46. The Must-Have Characteristics of SaaS Startups (Tomasz Tunguz)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Tom Tunguz of Redpoint Ventures joins Nick to cover The Must-Have Characteristics of Successful SaaS Startups. We will address questions including:

  • Must-have characteristics SaaS TunguzCan you talk about your decision to blog, selling your partners at Redpoint, how it went in the early going and what results it’s created for yourself and Redpoint?
  • Let’s start w/ when a SaaS founder first approaches you w/ their pitch… what key elements are you looking for in order to take a deeper dive?
  • We had a great interview with Mamoon Hamid some months ago about SaaS and discussed a lot of the key metrics like MRR, ARR, the Quick Ratio, etc. What are the main metrics you measure and what levels are you looking for?
  • From a marketing and channel standpoint, what practices have you seen the best SaaS companies employ?
  • You’ve written a lot about the sales process. Any must-haves here before you’d consider making an investment?
  • You’ve talked about the two-step value proposition in the past. Can you touch on what this means and why it’s so critical for SMB SaaS companies?
  • I’ve enjoyed a great deal of your writing on pricing in SaaS. Could you highlight the key mistakes made in pricing and give us some insight on how SaaS startups can determine an optimal pricing strategy?
  • Software-as-a-Service has grown exceptional fast and in 2014 venture capital funding to SaaS companies hit $11.7B, a 70% increase year-over-year according to CB Insights. What are you thoughts on the trajectory going forward?
  • Do you have any other thoughts or suggestions regarding must-have characteristics for either startup investors or founders?

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Key Takeaways:


1- Critical Elements & Metrics for SaaS Startups Pitching for Capital

Four Elements:

1. Unique idea, unique point of view and a vision.. what Peter Thiel calls the secret
2. Winner take all dynamic
3. Early signs of great sales and marketing execution
4. Ability to raise money

Three Metrics:

1. Revenue Growth- 15-25% monthly
2. Payback Period: The median is around 15 months, but every once in a while you find an exceptional payback in the 6-8 month range
3. Account Expansion: How much more your customers pay you this period vs. the previous period


2- Sales in SaaS

Tom cited four items that are critical when conducting diligence calls with customers. On each call he asks the following questions…

1. Related to growth, virality and customer acquisition, he asks: How did you hear about this product?
2. Related to value proposition and defensibility,he asks: Why is this product much better than everything else?
3. Related to speed of adoption and use, he asks: How is the implementation?
4. Related to ongoing product use, engagement and likelihood to recommend to others, he asks: Did the product deliver what the sales team promised?


3- SaaS Pricing Strategy

Tomasz reviewed the mistakes that founders make when pricing their product which can hurt their cash position, limit customer adoption or cause elevated churn rates. These included:

-They don’t move to annual pre-pay soon enough. So while critics believe startups may leave money on the table by offering a discount for annual pre-pay… this provides a huge cash efficiency advantage, to a company where cash efficiency is king.
-The next trap Tom mentioned was when startups have an overly complex pricing model. It doesn’t really matter how appropriate a complicated model is, if it’s too difficult for a user to understand, it will limit conversion.
-The next was a lack of understanding that price is an evolution. One needs to keep testing and keep evolving the pricing model over-time.
-Tom also mentioned that customer procurement groups are often compensated by how much they can negotiate down. So startups need to approach the sales process with a lot of extra giveaways to throw-in, so that the customer can negotiate down and get their compensation.
-The final point discussed related to not using relative price discovery… So, how much is the customer willing to pay relative to X product that already exists in the marketplace. And it doesn’t have to be a perfect proxy for the new SaaS product on offer… it just needs to be related and similar enough to get an idea of acceptable price ranges that the customer is anchored on.

Tip of the Week:   Building an Investor-Brand


*Please excuse any errors in the below transcript

Nick: Today we have #Tom Tunguz. He’s a partner at #RedPoint and rights at one of the, if not the most well-read blogs on V.C. and SaaS startups over at Tomtunguz.com. Tom and I have been trying to schedule something for many months and it’s a big thrill for me to have the man behind one of my favourite blogs here on the show today. Tom, thank you for joining us.

Tom: Nick, it’s a pleasure. I’m glad we could do it.
Nick: So, Tom I really enjoyed your backstory and how it led you to Venture Capital. Can you start us off by walking us through your background and how you got to where you’re at today?
Tom: Absolutely. Yeah. I’m originally from Europe and I lived in Europe for about ten years and we moved around a lot of kids. Then we moved to New York and when I was about seventeen my dad to me out to South American and I started the business there. It was a software business. I was an S.P. before the SaaS days and then I went to school at Dartmouth and I studied Computer Science and Mechanical Engineering but when I graduated, I wanted to understand how business was built for real because the little company I had co-founded, it was more of a toy and so I went to work for a SaaS company in Washington D.C.; It’s called #Appian. It still is a business process management software company and I was a job engineer there for about a year. #Pegasystems ultimately became the winner in that space but it was a ton of fun. I learned how to build high skill software with  the U.S. government that I was working with the department of Homeland Security but after a year I decided, time for change and I came West and I joined Google but I had a 3.3 G.P.A. and they wouldn’t take me as a Product Manager in engineer with those poor grades but they would take me as basically a customer service rep in a roll call AdSense operations and so I was managing the accounts of lots of different social networking clients but that entry point lead me to become a product manager building ad products for social networking customers like #My Space and bunch of others and I there for about two years and I really loved my time there and then I can the RedPoint about almost seven and a half years ago; and at Redpoint, focus on early stage software companies mostly and then a bunch of data and data infrastructure businesses too.
Nick: So how did you make the transition then from working with a tech company over to RedPoint?
Tom: Yeah, it’s a bigger transition than I thought you know But I have been a guru here… It’s a pretty big transition but I was in this program called Associate Product Manager Program at Google. It’s an exceptional program. I recommend it to everybody. It’s basically a two year rotation inside of the company and my time was coming to an end and I was looking for a new project inside of Google and I started looking outside and you know, I’d always been fascinated by the idea of Venture Capital. I had read this book, The founder of Netscape. He wrote a book about traveling across the world on a motorcycle and I was like, “Man! That’s a pretty great” but then… and he was Venture Capitalist so I was like you know, maybe they’re related but the reason I join Venture Capital is, there is an unlimited learning curve to the business. It turns out there’s not one but two and I only discovered the second one after I joined. Like the first one is the obvious one which is the ‘subject matter learning curve’ is never ending, right? There’s always some new technology whether it’s bitcoin or the block chain or drones or machine learning or deep learning and you know, I’ve always been fascinated by technology and the second one which I think is the more interesting one and the steeper one is the people learning curve which is when you’re on a board and you’re investing in a company and my methodology of being on a board is really… It comes from my product manager days which is I really want to

pretend like I’m a PM for the company and what that means is, I try to figure out the most pressing problem for the company and do whatever I can to help the business and if there’s nothing I can do then I just get the hell out of the way and the other people to care of it 3:39 (unclear) the whole idea but the people learning curve part of the business is really interesting because you work with a company for a long time right, seven, eight, nine years and our roles as a venture capitalist board members, it’s to do whatever we can in order to make sure that the founding team really achieve their potential, right and the company achieves its potential and different teams and different companies are going to need very different things from us, right? And so that means how do we shape ourselves to the business and how do we take… What we can bring to the table and maximize the potential of the business. So I really love that challenge.
Nick: You know Tom, I had a listener email me the other day with a question about blogging and building a brand as a V.C. blogger. Would you mind taking a second and talking about how you went through the process of deciding to blog, selling your partners at RedPoint on the time commitment of the blog and kind of how it went early going with the results that it has created for both you and RedPoint?
Tom: Yeah. So, I initially started maybe about a year after I got to RedPoint and there was this weekly news summary that I was preparing for our partnership every Monday and I just started publishing that right. It’s not proprietary, there was no risk. The potential downside was pretty low and that started going and I was like, “Hey, maybe I’ll throw in a couple of opinions.” Then after I had worked on a couple of deal teams and I starting work with a handful of portfolio companies, the C.E.O.’s were asking these questions in the board meetings. Like, “Hey, how many salespeople should I have given? I have seven engineers?” or “What’s a typical price point for a company in this space?…” or “How fast should we be growing?” and so what I do is I go back to the office after the board meeting and analyze some data set and then send it to them and then I also realized, “Hey, none of this stuff is proprietary…” so I started publishing on the blog and I just kind of kept doing it and kept doing it and at the beginning it was you know, I would go home and tell my wife, “Hey, one hundred people visited my site today” right and it was like that for a long time and then every once in awhile you know, I’d get a feature and I was running a WordPress. I would get a feature on WordPress or you know maybe like eighteen months or two years in I got my first Hacker News home Page thing, right and it was like champagne at home and it was a big deal and then I started talking to a bunch of other bloggers, right? So, I talk to #Chris Dixon and I just remember there was a seminal moment that Chris Dixon where he’s in Business Insider and he had… You know, he told me in his memory that there was this one blog books that he wrote about some thesis and e-commerce and all the C.E.O.’s, all the key startup C.E.O.’s in e-commerce companies started commenting on his blog and that was the moment. You know that was a.. Like he’d broken through. You know and I talk to much of other people and it turns out everyone builds a blog in a slightly different way but it’s just been you know… my ways really just been consistency. I think I learned…. I mean that’s obviously an example set by Fred Wilson who’s the most consistent and in terms of time allocation, I’ve always kind of woken up really early to write. So I try to get up between 4:30am and 4:45am and I try to write for sixty to ninety minutes and then it used to be whatever I had at the time just went out the door, right? That was it. That was all the time I had because I needed to get five posts at a day and now it’s kind of scale back so it’s about three and a half to four and a half posts a week and I spend a little more time on them but that’s the way it works.
Nick: And results for you and RedPoint, are you guys seeing more deal flow? Are you get more access to partners in the V.C. industry? How’s that?
Tom: Yeah. There are a lot of different benefits. I think… By the first one I saw, has it really build a brand for us as a firm and people be like, “Oh yeah. I read that post I was really great.” The second benefit was it really build our network so all the sudden we started seeing you know, VPs at later stage companies who had built exceptional businesses, we could reach out to them and befriend them and talk to them about their businesses right and so that helps us in forming our decision making when we invest and then the deal flow has really started to happen of late. So lots of wonderful founders e-mailing us and either asking for advice or wanting to come pitch and that’s been that’s been a really terrific; and then the fourth benefit is it’s also a great place for us to promote our portfolio companies, right and the way I like to do this is really through the lens of best practices so there’s this ongoing, not a colander like a weekly or bi weekly, what would we call them? Subset of posts that are focused on if they’re called Best practices because there are things I noticed in particular companies that seem to be working really well and are probably general lessons that other people could learn from and so that’s been fun.
I think for the first six months of my experience, my wife was giving me dirty looks and I was crazy including my family but you know, it get up to ten thousand and then she thought it was interesting and once i got over fifteen thousand then she was fully onboard so…
Nick: Awesome!
Tom: That’s the way it goes.
Nick: Yeah, yeah. You gotta prove it out right for people to believe…
Tom: That’s right. That’s right.
Nick: … in startups as well. So today we’re talking the “Must have” characteristics of successful SaaS companies. Let’s start with the founder approach. So when start up entrepreneurs come to you with a pitch deck, what are the key elements that you’re looking for in order to take a deeper dive?
Tom: Yeah, I mean I think at a really high level they’re probably four things we’re looking for. The first is a unique technology. A technology that enables some to go to market advantage or some you know, #Peter Thiel calls a secret which it is just kind of a unique perspective, right? Somebody looks at the market in a totally unique way and what’s interesting about that is, you can either come to the market knowing nothing in which case you start from first principles and so you have a different point of view or you can come to the market having worked in the space for a little while and you have a unique point of view. So, we’re looking for someone you know, who has a different vision. The second thing that we will look for is some sort of winner take all dynamics. So those are network effects, data network effects brand. The third thing that we look for is early signs of great sales and marketing execution selling software companies. In order to be really big, you have to have a terrific go-to market team and you know the Series A, that’s obviously nascent but the foundation of those teams is already there and then the fourth part is an ability to raise money, right? So what we’ve seen with software companies is; to grow really fast you’re going to burn a lot of cash, right and it’s because you’re in the business of buying

future cash flows which are your customers who are in your contract and in order be able to do that to finance growth, a lot of companies need a lot of capital and so the founders going to need to be able to do that effectively. And so we look for some subset of that. So it’s a two maybe three of those characteristics, every once in awhile you find a company that has all four and you do whatever you can to make sure that you’re the firm leading that investment.
Nick: You know, we had a great interview with #Mamoon Hamid ago about SaaS and…
Tom: Yeah?
Nick: … discussed a lot of the key metrics like MRR, ARR, the quick ratio… What are some of the main metrics that you measure and what levels are you looking for?
Tom: Yeah, I mean at the highest level at the series A you know, they’re probably three that we look for; revenue growth, payback period and account expansion, right? So, revenue growth is how fast your M.R. is growing and we’re looking for a company somewhere between 15 – 20 percent monthly revenue growth. On a payback period obviously shorter is better. The median there is probably around fifteen months but every once in awhile you come across a company that’s got a six month or an eight month back period and that’s a really attractive attribute because it means that you can grow incredibly quickly without very much cash and the third one is account expansion and this is really… I love this metric. So account expansion is how much more your customers pay you this period compared to the previous period and it’s a great proxy for customer satisfaction and priority that this product has within the company. It’s also an unbelievable growth accelerator. So there’s a probably the three metrics I look for just kind of in the first level meeting.
Nick: Just a couple days ago I was at a Techstars demo day here in Chicago and..
Tom: Yeah.
Nick: … I think four of the founders all pitched that they had at two to three month payback period…
Tom: Wow!
Nick: … and they’re on their acquisition but you know that’s what I tend to see a lot of these demo is, do you think there’s a common maybe misstep or a common oversight when it comes to the presentation of that metric and then when you dig a little deeper you find that maybe it’s not a two to three months payback?
Tom: Yeah, it could be. I mean, you’ve got to make sure that you know your costs of customer acquisition is fully loaded. That’s probably… but it’s tough in the early days right? I mean you don’t really have the accounting systems in place and it’s easy to kind of overstate or understate so you definitely need to do some digging but yeah, I mean I think you can also induce an artificially low payback, right? If you deliberately reduce spending on sales and marketing and then your business is some natural acquisition through a C.E.O. then your payback period is can be instant or… but that doesn’t scale, right? So, you can have to kind of balance the two and figure out in the pitch meeting what’s really going on and is this payback period actually sustainable and  

does that lead to the kind of growth rates that are attractive.
Nick: So from a marketing or channel standpoint, what practices have you seen some of the best SaaS companies employ?
Tom: You know, it’s a really interesting question. Channel is actually relatively new so I’ve only seen three or four companies maybe five that are actually using channels at scale but I think what’s consistent across all the SaaS companies are going really fast is they have two things: The first is a data centric culture. So a group of people who are willing to kind of let the data guide them and then the second is a willingness to invest and build a team that creates an experimental framework for the business, right? Like the reality is no one really knows how a company is going to grow really affected whether it’s content marketing like #HubSpot or inside sales or outside sales or partnerships on a big app store, right? Like an #Amazon or a hovercraft store and no one really understands the messaging inquiry of, “How you’re going to position the company to most effectively sell?” but you really have to do is you just have to keep testing, keep testing and trust the data to guide you and so the most consistent thing I found is a data driven culture and then in order to support that data driven culture you need to hire market. For example; a marketing analytics team, right and that means taking an engineering headcount that you have and putting them in a place where they’re not building outwardly facing product but they’re building and an organizational asset of muscle that’s going to help you figure out exactly what the right go-to market strategy is for a particular point in time.
Nick: It’s interesting. We had #Steve Blank on and he talked about sort of building a customer focused culture in which you’re just testing, constantly testing different messaging, testing different approaches to customer acquisition and testing different value propositions for the fundamental offering. Seems to be…
Tom: Yeah.
Nick: …you know companies with that sort of culture really do better than others.
Tom: Yeah that’s it. I mean, I think you know the one thing… If you kind of assume… Here we reach the global maximum, right. Like you figure out exactly what our pricing is, we’ve got a marketing nailed but the reality is like the underline… the environment that the companies operating is change all the time. Whether it’s competitors or you know, whether it’s just kind of the sophistication of the customer base it’s all of all thing, right? Like we spit out more and more content marketing and so everyone’s becoming more educated so as a consequence, like the optimal way of approaching the market is going to change, right? And so you have to position your business in such a way that you are listening for those changes and observing those changes and then evolving to go to market to respond to them.
Nick: Any thoughts on defensibility whether it be network effects or otherwise when the marketplace is changing so rapidly, whether be technological disruption or information, disruption or otherwise?
Tom: Yeah. So, in a lot of SaaS categories you don’t have to acknowledge the differentiation. It’s pretty easy to replicate somebody else’s product like stock for example. You can build a client on top of Internet Relay Chat pretty quickly, right? Like workflow tools would be another example.

