Part II/II: The Triangle’s First and Only, Authoritative Guide to Startup Valuations, Deal Terms and Investment Vehicles
In Part II, we reveal more details about startup funding in the Triangles startup ecosystem including, by stage, amounts raised with high/lows, valuations, discounts and more!
Welcome to Part II of our two part series. In Part I, which is here, we ‘set the table’ by explaining a brief origin of the Tweener Fund, how our model works and because of all that we now have 4 years of incredible, proprietary and exclusive data on the Triangle’s startup ecosystem and how fundraising works and trends in the Triangle.
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Public SaaS Valuations
Most private companies in the Triangle are Software-as-a-Service, recurring revenue/subscription business models. The way private company valuations work is investors (venture capitalists for privates) use the public-market comps to figure out how to price D/C/B/A and sometimes Seed.
There are lots of static tables like this:
We’re fans of Tweener Fund friend, David Spitz’s, Benchsights dynamic tracker available free here. Check it out! This will come up again.
Funding Type By Stage
There are three types of funding types that are common in early-stage tech startups. We could fill our space going over these, but we’re going to just summarize them here:
SAFE - The Simple Agreement for Future Equity, or S.A.F.E was invented by Y Combinator (A popular Silicon Valley Accelerator commonly called YC) in 2018. When we started Tweener Fund in 2022, the biggest learning I had was how many SAFEs were going on in the Triangle (I had never done one believe it or not) and the fact they were not being used for just pre-seeds but also for seed and between rounds. In 22 local investors were anti-SAFE and they are just now warming up to them because, frankly, they have to. SAFEs have these ‘terms’ that you can negotiate: Pre/Post money (post is now 99% of them), discount, and CAP. Most SAFEs in the triangle are Post, Discount AND CAP. In Silicon Valley it’s more common to see Post, Discount OR CAP. and hot companies get ‘uncapped’, no discount. When we say SAFE going forward in this piece you can assume we mean ‘SAFE that is post, cap and discount’ which is the vanilla ice cream of the Triangle’s fundraising ecosystem.
Convertible note - Prior to the invention of the SAFE, the ‘convert’ was the mechanism for pre-seed with some angel groups rejecting even that for a priced round and a board seat - this is now contrary to conventional wisdom in most startup ecosystems, but some angel groups continue to hold onto this. They have their reasons, we tend to disagree with them and encourage most entrepreneurs to as well. Like the SAFE, the convertible note has a pre/post - they are all pre in my experience, a discount and a cap (all of them have both) AND it adds in an interest rate, a ‘time bomb - time to convert period’ PLUS a bunch of other tricky terms that can trip up the first-time entrepreneur (conversion valuation, exit treatment, participation, etc.).
Priced round - The holy grail of venture investing, the priced round has 100 variables, the biggies we’re going to write about today are the pre-money valuation and the amount raised (the post-money valuation is those two added together so we have the third datapoint with simple addition). We’re not going to cover participation rate, board seat treatments, exec comp caps, common vs. preferred and all the other ‘goodies’ for investors that come in the preferred stock agreements.
Pre-seed Funding Types
In Pre-seed rounds you have the very unique situation that the company usually doesn’t have revenue or customers yet and may even be ‘pre-product’ (aka ‘idea on a napkin’ phase). Because of this valuations are particularly hard so priced-rounds are very rare, except those driven by angel groups that prefer/insist on the priced found even for very early stage companies.
The purpose of this round is to provide capital for the founders to start the company, build the product, and start selling to customers, iterate, generate revenue, improve the product and make headway towards product/market fit (PMF going forward).
In our dataset we have 71 pre-seed investments and here’s the breakdown:
SAFE: 60, or 85%, the vast majority
Convert: 9, or 13%, the distant second
Priced: 2, or 3%, the obvious unusual format at this stage.
Seed Funding Types
As we move to Seed, typically you have a product and some revenue. At Tweener Fund, our focus is what we think of this sweet-spot at $1m ARR (or $80k/MRR) - for a typical down the middle SaaS software company this usually indicates that you have a good set of initial customers, you are still probably doing founder-led sales, but you are either through PMF or can see the ‘light at the end of the tunnel’. VCs will look for some repeatability to the business (customers clustered around some ACV or an industry concentration, development of a pipeline/GTM motion, etc.).
In our dataset we have 37 seed investments and here’s the breakdown:
Priced: 46, or 43%, the majority at Seed.
