Networking with Tomasz Tunguz @ Redpoint Ventures | SaaStr Software Community

Attend his session this morning to kick us off. Always so much great information from Tomas. And he's back to answer any questions that you may still have for him and to do some live networking. So, Tomas, thank you so much for taking the time to join us again this afternoon. Looks like we have a few folks here in the room. You guys can unmute yourselves and feel free to jump right in with your questions. And I'll also be feeding some other ones over from the chat too. I'll let you guys take it away.

Awesome. Thanks, Taylor. Anybody have a question?

I actually do. So, Thomas, great presentation this morning. I really enjoyed. Lots of information to process. But my question is actually based on your last point right before you finish the meeting. And you mentioned that if you have a B2B business not to use the SAS metrics. That was the only thing that I didn't fully understand. It was actually don't use SaaS metrics for B2B marketplaces.

Yep. Because. Yeah, so we can double click on that. So, you know, a classic B2B company, you have a sales team that sells to a customer and the customer buys is very simple. A B2B marketplace is. Let's take a labor marketplace, for example. But there are other kinds of marketplaces. Take a translation marketplace and make that an example. So let's suppose I have a startup that develops translation software and there's a pool of translators and then there's a pool of people who want content translated. You can't look at that business the same way that you would look as the first business, because first you have two different customers that you're acquiring and serving.

The first is a pool of translators who are your suppliers.

Second.

And then the second are the customers.

The second is most of the time those B2B marketplaces aren't pure SaaS. They tend to actually take a transaction fee on the gross merchandise value which traded between the marketplace and that transaction fee is often significantly below what the.

Gross margin would be of a SaaS company.

Like a SaaS company's operating at 70% gross margin.

Most marketplaces operate somewhere around 15 to 20% gross margin.

So they actually look like very different businesses. And it means that the marketplace, marketplaces by and large tend to have less.

To spend on sales and marketing than a SaaS company would.

And so you're going to operate the business differently as a result. That's what I meant. Is that clear? Yeah, super clear.

Now I understand the difference. Thank you.

Yeah, you're welcome.

For sure. Yeah.

Sometimes I'm dropping in A question, a couple questions from Jason. He's leading us through the chat.

Okay, so the question from Jason is, so private equity, what does it take to be acquired by a billion dollars.

By a big PE firm?

How many of these deals are likely to happen? So it used to be that the only two places if you were, if you're a startup, the only two places to go if you wanted to exit was a strategic acquisition or an IPO. And then three years ago, out of nowhere, private equity represented 50% of all.

Venture backed software exits. And big firms like Thoma Bravo and Vista Equity decided they wanted to get into this space and they're continuing to do that. Gainsight is probably the most recent example.

Private equity firms look at SaaS companies very differently than the private markets do.

And the public markets, they tend to.

Value them at lower multiples.

And instead of looking at them on.

A revenue basis, which is what we.

Talked about during our conversation, they look at them much more on a cash basis or a profit basis.

Because what they do is they buy.

Them with debt, they then use the excess cash to pay off the loan and then two or three years later, after they've reshaped the business, they take it public again, which they did very successfully. What's the most recent example?

Marketo is an incredible example of that.

I think Vista will have made like 3x in 3 years or 5x in 5 years, something crazy.

So that's continuing to happen. But I think what's going on actually is more and more companies, instead of going the private equity route, will go the SPAC route. And SPACs are a new way of going public where you have a company that raises capital and then is publicly traded from the very first day and then it buys another company and it.

Makes that second company public by bringing it, by acquiring it.

And I think the number of SPACs.

Have gone up by 350% in the last year.

The other thing that's really interesting about.

The SPAC or the special Purpose Acquisition company is that they have a two year timeframe and at the end of.

2022, I think there's like more than.

200 SPACs that have to find a business to acquire.

And so you're going to see a flurry of these. And so my expectation is that the SPACs will sort of take away some.

Of those potential acquisitions by big PE firms. But we will see.

Okay, question two from Jason. Do you think any spaces will decelerate.

After Covid Digital Events, Video Collaboration, Discord Clubhouse.

So it's interesting we're actually researching the digital event space now and I think that that's actually one space that may actually accelerate after we go back in person. Because it used to be that there were in person events and then there were online events.

And with COVID there have only been online events.

And what we're hearing from event coordinators is that now all in person events will be hybrid. And the reason, there's two reasons for that. The first is there's a lot of value in having an in person event. Making somebody jump through the hoops of getting the budget to go to an.

Event, buy the ticket, show up means.

That they're actually quite interested in whatever content it is that you're offering. And so those are actually really good leads.

So, you know, for many people who run field marketing events, you want to drive leads through them.

But on the other hand, what we found with virtual events is that the audiences for them are massive.

