Q: I keep seeing tech scaleups raise larger amounts than ever before. Do you have any insights on what is happening on this market?

I’ve also been noticing the surprising amount of funding, and the sky-high valuations recently. $1B valuations seem to be far more common, especially during the recent months. I was talking with long-time venture capital reporter Eric Newcomer on a related topic as we caught up over a video call.

Eric writes Newcomer, a deeply reported newsletter on the inner workings of the startup industry. In his latest issue, he covers the topic from various angles, and he generously agreed to share a good chunk of his subscriber-only issue with The Pragmatic Engineer Newsletter readers (thanks, Eric!). You can check out to his newsletter - one of the most-read tech/VC publications on Substack - here:

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This article, along with my comments (that are also comments on the piece) should give a better understanding on the market with several, previously unreported fundraising details. The aricle is an important reminder on the risks high valuations carry, especially for employees joining after these stages if they are still issued options instead of double trigger RSUs. Now, over to Newcomer:

Raising More With Less

It can feel like a new baby software as a service unicorn is born every day.

The eye-popping valuations can attract the headlines. This week, Snowflake investor Mike Speiser’s latest hotshot company Lacework just raised $1 billion from Sutter Hill Ventures, Altimeter Capital, and Tiger Global at an $8.3 billion valuation.

Also this week, Grammarly raised $200 million from Baillie Gifford and accounts managed by BlackRock that valued the company at $13 billion.

Sources tell me that the whiteboarding company Miro is quietly in the process of raising at a decacorn valuation.1

But investors are just as floored by what’s happening with incipient unicorns.

We’re seeing a stampede of billion dollar valuation software as a service businesses that are raising money with single digit millions in annual recurring revenue (or less).

Many of these companies are building cloud infrastructure on top of open source projects. These companies are following the trail blazed by Snowflake, Databricks, and Confluent.

HashiCorp, another company in this category, is preparing to go public.

We’ve entered an era once associated with buzzy consumer businesses where investors are valuing companies based on softer engagement metrics — not on hard revenue. The argument is that investors have figured out open source companies and can translate early adoption metrics into future revenue.

Sources tell me that Temporal, the open source microservices platform, fits in this bucket of unicorns with single digit millions in annual recurring revenue — or less.

The company is in the process of raising at a $1.5 billion valuation in a round that includes Index Ventures and Sequoia Capital, sources tell me. One source put Temporal’s annual recurring revenue below $1 million.

Meanwhile, Lightspeed-backed Panther Labs has secretly raised from Coatue at a roughly $1.4 billion valuation, according to sources. The startup’s annual recurring revenue is in the single digit millions or less.

In yet another undisclosed unicorn funding round, sources tell me that Anyscale — an application development platform, which recently had less than $5 million in annual recurring revenue — has raised at about a $1 billion dollar valuation from Lee Fixel’s Addition.

Yesterday, Stytch beat me to the punch and announced that it had raised $90 million in a round led by Coatue that valued that company at $1 billion. I hear that’s another one of our early revenue SaaS unicorns.

“People have moved where they can suspend disbelief,” one investor told me.

Here’s a list of startups that raised at unicorn status with single digit millions (or less) in annual recurring revenue:

(according to sources 2)

• Anyscale — Andreessen Horowitz and NEA-backed application development platform has raised at a unicorn valuation in a round led by Addition.

• ClickHouse — Benchmark-backed company, running Confluent’s playbook. Coatue and Altimeter led a $250 million investment that valued the company at $2 billion in October.

• dbt Labs — Andreessen Horowitz and Sequoia-backed analytics engineering tools company raised at a $1.5 billion valuation in a round led by Andreessen, Sequoia, and Altimeter.

• Drata — Cowboy Ventures and GGV Capital-backed security and compliance automation platform company raised $100 million in a Series B round led by ICONIQ Capital that valued the company at $1 billion.

• Modern Treasury — Benchmark-backed company that raised $85 million in a round led by Altimeter in August that valued the company at $2 billion.

• Panther Labs — a Lightspeed-backed infrastructure security and compliance platform company is quietly raising at a unicorn valuation from Coatue.

• Stytch — Benchmark and Thrive Capital-backed startup raised $90 million from Coatue in a round announced this week.

• Temporal — Sequoia Capital-backed company that is raising another funding round that includes Index and Sequoia.

