In 2023, the venture and tech ecosystem faced significant challenges. Funding rounds and total investments saw a steep decline, with a 64% drop in the total number of rounds and an 86% drop in total dollars invested compared to the peak in late 2021. The difficulties in raising funds was experienced by founders at all stages of the market, as observed by Forum Ventures, which has invested in over 100 B2B SaaS companies through their accelerator and seed funds. CEO and managing partner, Michael Cardamone, spoke to emerging managers about the current state of the market and noted that “this is the most challenging environment for raising a fund in a long time.”
In a recent report, Forum Ventures surveyed 70 funds and analyzed data from 167 pre-seed and seed rounds that closed between January and October 2023. The purpose was to provide a comprehensive overview of the current landscape of early-stage B2B SaaS investments.
Few key findings from the report include:
- 75% of respondents reported a decrease in valuations since 2022, with a 10% decrease in valuations compared to last year’s survey.
- The mean valuation for pre-seed rounds was $9 million post, which remained consistent for companies with no revenue up to $250,000 in ARR (annual recurring revenue).
- Companies with $250,000 in ARR or higher had a mean valuation cap of $15 million.
Seed rounds have maintained consistent valuations throughout 2022 and 2023. However, achieving the necessary traction for these rounds has become more challenging, leading to misaligned expectations for founders. In 2020-2021, it was typical for seed rounds of $3 million to $5 million to be completed with little to no traction, with valuations ranging from $12 million to $25 million, depending on the industry and founders’ background.
While there are exceptions, the current market demands considerable early traction. Startups typically need $250,000 to $1 million in ARR to secure a seed round of $3 million or more, with a dilution rate of 20% to 25% (i.e., $3 million at a post-money valuation of $12 million to $15 million, or $4 million at a post-money valuation of $16 million to $20 million). The bar has been raised significantly for receiving an institutional seed round, and founders must prove a lot more in today’s market than in the past. This trend often results in founders having to raise a pre-seed round first to reach the necessary milestones and then raising multiple funding rounds to reach a Series A.
As a founder, it is crucial to manage cash flow wisely, attract talented individuals to join your company, and focus on creating a product that your customers cannot resist.
