What’s the right pace for raising capital?

Identifying patterns from 21 SaaS IPOs

A common question in the minds of many SaaS founders is the pace of raising capital. How much is too much too early? What amount of capital raise is typical for comparable peers? How capital-efficient are the best-in-class companies?

In the last 30 months (2017 2H onwards), a total of 21 SaaS U.S.-based, VC-backed companies have gone public, including Zoom, Slack, Datadog and others1. To answer the above questions, I analyzed all 21 companies to understand their fundraising and revenue-generating trajectories.

The charts below show each company’s annual run-rate revenue (ARR)2 and cumulative equity funding3 over time. Read endnotes for details on data source4 and methodology5. The backup for the full analysis can be accessed here.

I divided the companies into four patterns:

1. The most common pattern

Most commonly, the two curves track each other closely, intersecting multiple times throughout the company’s life leading up to the IPO. At times, ARR is ahead of capital raised, but at other times, the opposite is true.

PagerDuty is a prime example of this pattern. Every time the ARR exceeded the total capital raised, a new round of funding followed, usually within a few quarters. Each funding took the total capital raised back above the ARR and the cycle would repeat. As a result, the two metrics were never too far apart.

I suggest this as a heuristic for SaaS founders regarding fundraising timing: ARR exceeding the total capital raised is a healthy sign that the company is ready to raise a fresh round of capital. There are almost no examples in the entire data set of ARR exceeding total capital raised for extended periods of times, unless the company was approaching an IPO.

2. Capital-hungry companies

Many companies can be described as capital-hungry, their raised capital outpacing ARR from early on and the two curves never intersecting.

Domo is the most extreme example, where the gap widens aggressively over time, its raised capital reaching 5.4x of ARR by the time of its IPO. Domo raised $690 million of capital and spent through most of it to get to just $128 million of ARR at its IPO. The cash burn suggests Domo’s capital-raising was need-driven.

Slack is an interesting example because, despite its abundant fundraising that reached 2.6x of ARR by the time of its IPO, 60%+ of the raised capital was left intact on its balance sheet. The company could have almost omitted its Series G and Series H totaling $840 million of funding. This suggests that Slack’s fundraising was likely more market-driven than need-driven.

What allowed these companies to raise a lot of money from early on?

A common thread across the most salient examples like Domo, Slack and MongoDB are that their founders already had high-profile exits under their belts, like Flickr, DoubleClick and Omniture. Investors are likely to have placed a premium on their track records leading to higher valuations and bigger rounds earlier on.

3. “Capital-lite” companies

On the other end of the spectrum, truly “capital-lite” companies whose ARR was consistently ahead of raised capital are a rare breed.

SendGrid is the only example that comes close to meeting this bar. Its ARR was ahead of capital raised for at least 10 quarters prior to the IPO, and possibly longer. This is an accomplishment unmatched by any other company in the data set.

4. Bootstrappers

Qualtrics, Tenable and Zscaler are worth calling out because they were uniquely able to reach IPO with just two or three rounds of institutional funding. They bootstrapped through early growth, effectively skipping early-stage rounds and moving straight into growth equity rounds.

Accordingly, their first institutional rounds were much larger than the typical Series A investments. Qualtrics, Tenable and Zscaler raised $70 million, $50 million and $38 million, respectively, compared to the average $10 million Series A for the other companies in the data set.

While bootstrapping allows for less dilution and more founder control, it comes at the cost of slower growth or self-funding from deep-pocketed founders. Qualtrics and Tenable both took 16 years until their IPO, notably longer than the non-bootstrapper average of 11 years. Zscaler took 10 years, but that was made possible by its founder Jay Chaudhry fueling early growth with his own money.

Conclusion

If you are a SaaS founder, here are some questions to apply to your business. What does your historical ARR and funding curve look like when juxtaposed against each other? Which of the above four patterns does your company most closely resemble? Is your funding need-driven or market-driven? If your ARR is fast catching up to total capital raised, is now a good time to consider raising a new round?

Thanks to Elad Gil and Denton Xu for reviewing drafts of this article.

Endnotes

1Only includes U.S.-based, VC-backed SaaS companies. Includes Quatrics even though it did not go public, as it was acquired right before its scheduled IPO.

2Note that this is not annual recurring revenue (also ARR), which is not a reporting requirement for public companies. Annual run-rate revenue is calculated by annualizing quarterly revenue (multiplying by four). The two metrics will track closely for SaaS businesses, given that SaaS revenue is predominantly recurring software subscriptions.

3Includes institutional investments prior to the IPO. Does not include founders’ personal capital investment.

4ARR data is mainly sourced from the IPO prospectus (S-1), which provides up to 10 quarters of business performance prior to the IPO. More dated ARR information is sourced from miscellaneous online sources like the company blog, Inc 5000 and various SaaS blogs. All equity funding data is sourced from Crunchbase.

5The ARR curve is an estimation — it represents the best-fitting exponential curve based on the available historical data points (the red dots). Given the sparsity of early-stage revenue data for most companies, the early portion of the ARR curve may not be an accurate depiction of the company’s actual growth.