• Weights & Biases — the Trinity Ventures and Bloomberg Beta-backed machine learning platform company raised $135 million in a Series C that valued it at $1 billion.

Weights & Biases CEO Lukas Biewald emailed me when I reached out for comment, “Is your take that the investors are crazy or that these companies must have something really exciting going on? :)”

I replied, “exactly the question.”

You can read these funding rounds as a direct response to Tiger Global. The firm has been the most prolific deal-maker this year and has convinced investors that they need to pay up and move quickly to get in great deals.

I’m going to talk more about the dynamics between different late stage firms more in a future piece. But barring a financial collapse, I would expect the competition to stay hot next year. Tiger has already announced its first close on its expected $10 billion fund. And my sense is they are going to invest at least as aggressively next year.

Clearly, Coatue, Altimeter, and ICONIQ are not content to sit on the sidelines. They’re moving to lead Series B and Series C companies. Greenoaks has been another under-the-radar software investor that’s proved willing to pay high prices to get in industry-leading companies.

In these deals, we see evidence that even firms like Sequoia and Index are willing to pinch their noses and pay up. “In this market everyone is price insensitive — even Sequoia,” one investor told me.

Meanwhile, Benchmark gets to bask in the glory of watching its portfolio companies get marked up astronomically soon after it invests.

While these valuations can seem crazy, you have to view it in the context of the rest of the world. If it was between investing in Rivian today or paying literally any price for a stake in Snowflake, I think that’s an easy choice.

I’ve also learned that Vercel, the cloud workflow platform, is raising again this year. I hear the new funding round puts the valuation at about $2.5 billion with a commitment from existing investor GGV. But I hear that Vercel’s annual recurring revenue has crossed into the teens.

How this will all play out is anyone’s guess.

The Good

It’s obviously the case that the software market is expanding rapidly — the question is just how many hundred billion SaaS infrastructure businesses there will be.

The share of global GDP is shifting toward technology and paying for software is much cheaper than hiring a bunch of employees to do tedious work.

In some cases, investors can find cheaper multiples in the private SaaS market when accounting for revenue growth than they could on the public markets. So that only pushes them to move earlier to get a stake in promising companies before it’s too late.

In one sense investing tens of millions of dollars in companies before they’ve hit $10 million in revenue is a small price to pay for a stake in what could be a $120 billion company like Snowflake. And companies tend to raise money from the same investors over and over again, so getting in early means that these late stage investors can secure their position to buy shares in ensuing funding rounds. You’ll hear investors refer to it as a “call option” should things continue to go well.

“I can see why they’re not crazy when you dig in. But they’re aggressive. I think they need to be growing at outlier rates,” says Jason Lemkin, a prolific SaaS investor. “If you’re hunting decacorns maybe any valuation below $1 billion doesn’t matter and that’s why there are so many unicorns.”

The Bad

For founders, they’re playing with fire.

“Investors are logically shooting for the company that could be the next Snowflake, the next decacorn,” says Nick Mehta, the CEO of SaaS company Gainsight. “But for some of those companies that never make it to that status but are still good businesses — they’ll be stuck with a high valuation and high 409a and won’t be able to get back to that valuation for 5, 7, 10 years.”

That could make it hard to hire and retain employees. And employees who join after an astronomical valuation could eventually find their options underwater.

For an unlucky subset of these companies, Mehta said, “It will be a little bit like a zombie existence where you feel like you’re treading water.”

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Additional thoughts from Gergely

Temporal: having read the article, I was surprised that Temporal would want to raise at $1.5B already. I know the team from afar: one of the founders is also ex-Uber. Their traction in big tech has been very, very visible, as is the excellent team they recruited. On their traction: Stripe job ads have, in the past, mentioned Temporal, and they have strong developer relationships on top of the product.

What I don't understand is why jump ahead this much? Especially when your revenue is lagging so much behind. Raise a war chest? Avoid dilution? A boost for recruitment? All three?

The market is changing, so are investors and companies taking advantage of it.

Thoughts on higher valuations: higher valuations tend to pull in better people in the recruitment pipeline, though. I talked with multiple founders who all shared they are getting a *lot* more applications since they became unicorns.

If the company starts issuing not options, but double-trigger RSUs, they will have no problem hiring people, as this structure takes away the risk of the equity being underwater.

If they keep issuing options, more experienced people who understand how equity works will likely pass on joining… unless the 409a is low enough that they take the gamble.