SaaS valuation gap widening

Carta recently released its latest Q2 numbers for valuations and round sizes of U.S. startups. No major changes in early-stage rounds, but a turnaround in growth rounds - valuations rose again and the amount of cash raised increased slightly.

While many welcome this rebound and interpret it as a sign of recovery, I take a less positive view. After everything has fallen back to more reasonable levels (rightfully so), the already large gap between VC and M&A multiples is widening again.

Last year’s SaaS Funding Napkin by Christoph Janz shows what it takes for a SaaS startup to get VC money:

• Seed: $0-1M ARR

• Series A: $0.5-2.5M ARR

• Series B: $3-5M ARR

This probably has not changed much in the meantime. If we use the upper end of the ARR ranges and assume another doubling to $10M ARR from Series B to Series C (which is btw still well below the T2D3 path), it leads to pre-money valuations ranging from 13-32xARR:

No matter how you twist and turn the numbers, you usually end up with a multiple >10x. Lower than it used to be in 2021, but still way beyond current exit multiples in the private SaaS market (specified as EV/TTM Revenue), which - by contrast - are trending downward.¹

SaaS startups which are growing exponentially and continue to fit the VC framework should not worry too much. But part of the truth is that many fail to meet high expectations along the way - often despite having reached product-market fit. From seeded startups, only ~10% make it to Series C.²

Startups at Series B and beyond have a good chance of exiting (>80%)³ and likely have a profile that leads to a multiple above the median.

For those who got off the VC track earlier, it is becoming increasingly difficult.

Apart from the fact that the amount of buyers interested in such companies is very limited, VC investors need to accept that the gap between what they paid for their shares and what they might get in a sale is widening.

Along with this, the chances of founders getting even a $ in such a scenario further decreases. If possible, it may be the better way to get the company into the black and continue to grow it on its own.

With this in mind, founders are advised to..

1. Not always go for the highest valuation,

2. Only raise as much capital as they really need,

3. Have a plan B ready in case sh*t hits the fan.

VC Investors share responsibility for these points.