I mean like a 5 or 10. We've seen portfolio companies have a 5 or a 10x lift and the total number of people coming to the virtual events.

And so you still want to have that reach. And so the consequence of that is that all events will be hybrid, everything.

Will be telecast, but people will also be in person.

And so I think that space, like.

The willingness to pay on software will actually increase afterwards.

I think the big question in the room is do we go back to five days in the office or is.

It two or three days in the office?

And most of the people that I've.

Been talking to have said that two or three days.

But that's sort of the question.

And we don't really know. We don't really know.

Hey Thomas, I have a question for you. You were talking earlier about both gross margin and PLG becoming more prevalent as PLG takes even more hold. Do you think contribution will become more of a focus than gross margin given there's less sales force needed for a PLG based strategy and customer success is going to be more of your sales force than an actual salesforce?

Yeah, it's a good question. I haven't seen contribution margin being talked about in the B2B world. You do hear a lot about it.

In the B2C world.

And so the idea that, you know, as you move to more PG PLG.

Based motions, you look at contribution sort.

Of makes sense because, you know, if you're selling big ACVs, you're not going.

To look at contribution margin. But if you're selling B2C, so maybe.

Somewhere in the middle there is but A lot of companies talk about, a.

Lot of consumer companies talk about contribution margin because.

It's sort of used as like, if you have high fixed operating costs on each marginal unit, how much margin am I generating? And that may be true in consumer. So let's give an example. Let's say you're building. What's the next generation doctor, the publicly.

Traded company, One Medical.

If you're building One Medical, you have lots of upfront fixed costs. You have to go and buy real estate, build a building, hire the staff and then you're going to look at each patient on a contribution basis, which.

Is how much profit am I generating per marginal patient?

And that's because I don't know what that business operates in terms of gross margin.

But I would say it's probably less than like 30% at hazardous. And so contribution margin matters there.

Whereas, like for a SaaS company, the marginal instance of selling a piece of software, what does that cost? It's effectively zero. And so there may not be that much of a difference between like contribution.

Margin and gross margin is my point. But great question.

Hey, Thomas, I've got a question. So I'm based over in the UK and really loved your talk earlier today. You talked a lot about sort of valuation. What drives valuation? I was wondering if there are any sort of rules of thumb at what stage you're ready to go and seek Series A in the uk, the goalposts have moved over the last couple of years. I'd be interested to see what's happening over there.

Yeah. So the definition of. We just ran this analysis. The definition of Series A has changed in the last year. The median post money has gone from.

About 45 to 75 in the last.

Year and the 75th percentile has gone.

From 60 to 120 post.

And the check size has gone from about 10.

To 15 or 16.

So internally we have stopped talking about seed and Series A or pre seed post seed, and we talk about rounds of a particular investment size because they're all over the place. Like a Series A could mean a six million dollar round on a, you know, buying 20%.

It could also mean a $15 million round buying 10%.

And so this is sort of meaningless at this point. So. A company that is at half here, these are just kind of heuristics. But anywhere from about half a million in ARR to a million in ARR, growing 3x plus in the US is probably going to raise at least $10 million.

And at somewhere around 50 to 60.

Post, a company that's earlier than that.

Say like 200, 100k to 250k would.

Probably raise like 4 to a 7.

Million dollar round at somewhere under 30 post.

Excellent. That's brilliant. I won't hold you to those, but that's really good.

Yeah. Big asses. Cool.

A few questions in the chat, Thomas. We are. But everyone. Yeah. Feel free to raise your hand or keep unmuting. This is perfect.

Cool. I got another question from Jason that I'll touch on. Procore will do a huge IPO, but was founded in 2002 and had a.

Slow first 10 years. How patient is VC capital these days when unicorns are minted in two or three years sometimes?

So it's an interesting question, I think. Well, the reality is when we raise venture capital funds, we raise them for.

At least 10 years.

And so there's no real urgency for.

Us to get out of a position.

Necessarily or out of an investment or.

A partnership with a startup.

So we can be very patient, particularly if we believe. And I think there's actually sort of an increased patience that's happened. Like if you look at the amount of time it takes for a company.

To go Public, in 1999, it took.

Four years, about four years and about.

Six quarters of profitability to go public.

And as a historical aside, that's the.

Reason why most options vest over four years.

You have four year vesting plans because in 99, four years meant you would go public.

And now we've got the median time to an IPO is about 10 years.

And the other dynamic that's important there is you used to go public much earlier in terms of revenue, but now VCs and growth funds and hedge funds want to stuff more capital into these businesses before they go public in order to get more return on those dollars. And so because of our opportunity funds.

And the growth funds, we're actually delaying those IPOs and those sales because we're investing more and more as the companies grow.

So from that lens, you could even.

Argue that venture capital has become more patient. We used to be in the business.