SAFE: 37, or 35%, the second most popular
Convert: 23, or 22%, the distant second
Usually a SAFE or Convert at a Seed round company is an indication of potentially:
A lead could not be found, so the company did a ‘community round’ or an extension of the pre-seed.
The company is Seedstrapping - they pre-seeded themselves or very small and Seed and maybe A will be the only funding - usually these companies have vey fast revenue growth or a higher ARR at Seed.
It’s still a bit early and the company wants to let ARR mature a bit to raise a much bigger and/or higher valuation Series A priced round.
Series A (and higher) Funding Types
At this phase, the company is definitely through PMF, starting to scale at A, really scaling at B and C. Because of this, it is unusual to see SAFEs and converts because valuations are easy to come by.
In our dataset we have 40 Series A and higher investments and here’s the breakdown:
Priced: 30, or, 75%, the obviously preferred format at this stage.
Convert: 10 ,or, 25%, the distant second, usually used for a bridge to a next round or the hallowed ground of Cash Flow Positive 🎉 (CF+)
Funding Types Summary
To summarize, here’s a table by round:
Across all rounds we have 46% SAFE, 35% Priced round and 19% Convert. It’s important to note we start our investing in a company at the pre-seed/seed round, so the A’s/B’s/C’s we are invited to are mostly from newer companies. That’s the long way of saying we see all the pre-seed and seed, we don’t see all the A/B/C rounds so the think of this guide as ‘definitive’ for Pre-seed/seed and ‘directional’ for later rounds.
Valuation and Fund Raising Size Analysis by Stage
In this section, we take the data detailed below and for each round type we look at the valuation details and the key terms of the fundings in aggregate at each round type as well as highs/lows.
Pre-Seed
In Pre-Seed deals, largely SAFEs and converts, we have these stats:
Average Valuation (Cap): $8.7m
Average Amount Raised: $900k
Raised Range: $150k-$6m
Valuation Range: $1.5m-$30m
Discount Range: 15-25%
Pre-Seed Fundraising Variables
The ranges on amount raised and valuation are quite large which raises a lot of questions. Since Pre-seed investments are largely (80%+) based on the founder and some based on the idea/space (20%) the factors here are:
Founder - Is this a serial founder that has experience? What’s the founder/market fit?
Idea/Space - The biggest factor for all round sizes is: ‘b2c or b2b’ - consumer companies get a big discount to b2b companies.
AI Factor - B2B vertical AI companies are getting a clear valuation premium and this is where most of the early stage venture activity is happening so it’s more competitive. 99% of companies are using AI and building with it, here I mean they are AI-ifying a traditional SaaS B2B vertical- the venture market loves this right now, but as hot as trends are, they can go cold, this is the today
Swirl these together and you can map out these ranges. The low-end of the range is a first-time founder with no consumer experience doing a consumer company. The high-end of the range is a B2B serial founder building something in a space they know already that is AI native.
Seed
In Seed deals, largely priced rounds, with less SAFEs and converts, we have these stats:
Average Valuation (Cap): $16.3m
Average Amount Raised: $2.5k
Raised Range: $250k-$13m
Valuation Range: $4m-$40m
Discount Range: 20-25%
Seed Fundraising Variables
The ranges on amount raised and valuation are quite large which raises a lot of questions. At Seed, the valuation factors are 33% founder, 33% space and 33% progress:
Founder - Is this a serial founder that has experience? What’s the founder/market fit?
Idea/Space - The biggest factor for all round sizes is: ‘b2c or b2b’ - consumer companies get a big discount to b2b companies.
Progress - At these early stages, investors love to see progress, but since the company is young it’s hard to draw anything from y/y growth trends, so usually they are looking at month to month ARR/MRR growth or Q/Q. For example, if you have a 6 month trend with MRR ticking up $5k, $10k, $20k, $30k, $40k, etc. that’s a great signal. If it’s all over the place or stuck at zero, that’s bad. As founder, the message to take-away for founders is that when you start selling, be consistent and grow that ARR as regularly as possible. It should be so linear or accelerating that the chart is perfectly up-and-to-the-right.
