SaaStr 824: VC in the AI Era - Exactly What's Getting Funded, Why & When with SaaStr CEO and Founder Jason Lemkin - The Official SaaStr Podcast | Ryan Randels | Mobile & SaaS Strategy | Agentic AI

Full Title

SaaStr 824: VC in the AI Era - Exactly What's Getting Funded, Why & When with SaaStr CEO and Founder Jason Lemkin

Summary

This episode discusses the current landscape of VC funding, focusing on what types of AI and B2B startups are attracting investment, the metrics VCs are prioritizing, and the challenges founders face in securing funding in the current market.

The conversation highlights the shift in VC focus towards hyper-growth AI companies and the increased bar for traditional SaaS businesses, while also offering advice on how founders can navigate these trends.

Key Points

VCs are overwhelmingly prioritizing hyper-growth AI companies, exemplified by startups like Glean AI, 11 Labs, and Perplexity, which achieve rapid revenue milestones (e.g., $1M to $100M in under a year), diverting attention from traditional SaaS businesses.
The bar for traditional B2B SaaS companies to receive VC funding has significantly increased; many companies that would have been funded 18-24 months ago are now being overlooked by investors who are focused on faster growth metrics.
Bessemer's research categorizes startups into "Shooting Stars" (high-margin classic software with strong growth like triple-digit ARR increases) and "Supernovas" (AI-native companies with lower or negative gross margins but exceptionally fast growth), with VCs now heavily favoring the latter.
Despite the intense focus on AI, traditional B2B SaaS companies are still fundable, but require significantly higher growth rates and efficiency metrics (e.g., 90%+ growth and 120%+ NRR for companies at the $50M-$100M ARR stage) than in previous years.
Founder expectations regarding valuations and ownership stakes have also increased, creating a disconnect with VC expectations, particularly for companies that are not demonstrating hyper-growth.
There's a notable trend towards greater efficiency within startups, with revenue per employee significantly increasing, a key factor for VCs evaluating investment potential.
To stand out in the crowded AI funding space, startups must demonstrate they are "number one" in something specific, backed by data, as generic AI tools are struggling to gain traction.
Founders are advised not to assume future funding rounds are guaranteed and to have a clear understanding of their company's performance against current VC benchmarks to avoid running out of cash.
Experienced investors and AI tools can provide critical, data-driven feedback on a startup's funding prospects and pitch deck quality, helping founders navigate the current challenging market.
While AI-native companies are the primary focus, there is still a segment of VCs (like Rory) who are comfortable with strong, traditional B2B growth (e.g., triple-double metrics), indicating a nuanced market.

Conclusion

The venture capital landscape has shifted dramatically, with a strong preference for hyper-growth AI companies, making it significantly harder for traditional SaaS businesses to secure funding without exceptionally high growth metrics.

Founders must adapt to these new realities by focusing on clear differentiation, demonstrating exceptional performance against current benchmarks, and leveraging tools and expert advice to refine their funding strategies.

Understanding the precise metrics VCs are looking for, being honest about a startup's position, and proactively seeking feedback are crucial for navigating the current investment climate and increasing the chances of successful fundraising.

Discussion Topics

Given the VC preference for hyper-growth AI startups, how can traditional B2B SaaS companies effectively differentiate themselves and demonstrate their value to investors?
With the bar for funding raised significantly, what are the most critical metrics founders should focus on to attract VC attention in the current market?
How can founders best leverage AI-powered tools and expert feedback to refine their pitch decks and improve their chances of securing venture capital?

Key Terms

ARR: Annual Recurring Revenue - the predictable revenue a company expects to receive from its customers over a year.
NRR: Net Revenue Retention - a metric that measures the percentage of revenue retained from existing customers over a period, accounting for upgrades, downgrades, and churn.
VC: Venture Capital - funding provided by investors to startups and small businesses with perceived long-term growth potential.
Post-money valuation: The value of a company after a funding round, including the investment amount.
Pre-seed stage: The earliest stage of startup funding, typically before a company has a product or significant traction.
Seed stage: The first significant equity funding round for a startup, usually to finance its growth and operations.
Top quartile: In a dataset, the top 25% of performers based on a specific metric.
Magic Number: A SaaS metric used to measure the efficiency of a company's sales and marketing spend in generating new revenue.

Timeline

00:44:24

Number one has always been the most important venture, but people are obsessed with it now.

