More than 60 percent of startups stall in their fundraising, according to an in-depth analysis of startup survival rates by Crunchbase News.

In their extensive study, the research firm followed a cohort of 15,600 U.S.-based tech startups founded between 2003 and 2013. Of the cohort the Crunchbase News study tracked, they found that fewer than one in five venture-backed companies exit via M&A.

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While there was not one single round when companies stalled out, Crunchbase News notes that it was much harder to raise a Series A than the subsequent B (contrary to the phrase “”). Given recent fundraising trends, Crunchbase’s data may even be understating how difficult it is for startups to break through.

Seed and Series A deal volume is declining at the same time average round size is in the midst of an upswing, according to other Crunchbase News reporting. With larger seed rounds, startups have enough runway to demonstrate traction. That allows investors to bet bigger, earlier, and with higher conviction. The result is a flight to quality: the best performing startups are raising huge sums of money in extremely competitive fundraises at record-breaking pre-money valuations.

Series A Is The New Series B

So what does it take to raise your next round in 2018?

To find out, we combed through data from our . Our dataset covered 420 companies across all stages of growth from Seed to Series D. It spanned across geographies with significant representation from North America (57 percent of participants), Europe (20 percent), and Canada (12 percent).

There were a few table stakes criteria to attracting venture funding. The following metrics do not materially change from Series A through Series D rounds:

• Recurring revenue: Subscription revenue almost always accounts for 80 percent or more of total ARR.

• Healthy unit economics: Customer acquisition cost (CAC) payback periods are 12 months on average and range from 6-18 months (although CAC payback does increase in Series D rounds).

• Sticky products: Customer retention is 85-90 percent on average, and it is almost always above 80 percent.

• In-account growth: Net dollar retention (NDR) is generally 100 percent or above with best-in-class companies showing north of 115 percent NDR.

Now let’s deep dive into each round.

Series A

Less than half of seed-funded startups actually go on to raise a Series A round (42 percent), according to Crunchbase News. Given the increase in seed-stage deal sizes, and the trend of splitting seed funding into multiple different rounds, companies are more mature when they go to raise their Series A. Those that recently raised a Series A in our survey already had $1-4M in ARR, much larger in scale than what is traditionally thought of as a Series A.

These companies aren’t growing as fast as is typically expected. Average growth rates were only 80-180 percent YoY. Anecdotally, many Series A investors don’t get excited unless a startup is growing at 200 percent or more (as is backed up by a recent Series A and B run by ). This either indicates that slower growing companies are able to find capital from non-traditional investors (such as corporate venture arms or alternative growth financing) or that investors have lowered their standards in recent deals.

There is also already a major distinction between top performing companies compared to everyone else. The companies that have reached $1.5M-$2M in ARR and are growing 3x or faster are able to raise , which would traditionally be reserved for a Series B.

Series B

26 percent of seed-funded companies ultimately go on to reach a Series B. Successful companies are firmly in the expansion stage at this point. They have demonstrated product-market fit, shown signs of repeatability, and have started to build an efficient go-to-market engine. The name of the game is to scale as quickly and efficiently as possible. In other words, it’s time to pour buckets of cash into sales and marketing.

We actually see an acceleration in growth rates among Series B companies as compared to Series A, averaging between 125-175 percent YoY growth. At this stage, companies increase their sales and marketing spend to between 50-75 percent of their ARR and see burn rates rise to $300k-500k per month.

A word of caution: As you pour cash into sales and marketing, carefully track the return on your investment and where you’re wasting money. Doing so requires defining your leading indicators that predict the future success of your sales team such as time to first deal, time to quota, and average quota attainment. It also means that you should be using these indicators to optimize existing practices before layering in new reps or new channels. (For more advice, check out OpenView partner on moving from benchmarks to action.)

Series C

At Series C, investors are looking for continued growth at scale. This round is difficult to reach: only 16 percent of seed funded companies in the Crunchbase News study were able to raise a Series C round.

Growth rates remain elevated during this period (80-150 percent), although they start to slow down on average compared to Series B. Sales and marketing spend stays high as well, leading to burn rates of $450k-900k per month.

It’s especially important to maximize existing customers during this period, as average net dollar retention declines from 105 percent to 99 percent. Make sure that product, pricing, and sales incentives accommodate upsell paths for ongoing expansion. As you build new products, pay careful attention to how you’ll monetize those products from your install base.

Series D or later

At Series D and beyond, the ranks significantly thin out. Just six percent of seed-funded companies make it this far.

Growth at all costs only works for so long and growth will eventually slow as a company reaches scale. That starts to show up at Series C and continues into Series D, with average growth rates decelerating to 60-93 percent YoY.

At this point, it becomes important to start evaluating growth in the context of profitability and to monitor your Rule of 40. Companies start to throttle back on their sales and marketing spend at this stage, reducing their monthly burn in the process to $300k-750k per month. This helps these companies create optionality for potential exit opportunities, whether that be an IPO, acquisition by a large strategic, or increasingly, a .

What To Take Away

Looking at our investment pipeline, we don’t see these trends slowing down. In 2019, expect to see even more bifurcation and VCs continuing to bet big on standout companies.

We hope this information and more included in our 2018 Expansion SaaS Benchmarks provides you with a clearer understanding of what it takes to raise your next round, when and how to go about doing so. You can find the full report complete with statistics on fundraising, diversity, pricing, and more, .

This post was written by of , an expansion-stage venture firm based in Boston. Per OpenView, “Kyle helps OpenView’s portfolio companies accelerate top-line growth through deep insights into their market landscape and customers. He leads segmentation, positioning, channel/partner strategy, new market entry and packaging/pricing initiatives, partnering closely with portfolio leadership teams. He also covers OpenView’s SaaS metrics and benchmarking research.”

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It’s not hard to see continued investor enthusiasm in tech companies of all sizes. Venture activity keeps setting new records, late-stage private companies have infinite access to capital, IPOs are finally back to form, and the public markets are frothy and warm, provided that your company is not focused on social media.

Perhaps most notably, investment into modern software is rising again, Crunchbase News recently reported. Present-day software shops, which mostly sell their wares on a subscription basis (known as software-as-a-service, or “SaaS”), have seen some large recent public debuts, including Dropbox’s own. The Dropbox IPO was well-received by the market, quickly pushing the San Francisco unicorn to a higher public valuation than the one it last commanded while private.

Behind SaaS’s resurgence in the private markets, I suspect, are good metrics from public SaaS companies. Today, we’ll unpack that to better understand the current state of SaaS, especially from a valuation perspective.

10x

As we often do we’re leaning today on the data compiled by the , which tracks a number of public companies that work in the cloud space. Think and and and . SaaS shops.

Today we’re bringing the Index back up as one of its listed metrics has reached a nice, round number. And we humans love those.

Per the dataset, public cloud companies (SaaS unicorns, often) are trading for a 10x trailing enterprise value-revenue multiple. In English, that means that the average company on the Index is worth 10.0 times its 2018 revenue.1That figure falls to 8.2 times when present-day enterprise values are compared to 2019 revenue.

These are rich multiples that the market has been building for some time, as we’ve seen. But the 10x multiple seems pretty ecstatic given the following companion metrics from the company set in question:

• 72 percent mean gross margin (could be higher);
• 22 percent 2018 to 2019 revenue growth (could be higher);
• 11 percent anticipated free cash flow in 2019 (could be higher).

Therefore, the firms that are now averaging a 10x current-year revenue multiple aren’t growing too quickly and aren’t too profitable. Indeed, if we take the Rule of 40 (more on similar metrics here in theory, and here in practice) to mean growth rate added to free cash flow, the average company on the list fails in 2018 and 2019.

If we use a stricter profit metric for the Rule of 40 test, the average company on the list is even further from whole while sporting that same 10x multiple.

Our multiple becomes a bit more conservative if we turn to median numbers, but only some. On a median basis, the middle Cloud Index company has 2018 revenue-enterprise value multiple of 8.6. That’s , historically. Also growth and free cash flow metrics are roughly flat on a median basis, compared to the mean figures.

So this is where we are in middle-ish 2018: fat multiples for SaaS companies that are only so attractive, on a mean and median basis. How long this stands up depends on the public markets, which, as we noted at the start, are pretty hype today.

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