Of investing in a company and expecting.

An IPO or an acquisition four years later. And now we're in the business of expecting an acquisition eight years later in an IPO 11 years after that, or 11 years after the first investment. So I think it's in a sense, it's more patient. Okay, another.

Any other questions from the audience? Otherwise? Yeah, yeah.

Davis, I think you have a question.

Oh, sorry, he's got his hand raised too.

I can go first, right? Please Go ahead, Uday.

Yeah, hi Thomas. One quick, one quick question on the, you know, the longer IPO and longer acquisition. So this becomes a very challenging to motivate the especially engineers.

Right.

You know, engineers are used to like two to three years lifecycle, are probably like a four is kind of a max.

Right.

If you know, tell them it's going to be like a six to seven or even little longer than it's very hard to hire them and motivate them and retain them. So is it something like, you know, VC communities aware of this issue?

Yeah, it's a good question. It's. The question is how do I retain.

People for longer than four years?

Yes.

Yeah. And the way that they're. There are two different ways of doing this. The first is a lot of companies, almost every company that I work with does Evergreen grants. So about two or two and a.

Half years into somebody's tenure, you start.

Giving especially the very successful ones, equity to re up them. And most of the time there's this thing called the boxcar method and I.

Have a blog post on it.

The idea is if this engineer is in the top quartile, if they were to go out to market and we were to hire them, what would it.

Cost us in terms of equity?

Take that, divide it by four, have.

It vest over four years and then every two, two and a half years re up. And that way they're always vesting.

And that's important for whatever your top.

Third or top half of the company.

And then the second thing that we see with later stage companies is they offer programmatic secondary. And what I mean by that is once a business is sort of meaningfully.

Into ARR, maybe 30 to 50 million in ARR once a year or once every other year, the company will invite.

A bunch of secondary buyers that they've vetted to buy say 15% of employees options. So I'm an employee, let me make this example. I'm an employee in a company that's.

30 to 50 million in ARR once.

A year I have the opportunity to sell up to 15% of my then.

Vested options and get liquidity. And that's a program that repeats every year. And so people are retained that way. Those are the two techniques I've seen. Okay, thank you.

Davis. Take it away. I think you had a question and then.

Yes, I do.

So this a little bit, this is a different one, Thomas, but what are your thoughts on green tech companies that are focused on the solar industry for example?

Yeah, I don't spend a whole lot of time there. We did spend maybe four or five years as a fund looking at solar arrays and that kind of thing. So I'm a little out of my depth, I think, I think batteries are probably one of the most important technologies.

In the next 10 or 20 years. And new batteries, chemistries are going to be very, very important.

And they're important not only for electric.

Cars, but also like solar charging.

The thing that's really going to change.

The infrastructure in the US is assume.

You have, you're selling 5 million electric cars every year.

You need the infrastructure to recharge them.

And the electric grid in the US.

Is underwhelming, needs a lot of work.

And so what's going to happen is you're not going to, you're going to have a lot of solar generation that.

Fills batteries that then recharges cars and.

You know, battery chemistry, solar panels, all those kinds of those things are going.

To be super important.

But like I said, I, I read, you know, I spend like less than.

1% of my time there. So just shoot from the hip. Thank you, Yousef.

Yes, Tomas, thanks a lot for your initial session on valuation. I look forward to your blog post on that. We're actually an HR SaaS company and are transitioning from product market fit to growth. We focus on the Middle east region. I'm just curious about what are your thoughts on what would you consider a reliable metric to kind of verify or validate that you've transitioned from product market value and are ready to kind of start pushing forward with growth?

Great question.

Roughly how many people are you?

We're 65 people.

Okay.

So the first measurement of product market fit is the transition from founder selling.

To AE selling and the metrics associated there.

So how long does it take an.

Account executive to ramp to hit quota? What fraction of account executives attain quota?

And so that's sort of the first stage, you know, like can I teach.

Somebody else to sell?

So that's stage one, right. Then stage two around product market fit has to do with the ability to create leads and get to a pipeline to quota ratio.

That would be the second phase.

And the pipeline to quota ratio is how much sales qualified pipeline exists divided by the sum total of all this.

Quota on the street.

In other words, the quota of all.

The exist the ramped AES.

And typically what you're looking for there.

Is something like a 3 to 5x depending on your close rate from SQL to close customer. Okay, so let's, let's just double click on that for a second.

If my close Rate. If I close 20% of every SQL, I'm going to need five times the.

Amount of pipeline to make sure that my AES hit their quota right.

If I have a 33% close rate.

I need three times.

And so once you start hitting product market fit, what you want to be.

Able to see is that you can.

