Biweekly VC Insights by Uniborn #41

Inside: Answers to essential questions about startup success
Barbara Krassner
🇬🇪 Uniborn Team
3 min read

Hey there! Elon Musk is building a supercomputer to power his conversational AI, venture investors are again eyeing the blockchain industry, and we've gathered a fresh batch of intriguing news and stats for European angels. Let's dive in!

🔥 What can we infer from the last decade of seed-stage startup founders in Europe?

Insights shared by Adam Shuaib from Episode 1:

  • Experience level doesn't matter. Founders with less than 5 years of experience are just as likely to secure Series-A/Series-B funding as those with 15-20 years of experience.
  • Sector expertise isn't crucial either (sounds unexpected, huh?). A founder's deep knowledge of a particular industry doesn't 100% predict funding success.
  • University dropout status is also impartial. Dropping out neither hinders nor helps in raising funds. Unless it is a technical degree: having it doubles the chances of getting future funding.
  • Repeat founders excel. Those who have started companies before are twice as likely to secure Series-A or Series-B funding.
  • International work boosts chances. Experience working across countries significantly increases the likelihood of securing Series-A funding.
  • B2C startups are less predictable. Founder backgrounds are less indicative of future funding success for B2C startups compared to B2B.

If interested, check out the comments on Adam’s LinkedIn post.

🔥 What do more than 500 venture investors believe determines the success of a startup?

According to venture investors in the IT and healthcare sectors, the key components for founders' success are:

  • Team dynamics. The most critical factor, with 56% of venture capitalists identifying it as the main success component. This emphasis is even stronger in the IT sector, reaching 64%.
  • Timing. The second most important factor, though significantly less critical than team dynamics, with 12% of venture capitalists considering it the top component.
  • Technology. Prioritized by 9% of investors overall. Interestingly, this figure drops to 6% in the IT sector but rises to 11% in healthcare.
  • Sturdy business model. Valued by 7% of investors, with notable differences between industries: only 4% in IT compared to 18% in healthcare.
Image: Ilya Strebulaev, Professor at Stanford 
Image: Ilya Strebulaev, Professor at Stanford 

If interested, check out Ilya’s LinkedIn post.

🔥 What makes a SaaS business achieve a 15x+ revenue multiple?

Few SaaS companies in public markets reach a value-to-annual-revenue ratio of 15 or higher. Alex Pattis of Riverside Ventures has pinpointed the key traits these successful companies share so that investors can use these guidelines to identify and target promising newcomers in this niche.

So here are the mega-green flags for SaaS startups:

  • Strong Revenue Growth. High and consistent revenue growth, especially in expansive markets, is essential. Almost all SaaS companies with a 15x+ LTM revenue multiple have over 20% LTM and 20% NTM growth. 
  • High Free Cash Flow (FCF) Margin. Merely having high earnings growth isn't enough to warrant premium multiples, especially in today's market. Investors now favor companies that efficiently convert earnings into cash flow — the median FCF margin for companies with 15x+ LTM revenue multiples is 25%, compared to 13% for all SaaS firms.
  • Robust FCF Growth. Annual FCF growth of 20% or higher is a common trait among top performers, indicating strong future potential. DCF models are very sensitive to FCF growth, and even a 1% change in the FCF growth rate can greatly affect a company's valuation.
  • Rule of 40. This benchmark suggests that a company's revenue growth rate plus its profit margin should total 40% or more. Companies that significantly outperform the Rule of 40 often have valuations more than double those of companies below 40%.
  • Revenue Quality. Beyond just the top-line figures, factors such as recurring versus one-time revenue, revenue visibility, diversification, pricing power, customer stickiness, and retention/expansion rates are crucial indicators of success.
Image: Alex Pattis
Image: Alex Pattis

If interested, check out Alex Pattis’s review.

🔥 And for a little treat, check out this visual infographic on the stock prices of six companies that thrived during the COVID pandemic

Image: Sherwood News
Image: Sherwood News

It's no shock companies that boomed during the lockdowns are now seeing significant drops in their value. Moderna, the biotech company pivotal in the return to normal life, experienced a massive share price drop of over 1,700% as the demand for its vaccines and boosters decreased. Peloton, the home fitness provider, announced refinancing efforts to avoid a "cash crunch," and Wayfair, the online home goods retailer, is now shifting focus to physical stores.

What's interesting is that despite the recent decline in many companies' shares (with many S&P 500 index participants seeing more daily losses than gains in the past two weeks), experts believe there's more to the story than just the downturn.

If interested, check out the Sherwood News article.

Cover image: Unsplash

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