Round Dilutions, User vs. Revenue Retention, SAFE vs. Convertible, SaaS IPO Playbook & More
Digesting Insights From the Data
👋 Hi, I’m Andre and welcome to my weekly newsletter, Data-driven VC. Every Tuesday, I publish “Insights” to digest the most relevant startup research & reports, and every Thursday, I publish “Essays” that cover hands-on insights about data-driven innovation & AI in VC. Follow along to understand how startup investing becomes more data-driven, why it matters, and what it means for you.
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Welcome to another “INSIGHTS” episode where we cover the most interesting startup research & reports from the previous two weeks.
We read all reports, studies, and papers about startups and the wider ecosystem, and condense the most important insights for you.
The only source you need to keep up with data-driven startup insights.
Ivy League to Silicon Valley: Mapping the Unicorn Founder Trail
In the quest to uncover the graduate programs most likely to produce unicorn founders, a new analysis by Ilia Strebulaev reveals intriguing insights into the academic origins of these rare business leaders. This study not only highlights the elite institutions that have become hotbeds for innovative entrepreneurship but also underscores the nuanced landscape of higher education's impact on the startup ecosystem.
Yale University stands out with an 80% higher likelihood than the average of producing unicorn founders, leading the rankings.
Stanford University and MIT tie for second, each offering a 40% increased chance of alumni becoming unicorn founders, showcasing their significant influence in the tech and business worlds.
Columbia University and NYU round out the top spots with a 30% higher likelihood, indicating their roles in fostering entrepreneurial success.
✈️ KEY TAKEAWAY
Yale, Stanford, and MIT remain the clear leaders in producing unicorn founders in the US. Their odds are substantially higher than those of other universities.
Decoding Round Dilution: How Much Equity Should You Sell?
20-30%, this is the typical answer when asking investors for standard round dilutions in Seed or Series A. In reality, however, round dilutions depend on a range of factors. Peter Walker at Carta analyzed data from 17k primary rounds since 2020 and sheds light on the evolving dynamics of equity distribution from seed to later stages, amid a backdrop of inventive financing strategies.
Priced Seed Rounds saw a median dilution of 20.6% in 2023, indicating a slight decrease from 2020, yet remaining steady from the previous year.
Series A Rounds experienced a median dilution of 20.1% in 2023, continuing a subtle downward trend observed over the last four years.
Series B Rounds recorded a median dilution of 17.6% in 2023, a slight increase from 17.1% in 2022, suggesting a nuanced shift in founder-investor equity agreements at this stage.
Series C and D Rounds show more significant founder retention of equity, with medians of 13.4% and 11.5% respectively in 2023, pointing to a strategic consolidation of ownership as companies mature.
✈️ KEY TAKEAWAY
While there is quite a bit of variance in how much equity is sold each round there are best practice numbers that will help you navigate future funding rounds.
How SAFEs Changed the Game: Early-Stage’s Favorite Funding Instrument
In the fast-paced world of startup fundraising, the Simple Agreement for Future Equity (SAFE) has emerged as the preeminent vehicle for pre-seed rounds.
A staggering 89% of all pre-seed funding, defined here as any raise under $1 million, flowed through SAFEs in Q4 2023, leaving convertible notes in the dust. Here's why the SAFE is the go-to choice for founders and investors alike:
Dominance in the Field: SAFEs accounted for 89% of all funding and 85% of all signed notes for pre-seed rounds in the last quarter of 2023. This trend is particularly pronounced in sectors like SaaS, Fintech, Gaming, and Edtech, where over 90% of fundraising utilized SAFEs.
Founder-Friendly Terms: Approximately 80% of these agreements were post-money SAFEs, the Y Combinator default, offering a more favourable setup for founders.
Sector Specificity: While SAFEs rule the roost in most industries, Convertible Notes still capture at least 30% of funding in Medical Devices, Pharma/Biotech, and Energy sectors, highlighting a nuanced landscape.
✈️ KEY TAKEAWAY
The rise of SAFEs, particularly since the pandemic began in Q1 2020, underscores a shift towards more founder-friendly, efficient fundraising mechanisms. However, the debate continues on whether the simplicity and speed of SAFEs outweigh the long-term benefits of priced equity rounds, especially in terms of dilution management and investor diligence
SaaS IPO Playbook: Mastering the 2024 Market with Metrics and Timing
In the shifting sands of the SaaS IPO landscape, the recent analysis by ICONIQ Growth Analytics offers a deep dive into what's driving success in public markets as we move into 2024 and beyond.
