuations, with some companies thriving while others face challenges. Notable examples include Canva growing at 40% with $2.3 billion in revenue, while companies like Salesforce and MongoDB are seeing slower growth and deal contractions.
• Impact of AI on SaaS: AI is a major disruptor, with significant investments and interest from VCs. However, the benefits are not uniformly distributed. Companies must achieve AI parity with competitors to avoid losing deals, even if AI does not immediately enhance their product.
• Public Market Pressures: The public markets are tough, with SaaS companies trading at a median of 6x ARR. This low multiple creates stress across the system, making it difficult for companies to raise funds and for VCs to achieve desired returns.

Age doesn’t matter — per se. You’re not “too old” to do a start-up until you think you are and feel you are. And in B2B SaaS, the domain expertise and experience that come with more years in the field does help a ton.

The average age for founders at founding for SaaS companies that have IPO’d is 32, and that’s the average. Peter Gassner was 42 when he founded $30B+ Veeva, Eric Yuan was 41 when he founded Zoom, etc.  And both really benefitted from their domain expertise.  Peter had already been a CTO at Salesforce working in part on the same vertical, and Eric led engineering at WebEx.  Therese Tucker founded Blackline at 40 as a solo founder (that story below in a great interview).

When is the right time to move upmarket, and how will you do it well? It sounds great to be able to sell to more people and sell bigger deals, but are you ready? Thoropass CRO Bryan Caplin and Head of Demand Generation Jenna Keegan share when you should move upmarket and 5 tips for how to move upmarket successfully.

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