For you, just *surviving* this year's downward pull isn't enough. You want to thrive, even grow. And, you have your eyes set on Series A funding.
Well, it's not off the table, but it won't be easy. So how do you do it?
This hasn't exactly been the year for growth—to put it mildly. So far, 2022 has been bearish and lean, and VCs have pulled back. They’re slower to part with their cash, and if they do, they’re less generous.
And while B2B companies (especially in the UK) may be slightly better off, they still face storm clouds ahead.
Sharp CEOs and founders know when it’s time for nuance. And for the right players who play their cards right, there might be the opportunity to aim for and to even *get* that Series A they’re gunning for.
🔑 The key is high growth—at least, for ambitious B2B seed companies that want to shine 🌟
Indeed, according to VCs we talked to, a 300% to 400% growth rate is *the* height to aim for. And, even with lower growth, there’s still a chance to close that funding.
Where do we stand?
Sure, the landscape remains as uncharted as ever. Gone are the days of cheap capital, for now.
Bear markets tend to be short-lived, it's true. But, preparing for a continued downturn and a correction will set shrewd founders up for success, even when the waters get less choppy.
After all, navigating an uncertain future is a skill we’ve *all* learned to appreciate in the past few years—especially in the market setting.
It hasn't all been doom and gloom, after all. Recent times have also:
- Brought more clarity 👓
- Blown away the speculative froth
- And, demanded more metric-backed excellence 📊
Overall, it’s no longer the time for a flamboyant pitch or unsustainable metrics. However, it's also important to factor in differences worldwide, in Europe, and in the UK.
Globally, the venture ecosystem had continued its slowdown as of Q2 ’22. Meanwhile, recent Dealroom figures show investment falling from 2021 highs for European fintechs. Still, that doesn’t mean there’s *no* fundraising or scaling. Here, it’s consumer-facing businesses that face the steepest climb, one slightly less arduous for companies with a strong tech component.
Meanwhile, in the UK, fintech bucked a downward trend. We’ve seen an increase in year-on-year fintech investments for the first half of this year, going up by 24%. In fact, it ranks second in the world for startup funding this year…and this, after a record Q1. This is above India and China, behind only the US.
The UK is also now home to over a third of the fastest-growing next-generation tech companies in Europe…as well as over 100 unicorns 🦄
So, it’s safe to say that *some* B2B seed companies might be safe to aim for that Series A—even in these rough waters.
Aim for four-fold
Let’s dive in. The VCs we talked to include:
- Hussein Kanji, Partner at Hoxton Ventures;
- Natasha Jones, Investor at Octopus Ventures;
- Mattias Ljungman, Founder and Managing Partner at Moonfire Ventures;
- Hector Mason, Partner at Episode 1 Ventures;
- Rich Ashton, Managing Partner at FirstPartyCapital.
It's important to remember that the answers brought as much variety as they did insight. Below, we relay as much clarity as possible to guide you forward!
TL;DR, the guidelines for growth rate are:
- ☹️ Bad: Less than 2x
- 😐 Ok: Above 2x
- ☺️ Good: Above 3x
- 🤩 WOW: 4x
Growth rates: the good, the bad, and the ugly
First, let’s start with the bad. The range to avoid sits below the 2x YoY growth, where under 100% to 50% varies from OK to less than desirable, according to VCs we spoke to.
Hector Mason explains that in a low range it will be “hard to raise a Series A,” unless, he says, “you're building amazing technology, solving a huge problem, and are excellent at selling the story.”
Above a two-time year-over-year growth, securing Series A starts to be easier—but only with decent margins and capital efficiency, says Mason.
Both Mason and Kanji agree that threefold would qualify as “good.” But remember, Mason says, you still need a “compelling story to go with the growth.” This is, according to him: “great tech, big market, interesting roadmap, impressive talent acquisition and retention.”
Meanwhile, Mattias Ljungman from Moonfire Ventures explains that “the higher the growth multiple, the higher the valuation.” He elaborates:
Investors are more careful about good growth vs bad growth. Good growth has strong retention, low marketing costs and from logo customers.
Growth rate below $1m should be around 20-40% mom. Above $1m we are looking at 15-20% mom.Mattias Ljungman
And now, for the *wow* growth rate, the fantastic upward trend that will truly show your value. Here, you should be aiming for as close to 400% as you can get. Hussein Kanji tells us more:
The great public market companies are doing 40% growth. For instance, Microsoft Azure grew 40% and has been 50%. Since growth rates diminish as you get bigger, if you work backwards, a startup at the early stage should be growing at least 400% to be considered great.Hussein Kanji
Each company is different, of course. But when it comes to software companies, new revenue is one element of this, says Kanji. Comparing it to a pyramid, he points out how accounts “stay on and stack upwards, as businesses continue using the service.”