After a quiet period, the SaaS sector saw renewed IPO activity in 2023, with notable entries like Klaviyo and Instacart, despite their valuations not meeting the high-water mark of 2021. This report unpacks the evolving market dynamics, investor preferences, and the crucial metrics that now dictate IPO viability in a more cautious economic climate:
The landscape has decidedly tilted towards favouring companies that can demonstrate efficient growth with strong bottom lines, marking a significant change from the growth-at-all-costs era.
Key performance indicators such as the Rule of 40, year-over-year growth, and net dollar retention rate have emerged as primary drivers of valuation, underscoring the market's prioritization of sustainable growth.
With an eye on the broader economic environment and upcoming events like the US presidential election, the timing of IPOs in 2024 is expected to be strategic, focusing on the summer months for the bulk of activity.
✈️ KEY TAKEAWAY
As we navigate the complexities of the current SaaS IPO environment, it's clear that achieving a successful public offering now demands not only stellar growth metrics but also a robust financial profile and strategic timing. This paradigm shift towards valuing profitability alongside growth signals a maturing market where only the most prepared and efficient companies will likely thrive.
Also relevant in this context: BVP’s recent “Rule of X” concept shows that different from the “Rule of 40”, growth is higher valued than profitability.
Sales is Dead - Long Live Sales! How B2B Sales Teams Adapt
The 2024 B2B Sales Benchmark Report by Ebsta and Pavillion unveils the evolving challenges and strategies within the B2B sales domain, illuminated by insights from $54 billion in revenue across 530 leading companies.
As the landscape adapts to post-ZIRP realities and the aftermath of significant market events like the collapse of Silicon Valley Bank, sales teams are forced to innovate and optimize amidst tightening budgets and increasing demands.
Amidst a bear market, sales teams have navigated an 18% dip in win rates alongside elongated sales cycles and reduced deal values, underscoring the necessity for agility and strategic foresight in sales processes.
With 69% of sales reps failing to meet quotas, the report highlights the critical delta in performance between top performers and the average, emphasizing the importance of effective pipeline management, objection handling, and relationship cultivation.
The analysis identifies key factors contributing to top performance, including prioritized pipeline generation, rigorous qualification, and strategic deal management, offering a blueprint for sales resilience and efficiency.
✈️ KEY TAKEAWAY
The 2024 B2B Sales Benchmark Report highlights the power of data-driven strategies, efficiency, and adaptability. As sales teams grapple with the challenges of a tightening market, the value of top performers only rises.
Cracking the Retention Code: What Great User And Revenue Retention Look Like
Navigating the murky waters of business growth, Lenny Rachitsky's latest newsletter dives deep into the crucial world of retention metrics, unraveling what constitutes GOOD and GREAT retention across different business models.
This Delphi-study inspired expert interview is less about throwing numbers around and more about understanding the lifeblood of successful businesses: keeping customers hooked.
For those in the Enterprise SaaS realm, good user retention hovers around 70%, but reaching the zenith of 90% marks the transition from merely surviving to truly thriving in a competitive landscape. This insight isn't just a number; it's a testament to the power of creating value that keeps large-scale clients engaged and invested over the long haul.
Beyond just keeping users, how your revenue sticks around tells a more in-depth story of growth and sustainability. For instance, a consumer SaaS hitting an 80% net revenue retention rate isn't just growing; it's thriving on a loyal customer base that sees value in sticking around.
What sets this analysis apart is the actionable advice wrapped around these metrics. It's not just about reaching these numbers but understanding what they mean for your business strategy and how they can guide your path forward in building a product or service that not only attracts but retains.
✈️ KEY TAKEAWAY
This article isn't just a peek into the retention rates that define the good from the great; it's a roadmap for startups and established businesses alike to benchmark their growth strategies against industry peers. It emphasizes that while high retention doesn't happen overnight, it's a clear signpost of a business's health and long-term viability.
Thanks to Jérôme Jaggi for his help with this post.
Stay driven,
Andre
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