Why most startups will fail to raise venture capital 

I just came across the most shocking piece of data I’ve seen in a long time. 

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It’s this chart, and in it there are thousands of (anonymized) SaaS companies grouped by their size, and the chart shows their media growth. 

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Now, for example, these companies are in Seed Stage, but to raise a seed round they would need to grow much faster. Like 3x faster than this. 

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Or take a look at this company. This is a company with millions of dollars in annual revenue, and it’s ‘just’ growing at 3%. If you put this in front of an investor, they will call it mediocre and non-fundable, but this is the reality for thousands and thousands of startups. Bootstrapped, profitable companies with solid revenue basis, sticky products, and good economics, but not fundable. Why? Well, venture capital is reserved for a privileged few. It is for extremely-fast growing businesses. Essentially the top 10% of companies that are growing the fastest. 

Are the rest of the companies bad? Most certainly not. They just aren’t the sexy company that gets that TechCrunch article. They aren’t lifestyle businesses either (a term that I hate). They are just startups nobody talks about - which happens to be the majority - and today, I want to look into their (anonymous) stats. 

The fund raising landscape for startups

Okay, so let’s first look at 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. While the number of angel rounds decreased with the pandemic, the number of VC rounds grew. The interesting thing is that the size of the rounds skyrocketed. 

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More than $600B was raised in 2021, twice as much as companies raised in 2020. But like I said, this is a select club. In the US alone, over 5 million new business registrations happened in 2021, but less than 4,500 early-stage companies raised any venture capital. That is a mere 0.08%

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So many companies are not venturing backable, which is one of the reasons we decided to pivot our product into something that any startup, not just venture-backable companies, would find useful. So again, with that fundraising context, here are some stats that show the reality of SaaS companies- courtesy of our friends at ChartMogul. 

Startup growth 

First, let’s talk about growth. 

We can tie the bands used to classify companies so that they more or less correspond with funding rounds. According to Elizabeth Yin, GP at Hustle Fund, if you’re not growing 30% MoM you shouldn’t even be thinking of pitching investors - but, as we’ve seen in figure 3, the median company at this stage is growing at just 3.3%. 

That of course slows down as revenue grows. Growing 2.3% per month when you have $250K MRR is no easy feat (you’d be adding $6K in subscriptions per month).

Here’s the annualized version of that growth. Again, while not an investor favorite- building a startup with $250K or $500K in monthly subscriptions, and continuing to grow at 30% is VERY exciting. That’s the median - so half of the surveyed companies grow faster, and half grow slower. 

Now, if we zoom into that information, we can start looking at percentiles or brackets. The median is still there - but now we can look at the 75th percentile (or the top 25% of faster-growing companies). This is still annualized growth. Just like we concluded before, even that select 75th percentile is not reaching that 3x YoY growth that investors look for. 

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This is the 95th percentile (or the top 5% of fastest-growing companies). They grow at over 10% MoM for the seed stage, 7% MoM for Series A, and stay well above 5% throughout their journey to $1M MRR, but this is really just the tip of the iceberg on growth. What I was really excited to dig into was what drives that growth. 

What drives growth? 

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First, splitting companies by ARPA (Average Revenue per Account) - the guys from ChartMogul found that median monthly growth tends to be faster the more expensive the product is. The top 25% group across all ARPA bands stands at around 6%, and that seems, at least, indirectly correlated to churn rate. The median churn rate decreases drastically as the product gets more expensive. This makes sense of course: more expensive products are bound to be harder to sell, tend to have more hands-on assistance and onboarding, and customers are therefore less likely to cancel. Cheaper products are also more likely to be B2C focused (or at the very least self-service) versus the more expensive enterprise product. 

Going one step deeper in our nerdiness, we looked at Net Churn (which also accounts for expansion and reactivation revenue), which is when the same cohort of customers upgrades to a more expensive tier. This is where you can start to see what I like to call SaaS Nirvana: negative churn. A feat that companies in the lower pricing tears can only dream of achieving, but that for B2B and enterprise products looks pretty normal. 

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