Unpacking 2021’s Unprecedented SaaS Funding Market

August 18, 2021

You’re not the only one noticing that a ‘unicorn’ valuation is no longer all that, well, out of the ordinary.

In Q2 2021, we saw 161 new unicorns. Not only did this set a quarterly record, it surpassed the number of new unicorns created across all of last year.

Some fun facts about the current fundraising market:

  • Unicorns are now worth >$3 trillion according to Crunchbase, up from $2 trillion last year
  • A single firm (*cough* Tiger *cough*) added 58 unicorns to its portfolio in 2021 alone
  • 57 unicorns have gone public so far, compared to 40 in the entirety of 2020

One word comes to mind: bonkers 🤯

While I’m flabbergasted myself, I wanted to unpack what I see happening in the market and what it means for emerging SaaS startups.

  1. Potential risk and uncertainty: What’s the likelihood that the company achieves an attractive outcome vs. falls flat? How much uncertainty is there about the likelihood of different outcomes based on what we know and don’t know?
  2. Potential upside: What’s the outcome if the company were to go public or get acquired in an upside scenario?

Let’s start with risk and uncertainty. In general, SaaS companies have shown to be far less risky than many initially thought. The COVID-19 pandemic proved the durability of SaaS despite economic shutdowns and a global recession.

And uncertainty has decreased as folks have become more comfortable with the buying market and SaaS economic models. Many—if not most—SaaS companies have solid underlying economic models including net negative churn. As my colleague Sean Fanning wrote in OpenView’s 2020 SaaS benchmarks report:

“SaaS companies are getting better and at the same time folks better understand B2B markets, unit economics and payback periods are more clearly defined, and overall future price uncertainty of the assets seems to be reduced. This has created exuberance in the market.”

Now onto upside. The ultimate successful outcome in SaaS is for a company to go public, offering liquidity to early investors (as well as the LPs of these investors).

But the IPO is just the beginning for top SaaS companies. Many SaaS companies have increased their valuation by 10x (Zoom), 20x (Atlassian), 30x (Twilio & HubSpot), or much more (looking at you, Shopify) after their IPO.

Let’s take a look at some examples:

A table showing 7 public SaaS companies, their IPO year, valuation multiple today vs. IPO, valuation at IPO, and valuation as of Aug 2021, to show aggressive growth

We can debate the sanity of the public markets all day. But as SaaS companies have performed remarkably well post-IPO, folks have reason to believe that this performance will continue in the future.

And TAMs aren’t proving to be a barrier to eye-popping valuations. TAMs are often far larger than folks previously thought, even for vertical markets. This raises the ceiling on overall valuations.

With perceived risk and uncertainty coming down and potential upside going up, it’s natural that valuations would adapt accordingly.

Here’s the thing: this way of looking at valuations hinges on the ability for SaaS companies to continually deliver against increasingly high expectations.

In 2021, the Rule of 40—or finding the optimal balance between growth and profitability—is dead. (Rule of 40 refers to the trade-off between revenue growth and profitability. It was previously believed that companies should aim for at least 40% when adding their revenue growth rate with their profit margin.

Today it’s all about growth. 30% or faster growth at scale to be precise.

And there’s more and more bifurcation between the ‘haves’ and ‘have nots’ of SaaS.

  • Those growing >50% saw their EV multiples increase by 185% YoY
  • Those growing 30-50% saw their EV multiples increase by 115% YoY
  • But those growing 10-30% only saw an EV multiple increase of 51% YoY

EV/Revenue over time by growth. "The largest YoY valuation increases have been in the 30%+ growth ranges"

Meanwhile, Rule of 40 now has a far worse correlation with valuations than revenue growth alone (R^2 of 0.25 vs. 0.57 for the stats geeks).

This isn’t to say that companies can perpetually burn unreasonable sums of money in order to fuel their growth. A profitable economic model with a reasonable CAC and >100% NDR is now table stakes among public companies. Because this is an expectation for all companies, it no longer drives differences in valuations.

The TL;DR:

  • Today’s valuations are sky-high. That’s because investors view SaaS as having less perceived risk and uncertainty and greater upside than they did in the past.
  • Maintaining sky-high valuations depends on a company’s ability to keep growing quickly at scale. That means at least 30% YoY growth, ideally 50%+, even after going public.
  • But companies can’t just overspend their way to growth. There needs to be a healthy underlying economic model.
  • Those who can’t keep up may be (harshly) penalized with declining valuations.

Now comes the hard part: Continuing to execute on ambitious growth goals year after year in order to stay one of the ‘haves’. For advice on how to do that, you might want to subscribe to my newsletter 😉.

Disclaimer: I do not provide personal investment advice. All information found here are for informational, entertainment or educational purposes only and should not be construed as investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies.

Kyle Poyar

Partner at OpenView

Kyle helps OpenView’s portfolio companies accelerate top-line growth through segmentation, value proposition, packaging & pricing, customer insights, channel partner programs, new market entry and go-to-market strategy.