Generate that amount of pipeline to quota ratio consistently. Because if you can't, what it means is that you might have a false signal at the beginning where you were able to sort of achieve lift. But if you tap out and you can't generate the pipeline, it might suggest that the market size or the approach where the number of customers in your.

ICP are too small.

And this is a. This dynamic doesn't happen once in the.

Life of a company.

I'll give you an example.

Like looker was a BI company that Google bought for about 2.7 billion.

And we initially started selling business intelligence.

Products to a small segment of the called the data analysts, sorry, the data engineers, or the people inside of a company who are responsible for giving data to everybody else.

And then one year, Frank, who's the CEO, said, hey, we're going to change our ICP because we can't grow the.

Way that we want to just selling to them. We need to broaden it out and sell to the data analysts as well. And the number of data analysts are far larger. And so there was this year of the Hound where we repositioned the company.

And you're going to see companies go.

Through that at different scales.

Like Salesforce initially sold Salesforce Automation, then they got into Service Desk and now.

Service Desk is actually much bigger. And then they do all kinds of.

Other kinds of things. So it's a journey that it's a.

Cycle, let's put it that way.

Okay, thank you, Tomas. That's actually very helpful. Would you consider NPS as some sort of litmus test to validate your initial assumption or is it not something.

I know Jason loves NPS. I'm not a huge fan of NPS. We ran a survey of 600 SaaS companies and more than 60% of them had an NPS of greater than 50. Okay, so it's not. It's not. And then we surveyed heads of customer success and none of them put it as their top metric.

They used net dollar retention as the top metric.

And there's a couple different reasons why NPS can sort of lead you astray. The first is the NPS may just measure your last experience with the customer.

Support team or the sales team. As opposed to real satisfaction with the customer, the experience.

And that's why NDR is so much more powerful. Put your money where your mouth is, right? If you're going to buy more of the software, then you know that you're.

Really happy with the product. And if you churn, then you're not.

Cool.

Thanks.

Thank you.

Okay.

Stuart, you have a question?

Yeah, just kind of another sort of fun one, really. So are there any sort of particular sectors of the SaaS market that are particularly hot right now and any that are particularly cold? I mean, we've all got a business, so it's not like we're going to change based on your answer. Just kind of for fun, really.

Well, I don't think it's hot and cold. I think they're just sort of. There's these sort of waves. So, like, you know, when Covid started, the virtual event platforms were really hot.

Collaboration spaces were really hot. What else did we see there?

There's sort of a wave of next generation CRM brewing that we're excited about. I think that, you know, we talked a little bit about it in the earlier session, which is SaaS companies being built on platforms like Shopify and Snowflake.

I think that's a wave that we're going to see over the next three to four months. Um, anything else, like, you know, you.

Have kind of these like bizarre things. Like all of a sudden legal software.

Gets really hot and there's a quarter of like 25 different companies in legal raising.

Um, but those are the ones for now. Okay, here's a question from Ken. What is your take on the landscape for patient centric health? It B2C to B play in the market right now.

So let's break that down. A Patient centric health, IT B, B to C to B.

Okay, maybe Ken, can you rephrase? You typically see B to B to C where you're selling through a business.

To get to a consumer.

What does it mean to have a business that sells to a consumer that.

Then goes and sells to a business?

We're trying to hit it from the top and the bottom. Essentially, we're targeting both patients with a personal health record that is leveraging AI on the back end. So we're able to actually give them more information about their health data as well as aggregate both dental as well as, you know, your CL classic health data from hospitals and patient care providers and using that as a driving force. Because the PHR is free, they pay for a premium subscription that gives them additional analytics and other integrations with like Fitbit and Withings solutions, but to use that to then push the care coordination stack into small independent providers, small provider groups, and like rural situations where care coordination is a huge problem and they don't have a huge investment in Epic or Cerner. They may have a partner that has it, but they themselves don't have that capability. So.

Yeah, so going back to. I should have answered to Stuart, One of the areas that's actually gotten a lot of heat in the last couple.

Of months is next generation medicine.

And Ken, I'm glad that you said that you're not playing in the Cerner or Epic world. We did a research about like 18 months back and basically the conclusion was that Epic and Cerner actually will sue.

Customers who try to distribute the data.

Within those EMRs, which makes it incredibly hostile for startups to try to build or integrate. And so I think as long as you're not playing, if you're playing in a different sand, what's it called, a different sandbox, then I think that's great.

Well, the benefit that we have actually is ONC and CMS have rolled out new data privacy blocking rules that go into effect in April. And so the systems and the doctors have to give you your data when you request it. And they have a time limit and it doesn't matter if it's an ethics owner or where it is, they have to give you your data. The problem is patients don't know what the hell to do with that data. So that's where the AI and the NLP come in. So we're actually able to give you more insight into what you got.

Yeah, sounds promising.

Well, thank you.

Okay, let's.