Earlier today, TechCrunch caught up with Chris Sugden, a managing partner at Edison Partners, to talk about the current fundraising market, what’s next for SaaS startups and if there’s any good news to be found in today’s market.
As the stock market continues to gyrate (more up than down), and the unicorn exit market looks increasingly moribund, understanding how private investors are putting capital to work today and over the next few quarters is critical for startup founders. A host of startups that would have normally raised in Q1 of this year did not. The fundraising market they encounter the rest of the year will help determine their business trajectory.
Before we dive into our Q&A on all that, a short note on Edison Partners. Edison is a growth equity firm, which, according to Sugden, means that its checks range from $5 million to $30 million, with a “sweet spot” between $10 million and $15 million. Regarding stage, Sugden said that Edison looks to put capital into companies with between $8 million and $20 million in revenue, noting that the larger companies stretch his firm’s check size to the max.
About 75% of the firm’s investments are in software-as-a-service companies (SaaS), with the other 25% going into other types of startups. According to the investor, the average growth in Q4 2019 of the firm’s 12 investments from its ninth fund was about 100%, compared to the year-ago period.
So, Sugden is an active investor at a firm that has been around for a few decades with a good-sized account from which to invest. Let’s dig into how he sees the market shaking out.
Fundraising in 2020
The following excerpts come from TechCrunch’s chat with Sugden, which we’ve grouped and edited for clarity. We’ve peeled back the conversation, allowing us to pull out the parts that felt the most useful for startups. We start with his view of the 2020 venture capital market.
TechCrunch: As the world changes around us, are you encouraging portfolio companies to grow a little bit slower, to scale back sales and marketing spend?
Chris Sugden: Yesterday we literally held what we call a portfolio review meeting, where we tore down fund eight and nine, which is about 30 portfolio companies combined, and dug into this exact question. And number one, the real-time thinking and guidance to our companies is: Let’s keep our wits about us.
Number two, if you are planning to raise money this year, just know your best case is probably Q4, and we probably don’t think you should be thinking about raising money from outside [investors] because frankly, we’re just not able to tell how long this is going to be people holed up in their bunkers. The reality is gonna be a bunch of people guarding their own portfolio companies and taking care of their children they already know versus knowing new ones.
Saying that fundraising could be delayed to the fourth quarter is pretty brutal. His notes on inside rounds are less of a surprise, especially as in recent quarters inside rounds have lost much of their formerly negative stigma. Gone is the view that inside rounds are a sign that a company had to return to the same well to raise more capital, implying that it couldn’t find another source. In the market right up until the global economy slowed, inside rounds were indicators of a company being hot, as their preceding investors were busy putting as much of their capital into the business as they could.
Next, we wanted to know what’s changing for SaaS companies today, a key startup category that has lost some of its shine in recent months as its valuation interval has contracted.
What’s changing for SaaS companies today in the new, worse market?
- “In the ’08 recession, the best thing I can take from it, and I’m seeing it right now, literally right now in the last week: Enterprises freeze, mid-market businesses and large businesses don’t.”
- “What we saw in the Great Recession back in ’08 was that enterprises began to demand ROI inside of 12 months.”
- “You’d better be able to prove your ROI in a very short period of time [with] the enterprise. The mid-market is a lot easier to deal with, because they will keep moving along.”
- “The enterprise is not going to close anything. And I would literally doubt, unless deals were on the CEO’s desk to sign […] before people went to work from home, that the pipeline’s gonna freeze for anywhere from one to two to four months. And I say one to two, because that would be the rest of March into April. And I say four because it may not unfreeze again until June.”
This is useful advice for startups, especially if they are focused on selling software to the largest companies in the market. Sugden added that many startups book sales in the final two weeks of any quarter, making the current situation something of a “double whammy” for those firms.
Sugden summarized his views for TechCrunch on what 2020 will look like as follows:
“My best advice, one, is the cash you got from insiders, your [current investors] is what you’re going to get for most of 2020, if not all of 2020. And then the second bit being Q1 and Q2 are both going to be tough bookings quarters, particularly if you sell to the enterprise. If you sell mid-market and longer tail, and, frankly if you’re [selling to] a B2C customer where you’re almost all e-commerce, you have a reasonable shot to believe things will keep on moving along.”
There was nearly a glimmer of hope there for SaaS startups not selling to the largest companies, so we asked Sugden about possible good news and if there was any good news to be found.
“The bottom line is anticipate and be ahead of the charge and don’t wait. Don’t wait for it to get worse: Model worse, and start from there. And to the bright side, I think people understanding the value of the dollar.”
Apart from emphasizing improved views on cash, Sugden emphasized a return to more sane valuation expectations, and stressed his optimism around certain fintech companies. All told, however, I would not have guessed that the fundraising market could stay bad for so long.
TechCrunch is talking to a lot of folks, so stay tuned for more.