The focus for SaaS companies in 2023 is higher margins and improved profitability. At the same time generative AI is getting into more and more SaaS services. As AI is more computational intensive and more expensive than typical hosting costs, these two trends are likely to collide. Clouded Judgement newsletter writes about how AI is likely to increase COGS and put downward pressure on gross margins, and how companies can address that.
Another data point in the newsletter is that currently the median enterprise value/revenue ratio for the 10 publicly listed SaaS business with the highest ratio is 10.5 and the overall median enterprise value/revenue ratio for public SaaS companies is 6.
I’ve played around a little with Gamma, an online presentation software with generative AI capabilities. It’s an example of that it is possible to both speed up and increase design quality of a lot of tasks with generative AI. The product is perfect for companies that don’t have an army of designers in India working on slides overnight. And Gamma specifically makes PowerPoint feel old and tired.
I don’t think I’m going to be using Gamma everyday in the next six months, but it is a great way to get a tangible experience of how AI-powered productivity and design software is going to work.
TechStars has decided to restart its canceled Stockholm cohort, but will close the business once the program is done. Good for the companies involved, but I see the closure as another sign of the boom coming to an end.
History is said not to repeat, but to rhyme. To me this feels more like 2000-2002 than 2008-2009, with a combination of startup specific financial challenges (as a result of very high valuations from Series A to the largest companies on the Nasdaq culminating in 2021) and a general economic downturn.
If I would have to guess, this means it will take more than 2023 for most venture capital-backed startups to work through their challenges and find their balance in the new financial situation. Plan for continued tough times, work really hard to make them good times.
One of the biggest jobs for a startup CEO, if the founders decide to use external capital to invest and grow, is fundraising. It is not something that is done instead of “working on the real business”, it is the real business as much as product development, sales, marketing, recruiting etcetera (just consider that early-stage CEOs will often raise more money from investors than their sales teams will have sold to customers for a long time).
Being a great fundraiser is an enormous advantage when building a startup, as it gives access to more money (at a higher valuation) that can be used to shape the market and hire a great team. One later-stage example of this is Elon Musk and Tesla. By being a great fundraiser and storyteller, he solved very real financing challenges for Tesla so the company could invest in gigafactories and inventory.
As investors meet CEOs raising money everyday, and over time they start to be able to identify great fundraisers. No professional investor would invest in an early-stage startup just because the CEO is great at raising capital, but a good startup significantly increases it chances to raise if it has such a person and a great startup becomes extremely attractive.
It is not only the fact that the person is more likely to convince investors (she is), but also the fact that having a great fundraiser as CEO increases the likelihood of the company, in the future, will raise more capital at a higher valuation. And that is highly attractive.
What makes someone great at raising venture capital? I don’t think there is one formula, but some ingredients are: having the right type of business in a big market, being in a market venture capitalists want to fund (“consensus and right”), some traction, a big vision, interpersonal skills, presenting the right information and being able to run an effective process. And being able to take those and other ingredients and combining them in a simple story that makes it seem inevitable that you will build a very large company.
Understanding who the true decision makers are at a fund, helps founders navigate fundraising better. At Alliance VC we keep it simple, all investment roles are full partners, as we think that is the best long-term approach when seed investing.
You don’t need a partner title to be a good investor, but founders should know if they’re talking with a partner who can write cheques or a principal with a nicer title.
Discussion covers some learnings for startups from the SVB debacle.
One discussion topic towards the end of the program is around deployment speed for a venture fund. I find this interesting as it is, as Mike says, one of few things a venture firm can fully control that lowers risk.
A venture fund normally has an investment period of up to five years (often between three and five years in practice) where the fund makes new investments. Then it has another five years (which can be extended) to make follow-on investments, exit its investments and send the money to the investors in the fund.
One thing that happened in technology fundraising during 2020 and 2021, in addition to high valuations and startups fundraising quickly, was that more venture funds than usual ended the investment period very quickly (in 1.5-2 years) and raised new funds. This means that they only invested at the top of a cycle, as they invested too quickly to get the time diversification a longer investment period gives.
After working at Shockley Semiconductor and co-founding Fairchild Semiconductor, Gordon Moore and Bob Noyce co-founded Intel in 1968. He made the prediction, in 1965, that transistors on an integrated chip would double every year, which became known as Moore’s Law.
It’s a reminder that Silicon Valley and computer, software, networking and mobile type of technologies in one sense is getting old as one of the “founders” passes away after a long life. All while technology continues to develop as fast as ever, currently with generative AI changing perceptions of what is possible today and in the very near future.
Today it was announced that Alliance VC, together with OpenAI, Tiger Global and others, has invested in Norwegian 1X. 1X makes androids (humanoid robots), which is a more futuristic business than most startups we invest in.
In addition to the specific story there are some more general takeaways:
Arne and Alliance first met 1X in 2017, and got to know the founders over several years before making the investment.
1X always had a very ambitious vision, which was attractive already in 2017.
There was a true innovation in the electric motor the company had developed.
Over the years 1X solved many hard problems and added additional solutions in e.g. software and other to the electric motor innovation. This took the technology to a level where customers have put in significant initial orders.
It is easier to succeed with the right investor mix, and we believe 1X has created a strong alliance of institutional and individual investors.
Sports rights attract consumer attention and increases the willingness to spend, both very useful things when building scale, engagement and monetization for a mass-market steaming service like Apple TV+.
Building a company has a lot of nuance and dealing with people and technology is complex. But when it comes to fundraising from venture capitalists (and others) a big advantage is to have a simple story of what you are going to do. Not shallow, but simple (and ambitious).
To take every different variable affecting the future into account when making an investment decision is not possible. Thus investment decisions, in practice, are based on a combination of a plausible stories of the future and numbers.