Despite the macroeconomic headwinds, this year has not been that bad for service-as-a-software (SaaS) startups as they have managed to raise the second largest amount of capital from venture capitalists on record, data from the Silicon Valley Bank indicates.
Thus far in 2022, VCs have poured $48 billion into SaaS startups in a total of 2,518 deals. The California-based bank projects that the total amount could surge to $72 billion by the end of the year – roughly $26 billion less than what investors allocated into the sector the year before.
The Federal Reserve’s actions, war drums in Europe, higher commodity prices, and other similar challenges have apparently not been discouraging enough for investors to keep pushing funding to startups in this particular space or so the figures indicate.
Mature businesses appear to have been favored in the current environment as the median deal size in Series C funding rounds rose almost 16% to $69.5 million while the median pre-money valuation for companies in this stage rose from $411 million in 2021 to $443 million.
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The median value of SaaS deals for startups at earlier stages in their funding path stood relatively flat or experienced mild increases. Meanwhile, the median pre-money valuation for Series A and Series B startups in this space went up by 29% and 6% respectively.
“Investors have slowed down as they continue to assess the impact from sky-high inflation, rising interest rates, depressed public markets and weaker economic data”, analysts from SVB commented.
However, researchers emphasized that some prominent investors were still making an average of “20 to 30 global VC deals per month”. The study suggests that late-stage companies and top-quality startups should have no problem raising more capital while businesses that are still struggling to establish proof of concept may have a “tougher time”.
Down-Rounds Not in Fashion as SaaS Startups Rely on Reserves and Other Mechanisms
In striking contrast with what is going on in the public markets, the number of down-rounds for startups in the SaaS space has kept declining as a percentage of total deals. Data from SVB suggests that the percentage has moved from 11.7% in 2021 to 7.9% thus far in 2022.
Analysts from SVB Bank state that one of the reasons why down-rounds have ticked higher is that startups may also be relying on other mechanisms to raise the capital they need such as debt facilities and extensions from existing investors.
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Moreover, they could also be taken some “internal considerations” such as improving the economics of their business, managing expenditures more wisely, and shunning a bit the VC-pressed premise of growth at all costs.
“The relative cash “richness” of startups today makes some of these considerations to avoid a down round less immediately relevant. However, many are beginning to understand that hedging against a tight liquidity market in 2023 or beyond via raising debt is another way to protect their businesses” the report stated.
“Already, we have seen debt requests skyrocket during this uncertain market”, researchers noted.
Lofty VC Valuations from 2021 May be Fading but Not for All Sectors
SVB researchers also dug into data concerning funding round step-ups. These events occur when startups manage to raise capital at a higher valuation. In this regard, the research suggests that the predominantly lofty valuations that dominated the space in 2021 are started to show signs of easing.
The sharpest decline in step-ups across series was evidenced in late-stage startups as the median step-up percentage dropped from 169% to 107% from 2021 to 2022 for Series C and Series D funding rounds.
However, the report noted that not all sub-sectors of the SaaS space behaved in the same manner as step-ups in the cybersecurity and enterprise applications segments were notably higher than the mean during Series B (early stage) rounds.
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