The ONE thing Investors look for in Startups

Key Takeaways

I just came across the craziest piece of data that I've seen in a in a long time these are a bunch of anonymized SAS companies classified by their size and this is their median growth take a look at this bar for example these are all seed stage companies but in order to raise Capital they need to be growing at like three times the rate that they're currently growing take a look at a business like this one this is a company that's generating millions of dollars in annual revenue and it's still just just growing at 3% month over month if you put these companies in front of a venture capital investor they're going to call them mediocre or at least not fundable but this is the reality of thousands and thousands of companies these are exciting companies that may be profitable that may be growing fast that have exciting products and businesses good economics but they're still not Venture packable because venture capital is reserved for a privileged VI for extremely fast growing businesses effectively the top 10% of companies that are growing the fastest so are the rest of the companies Shi obviously no these just aren't the sexy company that will get covered on a tech runch article they aren't lifestyle businesses I actually hate that term they're just startups that nobody talks about that happen to be the majority of the companies and today I want to look into their very Anonymous statistics so let's start with some stats to make sense of this fundraising landscape globally around 35,000 funding rounds were closed last year 20,000 or so of those rounds were angel or seed rounds and while the number of Angel seed rounds decreased with the pandemic the number of VC rounds grew but more importantly the size of the rounds skyrocketed more than $600 billion dollar were raised in 2021 which is twice as much as what companies raised in 2020 but like I was saying this is very much a select club in the us alone over 5 million new business registrations happened in 2021 but only 4,500 or so early stage companies raised in Venture Capital that is 0.08% of all the companies because so many companies are just not Venture back this is actually one of the reasons why we decided to Pivot our product into something that any stter not just Venture back companies would find useful so again with that context here are some of the stats that shows the reality of all these SAS companies data courtesy of friends from Richard MoGo so first on growth we can tie the bands that we used to classify these companies so that they more or less correspond to founding rounds according to Elizabeth Yin she's a GP at the hustle fund and she was one of our mentors at 500 startups if you're not growing at 30% month of a month you shouldn't even be thinking about pitching investors or raising Capital take a look at the median company at this stage they're just growing at 3.3% that of course slows down as Revenue grows because growing say 2% per month when you have 2 $50,000 in Mr is a lot harder that's like adding around $6,000 in subscriptions every month but here's the annualized version of that growth again while not an investor favorite building a startup with $250,000 or $500,000 in monthly subscriptions and then continuing to grow at 30% every year is a very exciting company that is the median so half of the surveyed companies are growing faster and half are growing slower now if we zoom into that information we can start looking at the percentiles or or the bracket of growth so the median is still there but now we can look at the 75th percentile or in other words the top 25% of faster growing companies so this is still looking at annualized growth and just like we concluded before even that select 75th percentile of companies is not reaching that 3x year-on-year growth that Venture Capital investors are looking for if you look at the 95th percentile or the top 5% of fastest growing companies they are growing at 10% a month on a seat stage at 7% a month for series a and they are staying well above 5% through their journey to a million dollars in Mr what I was really excited to dig into was the drivers of this group for example if we split the companies by arpa arpa is average revenue per account or average revenue per user the guys from CH mogle found that the median monthly growth tends to be faster the more expensive the product is so the top 25% group across all our pands stands well above 6% of monthly growth and I think that seems at least indirectly correlated to the turn rate the median turn rate drops a lot as the product gets more expensive which makes sense more expensive products are bound to be harder to sell which means they need to have more a more Hands-On more assistance and onboarding and their customers are less likely to cancel cheaper products are also more likely to be B Toc focused at the very least self-service versus the more expensive Enterprise type of products and if we go even one step deeper in this nerdiness we can look at net churn which also accounts for expansion and reactivation Revenue that is when the same cohort the same group of customers upgrades to a more expensive tier plan so they're instead of dropping their Mr it increases so that causes negative net turn and this is of course what we call the SAS Nirvana negative turn it's a feat that companies in the lower pricing tiers can only dream of achieving but that for B2B and for Enterprise Products it looks like the norm so we we SAS Founders we tend to live in little bunkers of our own data I'm usually pretty open about exchanging information with other Founders that I know but some of this data is sensed we can't just publish it online like a lot of the stuff that we publish online um but having a chance to look at a report like this anonymized was really like data porn for me see you guys next week