SaaStr - LIVE: State of the Early-Stage Venture Market with Chemistry Ventures Ethan Kurzweil + Jason Lemkin
Ethan Kerszswall, a seasoned venture capitalist, shares insights on the Series A venture market, highlighting the importance of focus and alignment in early-stage investing. He emphasizes the need for venture funds to concentrate on core areas, similar to how startups should focus on their core products. Kerszswall discusses the current market dynamics, noting the significant capital absorption by AI deals and the challenges B2B companies face in raising funds compared to previous years. He advises startups to have a base plan and an accelerator plan, suggesting that multiple seed rounds are common and acceptable.
Kerszswall also addresses the AI premium in venture funding, noting that AI companies often receive higher valuations and larger deal sizes due to their potential for transformative impact. He stresses the importance of having a compelling vision, strong customer reviews, and clear articulation of how funds will be used. Additionally, he highlights the need for startups to be intentional in their fundraising process, focusing on the right metrics and avoiding vanity metrics. Kerszswall concludes by discussing the importance of developer and customer love as a moat in the competitive landscape, especially in the age of AI.
Key Points:
- Focus on core areas for successful early-stage investing.
- AI companies receive higher valuations due to transformative potential.
- Multiple seed rounds are common; have a base and accelerator plan.
- Intentional fundraising process is crucial; avoid vanity metrics.
- Developer and customer love are key competitive advantages.
Details:
1. 🎙️ Introduction and Guest Overview
1.1. Guest's Professional Achievements
1.2. Current Venture Fund Initiatives
2. 📈 Series A Insights and Venture Market Trends
2.1. AI's Impact on Venture Capital and B2B Fundraising
2.2. Series A Focus
2.3. Early Stage Investing Strategy
3. 📉 Economic Impact on Startups and Venture Capital
- Startups should concentrate on their core offerings to boost efficiency and impact, ensuring resources are allocated effectively to areas of greatest potential growth.
- Transitioning from large institutions to startup funds allows for more hands-on early-stage investing, enhancing alignment with entrepreneurs and fostering dedicated investment teams.
- Investment focus is primarily on seed and series A, with some series B, writing checks between $3 million and $30 million, averaging $10 to $12 million, which aligns with typical series A rounds, ensuring capital efficiency and targeted growth support.
- Operating as a generalist with specializations in fintech, BTOD, developer platforms, consumer application software, and vertical AI ensures a diversified and robust investment strategy that can adapt to changing market conditions.
- The firm's team, with a collective 35 years of startup experience, leverages this expertise to provide strategic guidance and support, enhancing the potential for successful ventures.
- To further improve investment outcomes, the firm could include detailed case studies and examples of successful investments, providing a richer understanding of effective economic strategies.
4. 🔍 Navigating Early Stage Funding Challenges
4.1. Current Market Environment and Impact on Early Stage Funding
4.2. State of Early Stage Funding and Deal Activity
4.3. Adapting to Funding Challenges
5. 💡 AI's Transformative Role in Startup Funding
- Startups are extending the time between seed funding and series A from one year to two years, reflecting a strategic shift in their funding approach.
- There is an increase in seed funding opportunities, allowing startups to diversify their sources of initial capital before reaching the series A stage.
- The doubling of time between seed and series A rounds suggests a strategic adjustment, impacting how startups plan their fundraising.
- Larger funding rounds are becoming the norm, reducing the frequency of fundraising but extending the time required to meet investor milestones at later stages, such as series A, B, and C.
- The average time between funding rounds is now 25 months, but no venture capital firm adheres strictly to this duration, suggesting startups may opt for multiple seed rounds or larger initial raises to extend their operational runway.
- Multiple seed rounds, often two, are increasingly common, indicating a shift in early-stage funding strategies among startups.
6. 🔑 Decoding the AI Premium and Market Dynamics
- Develop a dual-plan strategy comprising a base plan for sustainability and an accelerator plan for growth. The base plan should ensure steady operations, while the accelerator plan focuses on rapidly achieving growth metrics.
- Ensure at least 80% confidence in attaining accelerated growth metrics before increasing expenditure and pursuing Series A funding. This metric serves as a risk management benchmark.
- Multiple seed rounds, such as SAFE rounds, are not a negative indicator. The focus should be on meeting growth metrics necessary for Series A funding, rather than the number of rounds.
- Positioning the company effectively for Series A is crucial, even if it results in higher dilution through several seed rounds. This approach aligns with long-term strategic goals.
- Consider case studies of companies that have successfully navigated multiple seed rounds to position themselves advantageously for Series A, highlighting their growth metrics and market positioning.
7. 📊 Strategies for Successful Series A Fundraising
- Series A funding faces more scrutiny than seed funding, with investors closely examining the use of previous funds, especially if significant time has elapsed since the initial investment.
- A majority of companies remain at the seed stage, with only a small percentage advancing to Series A, despite some achieving success solely with seed funds.
- Between 2020 and 2021, there was a notable increase in seed funding rounds, with over 1100 additional companies receiving funding compared to 2018, marking a two to threefold increase.
- This rise in seed funding did not translate into a proportional increase in Series A and B funding rounds, indicating a bottleneck at Series A.
- Despite an increase in Series A investments, post-2023, the market has stabilized, with a decline in funding rounds as investors assess their prior investments.
- The 'Series A crunch' describes a situation where many companies with strong metrics struggle to secure funding in a competitive environment; some rounds are highly competitive while others struggle to attract interest.
- To overcome the 'Series A crunch', companies should focus on clearly demonstrating their growth metrics, scalability, and a clear path to profitability to attract investor interest.
- Case studies of successful Series A rounds often emphasize strong leadership teams, innovative product-market fit, and strategic use of prior funding to show traction and potential for growth.
8. 📌 Crafting Compelling Startup Narratives
8.1. AI and ML Trends in Startup Funding
8.2. Key Elements of Compelling Startup Narratives
9. 🧩 Metrics That Matter in SaaS and Developer Platforms
- AI investments are attracting a 20% premium at the seed stage, escalating to a 60% premium by the series B due to factors like raving customers and net account expansion.
- Average deal sizes for AI companies are significantly larger, with some skewing from large funding rounds.
- Investors prioritize AI applications that solve specific business or consumer problems rather than AI for its own sake.
- Series A stage investments require customer validation that demonstrates the effectiveness of the AI solution.
10. 📈 Setting Realistic Growth Expectations
- The market is increasingly polarized, with certain companies easily attracting investors while others face challenges.
- Chemistry stands out due to its unique market position and strong customer loyalty, attracting investors despite not being an AI company.
- Investors are keen on companies that address unique business problems with minimal competition, especially in developer platforms.
- Public SaaS companies have seen a decline in average growth, dropping from 70% in 2021 to 11% now.
- To attract investors, companies should focus on solving distinct issues with strong customer endorsements.
11. 🔄 Adapting to Market Adjustments and Future Predictions
- In 2021, SaaS companies achieved valuations of 70x with $23 million in ARR and 114% growth, reflecting a period of high market optimism and predictability where VCs could forecast unicorn status with precision.
- Post-2022, the market has shifted to a more cautious investment approach, acknowledging that the previous growth rates were exceptional and not sustainable under current conditions.
- The 'triple triple double double' growth model, once ideal for B2B sectors, is being re-evaluated in favor of more aggressive growth models like 5x, particularly in AI-driven markets where competition is intense.
- In less competitive environments, the traditional growth model may still be effective for securing investments, but companies are advised to adapt strategies to align with evolving market dynamics.
- Investors now prioritize companies that can demonstrate rapid, scalable growth and adaptability to technological advancements, emphasizing the need for strategic foresight in investment decisions.
12. 🔍 Evaluating Startup Potential Amid Economic Shifts
- Investors are increasingly looking for more than the traditional 'triple triple double double' growth metrics, making it harder for startups to secure meetings with investors based solely on these achievements.
- Chemistry's investment strategy focuses on whether they can accelerate a company's growth through capital, resources, and support, even if the company is currently underperforming traditional growth metrics.
- Companies with $5 million in revenue still relying on founder sales are seen as having potential for acceleration if they receive proper support and resources.
- There is skepticism about whether capital alone can lead to significant growth acceleration, as companies at the threshold of 'triple triple double double' often decelerate rather than accelerate.
- Some startups with small teams (5-6 people) are underoptimized, with potential growth opportunities lying in better resource allocation and optimization of existing operations.
- The current economic climate has startups being more cautious with growth strategies, often prioritizing profitability and efficient cash use, potentially leading to untapped growth opportunities.
- Chemistry has observed situations where growth could be unlocked if startups are able to scale, though there is risk due to their historically bootstrap operation style.
- Some startups are growing at 80% when the expectation is 100%, indicating potential for growth with the right strategic support.
13. 🧠 Strategic Planning for Series A Success
- Investors are often skeptical about needing extra capital without a clear plan; focus on demonstrating a 20% improvement in product or strategy instead.
- It's crucial to present a clear plan with specific numbers to gain investors' trust, rather than relying solely on capital increase.
- Raising funds should be tied to a compelling 'why' and 'now', emphasizing product, business, and market dynamics.
- Successful pitches incorporate timing and relevance to current trends, such as AI, to enhance attractiveness to investors.
- Founders should articulate why their company needs to exist and how additional capital will help achieve significant goals, as exemplified by leaders like Patrick Collison and Jeff Lawson.
14. 🔑 Key Insights for Founders and Investors
- Large language models are enabling the creation of products that were not possible two years ago, allowing for conversational interfaces that engage non-technical users.
- Investors often look for a 'why now' moment, questioning the current relevance and timing for a company's product, beyond just product viability and traction.
- The evolution of technology like large language models and code generation is transforming software development, creating opportunities for new companies.
- Effective storytelling is crucial for founders to convey the potential and relevance of their product to investors.