(00:48:680) They're obsessed with finding the next open AI, the next category winner.

(01:16:200) Fin is the number one AI agent for resolving complex queries like refunds, transaction disputes, and technical troubleshooting, all with speed and reliability.

(02:30:360) Certainly what I have learned talking with a lot of founders this year, running, should cross 1,000 VC pitch decks reviewed this week and almost 400,000 startup valuations on saster.ai.

(03:57:440) And I know almost everyone knows this, but I think this is just, it's good to summarize this, understand what's investors' heads and why it means a lot of B2B VCs, a lot of classic SaaS investors, B2B investors that might have been interested in you 18 to 24 months ago will not be interested today.

(05:13:440) Glean AI Enterprise Search got there in almost half the time.

(07:24:740) And they broke it down into the two types of startups they're investing in.

(08:41:578) But on the left like this is how we think about AI native companies where they really want to put their money in supernovas you'll see the gross margins are often 25 or even negative even open AI is burning far more cash than it's bringing in so is anthropic so are lovable and replet as they've been clear on another gross margins are this low that they're burning a ton of cash to build these cool tools for us but in one year going from one to 40 and in year two 125 some of them faster right gamma which we use for our slides they already hit 50 million in one year um replet level or others and so again you can pick up these and you can say oh my god these are just wrappers around ai tokens and these models aren't sustainable maybe that's true maybe it won't be true but this is what people want to fund okay they want to fund one of these two categories depending on they are and just as a side note what's really interesting and i'm writing more up on this on SaaS, and we're actually going to talk about this on the 20DC this week with Harry and Rory.

(10:39:060) Now, maybe if you're the number one fastest growing anything, you will stand out.

(11:36:220) But what's interesting is high growth is only 30% for a public company.

(12:58:199) This is of the good ones, okay?

(13:01:879) What does top quartile look like?

(14:17:000) It's just going to be really tough.

(14:53:240) And there is a zone, if you're below some of these numbers, but you're doing something really important, or you have really strong market share, or you have insane NRR or something, there is a zone below this where BCs will lean in.

(15:51:199) Founders are asking for higher prices and lower ownership, which pressures the VC model.

(17:00:120) It's just interesting to watch how efficient the companies are getting.

(17:58:000) So on Sastra Dead AI, which is our new platform, Sastra.com still hosts most of our content, but Sastra AI is where we're building all of our tools.

(18:30:800) If you want to get funded, you want to hit that.

(19:21:940) But the AI ones are growing 180% and the non-AI are going as low as 75.

(19:41:940) Okay, and maybe just two more things.

(20:04:059) So don't go in blind, just use our free tool.

(20:33:860) And so most folks, if you think that the average grade is a B minus, there's quite a few asses.

(22:04:059) But the fact that most people, if you look at this distribution are B minuses, it's probably summarized a lot of what I feel too, which is founders, they have something, they're in the zone.

(22:36:500) So how do you deal with this market?

(23:41:100) The second one, and this was a big deep dive on our 20DC conversation this week.

(24:25:020) Number one has always been the most important venture, but people are obsessed with it now.

(24:56:500) Point three, this is Captain Obvious went through it.

(25:08:300) Four, we know this one, but not everyone is AI-native or bust just most.

(26:18:580) It's just going to be harder because you're going to have to, sorry, never use these apps, but you're going to have to swipe left a lot more times and have a lot more meetings to find somebody if you're not AI native, but it doesn't mean they're not there.

(26:36:260) Two last points that I hope should be obvious, but I find that with founders, they're not.

(27:50:419) And I just had a debate the other day with a group of very seasoned investors who were convinced this company was hot as hot as what hot these days Hot as Travis Kelson Taylor Swift that hotter hotter And I like I love this company It great But this is a company that doesn have an ounce of AI in it today

(28:51:812) then finally then i'll break down click aibc at the top you can use them all we have we'll tell you what you're probably worth we'll we'll give us your vc pitch deck even if upload your latest investor update upload your latest financials upload anything that has your data and we'll benchmark you compared with you with all the other b2b startups we'll tell you how you stack up um we'll tell you what percentile you're in we'll grade everything and you don't have to be fundraising you don't have to do the vc pitch deck just give us whatever you have we'll do the best with it and we'll instantly tell you how you're really doing.

SaaStr 824: VC in the AI Era - Exactly What's Getting Funded,...