Extra AI Factor - B2B vertical AI companies are getting a clear valuation premium and this is where most of the early stage venture activity is happening so it’s more competitive. 99% of companies are using AI and building with it, here I mean they are AI-ifying a traditional SaaS B2B vertical- the venture market loves this right now, but as hot as trends are, they can go cold, this is the today
Swirl these together and you can map out these ranges. The low-end of the range is a first-time founder working on consumer with revenue all over the place. The high-end of the range is a B2B serial founder building something in a space they know already that is AI native and their ARR/MRR is cookin’.
Series A
In Growth-stage Series A deals, largely priced rounds, with minority SAFEs and converts, we have these stats:
Average Valuation (Cap): $34m
Average Amount Raised: $7.2k
Raised Range: $500k-$25m
Valuation Range: $10m-$100m
Series A Fundraising Variables
The ranges on amount raised and valuation are extremely large which raises a lot of questions. At Series A, the valuation factors are 25% founder, 25% space and 50% progress. Back at the top we talked about David Spitz’s Benchsite -look at the metrics on the upper left of that chart builder: ARR, Growth (y/y), NRR/GRR, R+D/S+M/G+A/COGs as % of rev (together called scalability factors), EBITDA margin (at scale), ARR/FTE, S+M payback, Rule of 40 - as a company gets closer to $100m+ in revenue, you get closer to public company valuation metrics and investors are going to want to know how you fit into the matrix of valuations and from there your valuation will be calculated.
Founder - Is this a serial founder that has experience? What’s the founder/market fit?
Idea/Space - The biggest factor for all round sizes is: ‘b2c or b2b’ - consumer companies get a big discount to b2b companies. At Series A, investors are going to really start to drill into TAM and how that ties into the GTM Motion. What are the competitors doing? Are you losing to them? Do you have a competitor better funded than you are chewing away at you?
Progress/Revenue - Series A is heavily about revenue progress. At this point the company is 2-3yrs old usually. Investors are going to want to see > 100% y/y growth.
Progress/GTM - In Series A, investors want their capital to be used for scaling and that usually means a large % is going to go to scaling up the GTM motion, they are going to dig deep into this.
Progress/Unit Economics - Finally on the topic of progress, the Series A investor is going to want to understand the unit economics of the business:
What are the gross margins, what direction do they trend as this scales?
How capital efficient is this business?
What’s the CAC/LTV?
What’s the pay-back period?
What’s the net and gross churn monthly/quarterly/annualized?
What’s the profit profile look like for this business 5-10yrs out?
Swirl these together and you can map out these ranges. The low-end of the range is a first-time founder working on consumer that isn’t growing over 100% The high-end of the range is a B2B founder that is growing revenue 300%+ in a space that’s massive, they are the early market leader. Their unit economics are ‘elite’, their GTM motion is a well-oiled machine and they know their unit-economics so well they can recite them to two decimal points and think about them when they dream.
Summary
This chart summarizes the above together so you can visually see the progression:
How to use this information. If you’re a pre-seed/seed founder we hope this helps you figure out where you want to fundraise and hopefully knowing the factors at the ‘stage above’ where you are helps you plan ahead.
What This Data ‘Means’ for Founders
Great founders learn quickly to juggle four balls at once:
Ball one - Short-term operations - Build the product, sell the product, build the team, communicate the vision. Do….not….drop….this….ball.
Ball two - Fundraising - convince investors this is awesome and you can juggle four balls. Once you are venture funded, unless you are seed-strapping, this ball comes around very quickly, keep an eye on it.
Ball three - Medium-term planning - you know what the next round is going to take, you set up targets and start building the strategic infrastructure to get your company there. You also need to hire in front of this and, see ball 2, fund-raising is the ball right around this one.
Ball four - Time management - have you ever tried to juggle four balls or spin four plates? It’s not easy, it takes very good time management, prioritization and triaging skills. You also have to have a great intuition for ‘what to do today’. For first time founder/CEOs, this can be very overwhelming because, by definition, you’ve never done it before and it’s unlike anything you’ve ever done. The buck stops here. Failure is a real option that is always on the table. Success is never guaranteed and you drop ball one today you are hosed, ball two you won’t feel for 6 months, but same outcome and ball three, takes 12. Ball four, well it’s kind of the foundation for the whole thing and you’ll HAVE to do it to make it to ball three.
This data shows you what that ball two and ball three are going to look like when they come zinging into your orbit. From Series A, the data goes higher. For example, in our limited, but directional data set: You are raising $10m+ at > $50m.
Let us know in comments if you have any questions, we’re here to help and want you to understand this data 100% which is why we shared it: