How is Pre-Seed Funding Shaping the Future of SaaS? Key Trends and Insights from the Carta Report 2024

Introduction

The pre-seed funding landscape is a critical indicator of future innovation, and understanding its dynamics is essential, especially for sectors like Software as a Service (SaaS), which continues to redefine how businesses operate. In this blog post, we’ll dive deep into the latest trends and insights from Carta’s State of Pre-Seed 2024 report, with a special focus on how these trends are influencing SaaS startups.

Key Pre-Seed Funding Trends in 2024

While the pre-seed fundraising activity showed growth in the first half of 2024, the momentum waned significantly in the latter half. This fluctuation is crucial for SaaS founders to note, as it directly impacts access to early-stage capital.  

• Decline in Pre-Priced Fundraising: There was a notable decline in pre-priced fundraising activity in Q4 2024. This shift indicates a potentially more cautious approach from investors, which SaaS startups need to factor into their fundraising strategies.  
• Overall Dollars Raised: Despite the late-year decline, pre-priced rounds still raised substantial amounts in 2024, with over $3.1 billion raised by rounds exceeding $1 million. This highlights that while the number of deals may have decreased, significant capital is still being invested in promising ventures, including those in the SaaS space.  
• Round Size Dynamics: The composition of pre-priced rounds has also evolved, with deals under $250K becoming more common. In Q4 2024, these smaller deals made up nearly half of all pre-priced rounds. For SaaS startups, this could mean adjusting initial funding targets and focusing on lean operations to achieve early milestones.  
• SAFEs vs. Convertible Notes: Simple Agreements for Future Equity (SAFEs) continue to dominate pre-seed funding, with over 90% of pre-priced rounds in Q4 2024 utilizing SAFEs. This preference for SAFEs is particularly pronounced in the SaaS sector, where 92% of pre-seed funding was raised through SAFEs in 2024.  

SaaS-Specific Funding Insights

The SaaS industry has unique funding characteristics within the pre-seed landscape. Here’s a closer look:

• SaaS Leads in Funding: SaaS companies raised the most pre-seed capital in 2024, amounting to $1.193 billion. This demonstrates the strong investor confidence in the SaaS business model and its potential for scalability and recurring revenue.  
• Valuation Caps: Pre-seed valuation caps in SaaS are competitive, reflecting the sector’s attractiveness. These caps can significantly impact early equity distribution and should be carefully negotiated by SaaS founders.  
• Fundraising Profiles:
  
  • Count of Rounds: The SaaS industry saw a high volume of pre-seed rounds in 2024, with 1,304 rounds closed. This indicates a vibrant ecosystem with numerous new SaaS companies seeking initial funding.  
  • Median Cash Raised: The median cash raised by SaaS companies in pre-seed rounds was $260K. This benchmark helps SaaS founders set realistic fundraising targets for their early stages.  
  • Median Valuation Cap: The median valuation cap for SaaS companies was $10M. This figure is essential for founders to understand when structuring their funding agreements and considering future dilution.  

SAFEs: The Preferred Instrument for SaaS Pre-Seed Funding

SAFEs have become the instrument of choice for pre-seed funding, and this trend is particularly strong in the SaaS sector.  

• Dominance of SAFEs: In 2024, 92% of pre-seed funding in SaaS was raised through SAFEs, compared to just 8% through convertible notes. This preference underscores the simplicity and flexibility that SAFEs offer for early-stage SaaS companies and their investors.  
• Post-Money SAFEs: Post-money SAFEs have been the prevailing type, maintaining over 80% of the market share throughout 2024. This structure provides clarity on ownership and dilution, which is crucial for SaaS founders.  
• Key Terms:
  
  • Valuation Caps: Nearly 90% of SAFEs issued in 2024 included a valuation cap. These caps are essential in determining the conversion price of the SAFE in future equity rounds, directly impacting the ownership of early investors.  
  • Discounts: Approximately half of the SAFEs also had a discount. Discounts incentivize early investors by offering them a lower conversion price, further highlighting the competitive nature of pre-seed funding in SaaS.  

• Trends in SAFE Terms:
  
  • SAFEs with No Valuation Cap: Interestingly, SAFEs with no valuation cap became more common in 2024. While still a minority, this trend suggests that some SaaS startups with strong potential are securing funding on more founder-friendly terms.  
  • SAFEs with Discount and No Valuation Cap: These types of SAFEs represent a growing minority. This reflects a nuanced shift in pre-seed funding strategies, where some investors are willing to forgo valuation caps for the potential upside of high-growth SaaS companies.  

Convertible Notes: A Less Common Instrument in SaaS

While SAFEs dominate SaaS pre-seed funding, convertible notes play a smaller role.  

