In the face of a shrinking economy, founders of early-stage software companies are looking for safety in numbers when it comes to co-founding teams; investors are more discerning, with a focus on quality over quantity; and start-up growth is moving away from HR and employee collaboration tools and towards the finance, compliance, DevOps and productivity categories. These are some of the trends identified in the latest “Notion Cloud Challengers Report”, published today by leading European B2B SaaS investor, Notion Capital. 

The study, the second of its kind, was designed to identify and analyse Europe’s top 100 early-stage B2B SaaS/cloud companies, and examine their challenges and opportunities.

Jos White, General Partner of Notion Capital, says, “Based on the Top 100 list from 2022, we think we’re doing a decent job of identifying the emerging stars of European SaaS. From last year's list, nearly half the companies have already raised follow-on funding, a conversion rate that after only 12 months, far surpasses market averages.”

He adds, “Conditions are undoubtedly challenging for tech companies right now, but there are a couple of things that give me more optimism heading into 2023. First, businesses continue to move to the cloud and this is not a trend that’s going away any time soon. The cloud sector represents around 30% of the total software industry so there is still a very large untapped market to go after. Cloud is growing by more than 20% a year and is expected to have 70% market share of a trillion dollar market by 2027. Awash with easy money, and further propelled by Covid, the market clearly got way ahead of itself. But the growth and the opportunities are still there.”

“Second, a recession is a great time to build a company. Costs are down, talent is more available and many of your competitors will be weakened or even go out of business altogether. Many of the most successful companies were started in challenging times, including Amazon, Google and Uber.”

The Cloud Challenger 100

The report also includes the “Cloud Challenger 100”, a list of Europe’s top 100 early-stage B2B SaaS/cloud companies. The rankings are based on three main categories: founders, funding and project. We believe these are the areas that provide the best signals for future success.

Founders and their backgrounds are becoming increasingly important. Key findings in this area include: 

• 77% of companies have more than one founder; 73% have at least one technical founder. 

• 94% of founders decided to build their companies together as a co-founding team. Sole founders were rare in the cohort. 

• There’s still plenty of work to be done on gender diversity since just 13% of founders and co-founders are female, though this is up 2% from last year’s report. Of this percentage, only 3% had solely female founding teams. 

• Out of the three leading geos, UK-based founders tend to raise the most, followed by those in Germany, who usually raise 20% less ahead of the Series A, and then France, which raises 30% less than the UK.

Five key trends

These are some of the most significant trends in the cloud/SaaS industry, as outlined in the report.

The co-founding craze

The size of a co-founding team is becoming more important. Solo founders are rarer and the trend is towards dual or multiple founders, with at least one of these being a technical founder. 

According to Michelle Cheng, Notion Capital’s Head of Talent, “Only 13 out of the 224 founders in our research opted to build their company as a sole founder. This is significantly lower than a 2016 study of global data examining prevalence of sole founders that raised over $10M. In those companies, over 45% were sole founders. On average, Cloud Challengers had 2.26 compared to a global average of 1.74. Considering the volatility of the current market, it’s unsurprising that most founders in the cohort have opted not to go solo.”

Jos White adds, “The data shows having more than one founder - and complementary skills within a founder team - meaningfully increases the chances of success.”

Quality over quantity 

With an unprecedented amount of dry powder in the VC market, there’s money available to cloud and SaaS startups, but the macro-economic environment is very uncertain. This is causing a shift toward investors being more cautious with funds and choosing quality over quantity. Jos White asserts that startups now need to be: category leaders, truly innovative and come from founders with good track records. They also need to perform well in terms of metrics, especially growth, gross margin, NRR, ACV, CAC payback, burn multiple and revenue per head.

He adds: “startups should aim to become an essential part of the customer’s operations - something they can no longer live without. In this way it will still resonate well in a cash-constrained environment and not be singled out in any product streamlining that many businesses will be going through right now.”

Sector shifts

Last year, HR/employee collaboration tools made up the largest contribution to the top 100. While these remain attractive areas for start-up growth (21%), this year sees companies building products in the finance, compliance, DevOps and productivity categories, which represent more than 50% of the total list.

Stephanie Opdam, Principal at Notion Capital, proposes: “Considering fears for a recession continue, finance software will focus on cost control and budgeting accuracy. Like LiveFlow (#29), for example. Compliance software will be in demand as online risks continue to be high and might increase down market, while DevOps software will further reduce the number of tech staff needed to develop or maintain tech, as talent shortages continue.”

Steadfast customer demand 

The report includes results from a survey of 35 founders from the Top 100 list. These indicate how they’ve been reacting to the market downturn and their attitudes towards fundraising, growth and customer demand. Notably, 80% reported no decrease in the latter. Pipeline conversion rates remained consistent with earlier in the year, with some respondents noting an increase in the length of the sales cycle. 

Notion Capital investor Radu Bozga explains, “Those who did report a decrease in customer demand were primarily startups selling to other startups or scaleups: this is a customer profile that has been significantly impacted by restructuring or cost-cutting measures.”