And, Kanji says, you’re going to want to make sure your retention is high, that your customers are staying on with you and increasing their spend.
That means your gross retention (logos) have to be above 90%, and your net retention (spend) should be closer to 120%. You should be able to expand your base inside a company.
If you factor all of these together, it isn’t far-fetched to see 400% growth.Hussein Kanji
And, if you’re not on track to hit that 400% target, not all hope is lost. Here’s what can help tip the scales in our favour, said some of our VCs:
- 📈 Margins
- 💰 Capital efficiency (like burn multiple, hype ratio, and more)
- 📱 Great tech
- 👥 A big addressable market
- 💪 Founder track record and perceived ability
- 🗺️ An interesting roadmap
- 🧑💻 And, impressive talent acquisition and retention
“Investors' decisions are never based on only growth,” says Mason.
Rich Ashton breaks down the focus on capital efficiency, especially when it comes to B2B SaaS. To put it "in plain English," he says, this is how much the startup spends to generate £1 of revenue. He elaborates:
If a company is growing at 200% per year but spending £4 for every £1 in revenue, then actually the company that is growing at 100% YoY using £2 to generate £1 of revenue could be a better investment, particularly as we head into increasingly choppy economic waters.Rich Ashton
Hussein Kanji also weighs in on the burn multiple industry convention. As a quick reminder, this is “a company’s net burn divided by its net new ARR in a given period, typically annually or quarterly. This formula tries to ascertain how much a startup is burning to get the next dollar of new revenue.”
The blueprint, overall? "The lower the burn, the more efficient the growth,” says Kanji.
Another way to offset lower growth: showing how you’ve set the foundations for great growth in the future, says Kanji.
Size of market and quality of team often can overcome the growth rates. But seeing a company put in the pieces they need to get to high growth rates in the future is often the easiest. If you believe they are building the foundation for high growth and can achieve this level of growth after the foundation is set up, it’s easier to invest. Of course, this is more true for companies that need more time and energy to build a foundation. It’s less true for companies that should hit the ground running from day one.Hussein Kanji
What are the other considerations?
There are, of course, other elements that are considered when assessing growth rate.
The industry might dictate which ones, for instance. Rich Ashton explains, using deeptech as an example:
Depending on the sector (e.g. deeptech), the company could be investing heavily in IP, which may result in a longer period of no/low revenue. If so, then there would be other factors/milestones to consider rather than revenue.Rich Ashton
And while good margin and capital efficiency are a consideration when it comes to revenue…where the revenue comes from is also important. Hector Mason poses the question:
Is it upselling to existing customers? If so, that's a good sign as long as you can also win new customers. Is your revenue all from the low-hanging fruit? If you've found some easy-wins early on, it might be hard to scale those channels which could be concerning to investors. The gold standard is scalable, high-margin revenue in a very big market.Hector Mason
Further, Mattias Ljungman highlights the importance of strong revenue retention, team, and business model. The latter, says Ljungman, “can transform an opportunity, as it almost becomes a machine that, on its own, drives growth and revenue.”
Timing is everything
You may have heard that the timing for decision-making has changed in recent times. You might have even heard it's a lot longer. Let's take a closer look, shall we? 🔎
Rich Ashton, for one, estimates the market has "returned to a 3-6 month period for raising." He also reminds that some firms remained disciplined even at peak of 2021 frothiness, avoiding rushed DD.
Meanwhile, Natasha Jones from Octopus Ventures advises founders to plan ahead “for a 6-month fundraising period" and suggests beginning "proactively updating and engaging with investors ahead of time.” She also urges:
As the market softens, capital efficiency and unit economics become increasingly important and, for some investors, can outweigh the excitement about growth rates if they are too far off industry benchmarks.Natasha Jones
VC decision-making time may be influenced by a knock-on effect, too. Hussein Kanji weighs in:
People in our community often look to others for inspiration. But if everyone is uncertain, then no one does anything and the industry as a whole catches a cold of sitting on the sidelines. There’s a reason for this as well. If the markets are going down, you don’t want to be the one doing deals and running the risk of catching a falling knife. It’s easier to sit it out until there is stability again. That's the period we’re in at the moment. There is a lack of confidence driven by the uncertainty of the wider macroeconomy, so a lot of folks are waiting it out.Hussein Kanji
OK, so right now there may be less confidence in the air, and many are more focused on diligence and efficiency. But, if they're doing things right and standing on solid ground, this is also also a time when the bold can shine—as long as they’re not reckless.
What’s more, this is just one way to get to the next level: there are plenty of other opportunities.
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