There really isn’t a technology differentiation. There you have to build something else and a lot of them, #Zendesk is probably great example. Zendesk really had a customer acquisition defensibility which is, they understood how to market and build communities and creative Vangelis within a particular community and that reduced their cost of customer acquisition to be substantially lower than anybody else in the space and as a consequence to grow more efficiently, right? You know, I think another way of doing it is you know what Nick, matters doing again side or which on #Miller did it. #Marchetto which is category creation. For marketing automation there was one company whose brand name was associated with it. So I think that’s you know Marchetto and marketing automation up spot for content marketing gian sight for customer success and the brand building is also a terrific differentiator and a moat and then the last one you know, like data network effects or network effects which is the bigger you become the harder it is to sell your position and you know those are really businesses to be an investor in.
Nick: Yeah. I’ve talked a lot with #Leo Polovets…
Tom: He’s great. Yeah.
Nick: … Definitely centres on creating data modes and the value of data but anyway, you’ve written a lot about the sales process. Any must haves here before you’d consider making an investment in a SaaS business?
Tom: I think that you know, three to five great customer references. It’s really indicative of what happens in the sales process, right? If you can call customer and ask them, “How did you hear about this product? Why is this much better than everything else? How is the implementation? Did the product actually deliver what the sales team promised you?” you know, I think that’s a really great start for a very early stage company. Yeah. The later you go, the more metrics you have on the business so you can see, “Hey, what quarters do the sales teams hit, right?” and we’re really looking for quarters that are 500K plus on the inside and then top of the heap is probably 1-1.2 in our quarter and you know, big numbers on the field stuff. So those are probably the two things we’re looking for.
Nick: If it’s more of a consumer business as opposed to a B. to B. enterprise sales process, are you looking at things like Net Promoter Score?
Tom: Yeah for sure and the promoter score is a really good so if you know your freemium bottoms up and you’re going through the App Store, you’re going through web, remember what we’re looking for is the efficiency of the conversion funnel, right and so it’s really kind of 2-4 percent from top of the funnel to the bottom of the funnel is where most companies actually end up and then that’s what we’re looking for. The promoter scores really good because just like Zendesk did, you really want to have a lot of Evangelist pushing the products because that’s just going to reduce your cost of customer acquisition and increase your efficiency.
Nick: 2-4 percent, it’s that low?
Tom: It’s really low. I mean, if it’s purely product based it tends to be about 2-4 percent. Every once in awhile you come across a company that’s kind of bidding at 5 percent but if you can lay

