Pieces of SaaS exit cake

I recently published a post about the best time to leave the VC path. Based on latest data, this appears to be after the seed round.

In general, I think it's a good strategy to raise some money initially and then continue to grow sustainably.

But what if you continue to play the VC game?

What does an exit have to look like to make it more attractive than bootstrapping?

In purely financial terms, let's leave the other aspects aside.

According to Carta, Q4/23 valuations and round sizes are as follows (please note that their data mainly covers US startups):

Round sizes & valuations | Source: Carta

There is an older chart from Carta that shows how much equity you usually give up in each round.

Source: Carta

Due to lack of data, I assumed another 5% for Series E+.

See below remaining founder stake post investment (if we disregard a possible ESOP pool etc.).

Compared to 2020/21, the milestones required to reach each stage have been raised. I'll use Christoph's 2023 SaaS Funding Napkin as benchmark here.

Source: Christoph Janz (P9)

Unfortunately, I couldn't find any reliable data on late stage rounds as the air gets pretty thin there.

I assumed that the multiple for Series B and beyond would gradually move towards public multiples (median currently at ~6x).

If you take the upper limit of the required ARR range for each round, you get the table below.

Looks like it is ~10x ARR in the early stages and then slowly decreases. Could also be much higher if you raise a round at similar valuations with a lower ARR. Or vice versa.

To receive any of the exit proceeds as founders, the exit must be higher than the amount of money raised (assuming a 1x non-participating liquidation preference, which is kind of standard).

Let's look at three scenarios:

  1. Shit hits the fan and there is a fire sale for 1x ARR.

  2. Exit at current median private market multiple (5x ARR)

  3. Attractive exit to a strategic for 10x ARR.

Info about liquidation preference:

With a 1x non-participating liquidation preference, the investor has 2 options:

  • Exercise liquidation preference and get 1x invested money back

  • Participate in the exit in proportion to your shareholding

If shareholding x exit proceeds is lower than the money invested, they would exercise the liquidation preference. Otherwise they would not.

The first scenario (fire sale) is sad but simple: $0 for founders, regardless of the stage. For the other two, see below.

Let's compare this with a bootstrapped SaaS startup that grows less quickly but is profitable and is wholly owned by the founders. It may sell for less, say 2.5x ARR.

(I know that bootstrapped startups rarely get to a high ARR - it's just hypothetical)

Not looking to start a debate here about VC vs. bootstrapping. Both models can make sense, depending on the circumstances.

Just want to use examples / data to show that the "I have to go the VC route to win big” is not always true.

It can make sense to lay out the cards early in order to decide which path looks more promising. And to keep iterating along the way.

Disclaimer: The article is a great simplification and may contain calculation errors.