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| Hey Insiders, Today we are bringing you an analysis of VC funding for enterprise SaaS startups and the slowdown in debt funding. Scroll down for some quick hits, then let us know if you'd like to see more in future issues!
Karan
p/karan-chafekar | |
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In Q1 2023, U.S.-based enterprise SaaS startups secured $13.9B in venture funding across 363 deals. Funding remained robust for the enterprise SaaS sector last year, second only to the record-setting totals of 2021. Funding for U.S. enterprise SaaS startups declined by 18.4% from $76.5B deployed in 2021 to $62.4B in 2022. Despite the dip, funding for the sector was 83.4% higher than the $34B deployed in 2020. Considering the market volatility and geopolitical instability, funding for the industry has remained stronger than anticipated. Judging by last year's tally and the recent trend, the sector's funding should remain strong this year, showing resilience to the VC funding pullback. Deal value increased by 18.5% QoQ in the recent quarter, largely due to Stripe's $6.5B funding round. Without Stripe's round, funding would have dropped 37% QoQ. CloudKitchens and Anduril were the other two large rounds that closed in the recent quarter. Alumni Ventures, Tiger Global, and Andreessen Horowitz were the most active investors in the sector. Enterprise SaaS startups snatched away nearly 90% of the total $15.9B funding deployed in software startups. Software startups remain a popular investment destination amongst investors and continue to take up a majority share of the funding, representing 42% of the total funding deployed in the quarter across all sectors. Consumer product and services and pharma and biotech sectors nabbed the second and third highest share of the financing, raking in 12.1% and 11.1% of the total funding deployed, respectively. 
Within the enterprise SaaS sector, enterprise resource planning (ERP) startups raked in over a third of the funding last year, taking up 37.1% of the deal value and 36.2% of the deal count. Customer relationship management (CRM) startups nabbed nearly a third of the deal value (28.1%). Startups across sub-sectors analytic platforms (AP), supply chain management (SCM), knowledge management system (KMS), and other application software (OAS) raked in 11.40%, 10.10%, 5.40%, and 7.90% funding, respectively. The advancement of AI solutions is poised to greatly impact the enterprise SaaS sector. Short-term implications include the impact on research, content creation, enterprise search, business insights, and lower barriers to entry. Due to AI's perceived potential to impact the sector, several startups are reimagining their products with AI at its core rather than having AI as an added functionality. As a result, several enterprise SaaS and B2B software-focused VCs are mainly investing in startups with AI at their core. Index Ventures' partner Erin Price-Wright believes that "going forward, it's going to be very difficult to raise any cash as a B2B or enterprise SaaS company if you don't have an A.I. strategy." She adds, "Within a decade, A.I. will be a core component of every piece of application software that's built and shipped." |     | |
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With the drop in equity venture funding for startups, investors anticipated an uptick in debt funding. However, due to the rising interest rates and fallout of prominent debt lender Silicon Valley Bank (SVB), debt funding raised by U.S.-based startups has averaged $5.5B in the past few quarters. The average value is half the nearly $11B debt capital allocated to startups in Q2 2022, just as the venture funding slump started. Startups in the U.S. availed debt financing worth $5.8B in Q3 2022, $6.0B in Q4 2022, and $5.3B in Q1 2023. In the current quarter to date, U.S. startups have availed debt funding worth $4.2B. While debt funding stagnated in the first quarter, such financings are picking up pace and will increase as the year progresses. "Later-stage software companies are increasingly turning to credit and structured debt solutions to continue to drive growth and play offense pending a broader market recovery and the IPO market reopening," said David Flannery, a senior managing director and president at Vista Credit Partners. During the first half of this year, Vista has provided more than $500M in debt to startups, including Fivetran, Arcadia, Demandbase, and Deepwatch. Flannery adds that Vista has witnessed record credit deployment so far this year. Last week, Fivetran availed a $125M delayed-draw term loan facility from Vista. The new funding arrangement is set up so that Fivetran receives cash in stages at regular periods. Fivetran's CEO, George Fraser, referred to the loan as an insurance policy to avoid being driven "into a corner" the next year or the year after. In 2021, the company raised $565M in equity funding at a $5.6B valuation. Fivetran turned to debt funding as the IPO market remained closed and the firm was unsure about the valuation multiple it could receive at an equity round. In addition to Fivetran, fintech startup Tipalti and e-commerce financier 8fig secured credit facilities worth $150M and $100M, respectively. Tipalti availed the credit facility from JPMorgan Chase Bank and venture debt firm Hercules Capital, whereas 8fig raised the debt from Koch Disruptive Technologies and SVB, now a division of First Citizens Bank. The collapse of SVB in March earlier this year significantly changed the venture debt landscape. Of the $74B worth of loans on its books, 20% was allocated to startups as venture debt. "Silicon Valley Bank was the most prolific financing partner to the growth ecosystem, and the full impact of its failure on the broader technology and financial markets remains unknown," said Flannery. After the downfall of SVB, several other banks realized the importance of alternative financing. SVB's competitors, including HSBC, Stifel, MUFG, Moelis & Co, and JPMorgan Chase, scooped up executives from the struggling bank to bolster their venture debt divisions. Blackstone hopes to lend startups $2B in venture debt over the next few years. Meanwhile, KKR is also in the process of establishing its venture debt division. Last week, Mars Growth Capital, a joint venture between Japanese bank Mitsubishi UFJ Financial Group (MUFG) and Israeli financial firm Liquidity Capital, launched two new venture debt funds worth $400M. | | | |
| 3 | | Today's Funding: - Tools for Humanity, the crypto startup co-founded by OpenAI CEO Sam Altman, raised $115M in Series C funding led by Blockchain Capital, with participation from Andreessen Horowitz, Bain Capital Crypto, and Distributed Global. The startup is behind the Worldcoin project, which intends to create unique digital identities for humans by scanning their eyes.
- Fintech startup NYMBUS closed its Series D funding round at $70M. Insight Partners led the fundraiser with support from ConnectOne Bank, PeoplesBank, The Banc Funds Company, and Mendon Venture Partners.
- Dutch biotech startup VarmX extended its Series B round with a €30M ($32.1M) Series B2 add-on round. The B2 round was led by Sound Bioventures with participation from the European Innovation Council (EIC) Fund, EQT Life Sciences, Inkef, BioGeneration Ventures, and InnovationQuarter.
- British data DevOps automation startup DataOps.live raised $17.5M in Series A funding from Notion Capital, Anthos Capital, and Snowflake Ventures.
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- OpenAI, the firm behind ChatGPT, secured $175.3M in capital commitments from 14 investors towards its new VC fund to invest in other startups.
- Public Policy Associates for ID Ventures urged the Michigan state government to allocate $126M capital to four non-profit VC funds to back tech startups in the state.
- The European Investment Fund (EIF) committed €60M ($64.3M) to German spacetech-focused VC firm Alpine Space Ventures' latest fund. Along with EIF's capital, the fund has now secured commitments worth €100M ($107.2M) against a target of €160M ($171.5M).
- Bankrupt crypto firm Celsius Network accepted Fahrenheit's proposal to create a new entity owned by creditors in order to emerge from bankruptcy. A consortium led by Fahrenheit and backed by Arrington Capital will provide the new entity, dubbed NewCo, with capital, management expertise, and technology.
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 | Analyst | | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot. | | This newsletter was edited by Aaron Crutchfield | |
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