• Decreasing Popularity: Only 8% of pre-seed funding in SaaS was raised through convertible notes in 2024. This indicates that SaaS founders and investors generally prefer the simpler structure and terms of SAFEs.  
• Post-Money Convertible Notes: Similar to SAFEs, post-money convertible notes are becoming more common. This trend aligns with the broader preference for post-money valuation in early-stage funding.  
• Key Terms:
  
  • Valuation Caps and Discounts: The vast majority of convertible notes include both a discount and a valuation cap. These terms function similarly to those in SAFEs, setting the stage for future equity conversion.  
• Trends in Convertible Note Terms:
  
  • Median Interest Rate: The median interest rate on convertible notes declined to 7.5% in Q4 2024, down from a recent high of 8%. This decrease may reflect the overall market conditions and the changing dynamics of early-stage funding.  

Regional Insights: Pre-Seed Funding for SaaS

Geographic location plays a significant role in pre-seed funding. Here’s how SaaS funding is distributed across the US:

• Leading States:
  
  • California: Leads with the highest percentage of pre-priced capital invested (38.8%). California remains a hub for SaaS innovation and investment, attracting a substantial portion of pre-seed funding.  
  • New York: Follows with 13% of pre-seed capital invested. New York is another major center for SaaS startups, particularly in sectors like fintech and enterprise software.  
  • New Jersey: Ranks third, with 8.1% of pre-seed capital invested. New Jersey’s growing tech ecosystem is also contributing to SaaS funding.  
• Regional Distribution:
  
  • West: Attracts the largest share of pre-seed capital (49.4%). The West Coast, driven by Silicon Valley, continues to be a dominant force in SaaS funding.  
  • Northeast: Accounts for 29.5% of pre-seed capital. The Northeast, with cities like New York and Boston, is a strong contender in SaaS investment.  
  • South: Holds 14.8% of pre-seed capital. The South is an emerging region for SaaS, with cities like Austin and Miami experiencing significant growth.  
  • Midwest: Receives 6.3% of pre-seed capital. The Midwest, while smaller, is also fostering SaaS innovation and attracting investment.  
• Top Metro Areas: The top 20 metro areas for pre-seed fundraising include several key cities for SaaS:
  
  • Bay Area: Ranks #1.  
  • New York Metro: Ranks #2.  
  • Los Angeles Metro: Ranks #3.  
  • Boston Metro: Ranks #4.  
  • Austin Metro: Ranks #5.  
  • Seattle Metro: Ranks #6.  

Key Factors Influencing SaaS Pre-Seed Funding

Several factors are shaping the pre-seed funding landscape for SaaS companies:

• Business Model Attractiveness: The SaaS model, with its recurring revenue, scalability, and high customer retention, remains highly attractive to investors. This inherent attractiveness drives significant investment into SaaS startups.  
• Technological Innovation: Continuous advancements in technology, such as AI, cloud computing, and automation, fuel the development of new SaaS solutions. Investors are keen to fund SaaS companies that leverage these technologies to disrupt markets or solve critical business problems.  
• Market Demand: The increasing reliance on software solutions across industries drives strong demand for SaaS products. This demand creates a favorable environment for SaaS startups to secure funding and grow rapidly.  
• Investor Sentiment: Overall investor sentiment and macroeconomic conditions play a crucial role. Fluctuations in the economy can impact the availability of pre-seed funding, even for high-potential SaaS companies.  

Strategies for SaaS Startups to Secure Pre-Seed Funding

Given the dynamic nature of pre-seed funding, SaaS startups need to adopt strategic approaches to secure investment:

• Strong Business Plan: Develop a comprehensive business plan that clearly articulates the problem you’re solving, your target market, your unique value proposition, and your growth strategy.  
• Compelling Pitch Deck: Create a visually appealing and persuasive pitch deck that highlights your team, your product, your traction (if any), and your financial projections.
• Focus on Key Metrics: Emphasize key SaaS metrics such as customer acquisition cost (CAC), customer lifetime value (CLTV), churn rate, and monthly recurring revenue (MRR) to demonstrate the potential of your business.  
• Leverage SAFEs: Understand the nuances of SAFEs and use them effectively to structure your pre-seed funding rounds. Be prepared to negotiate terms such as valuation caps and discounts.  
• Build a Strong Network: Attend industry events, network with investors, and seek introductions to potential funders. Building relationships is crucial for accessing pre-seed capital.  
• Target the Right Investors: Identify investors who specialize in SaaS or have a track record of funding similar companies. Tailor your pitch to resonate with their investment thesis.  
• Demonstrate Traction: Even in the pre-seed stage, demonstrating early traction, such as user growth, pilot programs, or letters of intent, can significantly increase your chances of securing funding.
• Be Prepared for Due Diligence: Investors will conduct due diligence, so ensure your financials, legal documents, and other relevant information are organized and readily available.
  

Conclusion

The pre-seed funding landscape is a crucial foundation for the growth of SaaS companies. While there are fluctuations and trends to navigate, the SaaS sector continues to attract significant investment due to its inherent strengths and potential for high returns. By understanding the key trends, leveraging appropriate funding instruments like SAFEs, and employing strategic fundraising approaches, SaaS startups can effectively secure the capital they need to innovate, scale, and shape the future of software.

Also published on Medium.