on inside sales team and inside sales team that actually farming the leads, you can push that up to about 15-18 maybe 20 percent and so that can be huge catalysts for companies but on the premiums side, yeah it’s about 2-4 percent 18:55(unclear).
Nick: Tom, you’ve talked about the two step value proposition in the past…
Tom: Yeah.
Nick: … Can you touch on what this means and why it’s so critical for SMB size companies?
Tom: Absolutely. So there’s two steps that you proposition is for SMB is first you have to convince an employee of a company to use your product and get really excited about it. That’s the first step and then the second step is for that employer group of employees within the company to promote a product internally and convince the company to buy either for department or for the whole of the company, right and one company that I work with that does this a lot is #Expensify. So Expensify and expense management tracking company and the whole idea is, you basically just take a photograph of your receipt when you’re taking a client out to dinner and the software takes care of the rest and we’ve got a lot of traction, we have millions of users and a lot of those users actually come just from downloading the app on the App Store. You know, we’ll get a sales team within particular company and that sales team will be so over the moon about the product that they don’t want to use anything else and so then they end up going to their finance team and they say, “Hey, we really want to use Expensify company wide and that’s the second part of the sales process and so the value proposition for the sales people is the simplicity and then the value proposition for the finance team or the accounting team is what’s called compliance which is because this Expensify is so much easier to use, more expenses will be tracked and so you’ll be able to report on those expenses in greater detail which is a key feature for the finance teams; and so all the SMB, I mean really successful SMB SaaS companies need to understand, “What value proposition do I sell to the individual and what value proposition do I ultimately end up selling to the larger enterprise?” and oftentimes are very, very different and that’s why you need two value propositions.
Nick: When we think about these brand evangelists and how they kind of become an extension of your sales force, are you looking for the users of a SaaS program to not only experience the benefit for themselves but also see a huge benefit if there are entire functional Department were to be using it such that they will make that case and make that sale to their decision maker at a higher level within their organization?
Tom:  Absolutely. It’s an ideal… It’s a really ideal characteristic of a business because  that’s what lead to negative account grow, a negative account churn or just account growth right which is they’re going to spread the product. We see this a #Looker which is a business intelligence company we’ve invested in and that company, we just hear stories from our customers that once someone in the organization starts looking at data everyone else around and wants to start looking at data and so it just grows and grows and grows and grows.
Nick: So, I’ve enjoyed a great deal of your writing on pricing in SaaS. Could you highlight the key mistakes made in pricing and give us some insight on how SaaS startups can determine an optimal pricing strategy?
Tom: Yeah. I think this is one of the questions that start-ups struggle with a lot and I think the reason that they struggle is it’s really hard and it’s really hard because it’s dynamic. Again it kind of goes back to this marketing idea which is the ecosystem that you’re pricing in is changing all the time. The competitive landscape is changing but more importantly the company itself is changing the landscape for itself, right? The role of the marketing team within the company is to change the supply and demand curve in a more favourable way. Yeah and so as their efforts bear more fruit this prior demand curve changes and so price has to change. So the five mistakes that I see companies make pretty often in pricing is, they don’t move to annual pre-pay soon enough and it’s almost an industry standard at this point. A lot of startups will face pushback particular from their sales people and initially from the early customers but the advantages in terms of cash efficiency of champion was stated.
The second mistake is an overly complex pricing model, right? So, you have to price our product in a way that it makes it immediately apparent to a customer why your pricing this way and so good counter example of an or an example of a nonsensical pricing mechanism would be a slack instead of charging on a proceed basis decided to charge on the number of messages sent between people. For purely economic point of view that makes sense right? Which is because the marginal cost for slack, you could argue right because they have these servers, it’s carrying these messages from one person to another but there are a lot of problems with that which is the customers has no idea, right? So the predictability is really tough and it’s so intangible that it’s going to really decelerate the sales process. You can spend a whole lot of time explaining why you’re pricing this way. So that’s pretty frequent.
The third is static pricing is what we’re talking about before. The pricing has to evolve to continue testing and at the beginning you know, a lot of startups coming in to say, “We know we’re leaving money on the table.”… Yeah, you’d be surprised that you can actually… One of the companies I work with they’ve increased pricing by ten X in about three years, right and so if you achieve product market fit, you can really increase your price point and testing its very important.
The fourth is, not a lot of start of founders have been through a procurement process with a large company and it’s really important to understand that procurement teams, they’re compensated on how much they can negotiate a vendor down and so you have to structure proposal with a bunch of giveaways or concessions ahead of time so that you get to where you want to be after the negotiations and then the fifth one is, not using relative price discovery. So, it’s really hard to ask somebody, “Hey, how much are you willing to pay for my product?” Right? I mean, the incentives are skewed. It’s against their economic interest to tell you exactly what the maximum willing to pay is but you can get closer to the answer if you ask them, “How much you’re willing to pay relative this is other product, right? I have this Apple laptop and it’s beautiful but I notice that you have a Windows machine. How much are you willing to pay relative, right? Are you will to pay a little bit more or a little bit less?” So, that gives you a lot really great price guide.

Nick: Wat you said about the complicated pricing models…
Tom: Yeah?
Nick: … it seems like there’s a lot of old incumbents and a lot of older established industries with really high entry barriers where they almost intentionally keep them raising model super complicated which frustrates the consumer but there’s not much you can do about it. I mean, I’m  

thinking about telecom in my career for instance it’s super confusing.
Tom: Yeah I agree but that’s a little bit of a different industry because there’s total saturation, right and what they’re trying to do is maximize the revenue from every customer and so they have a particular kind of model but startups are really trying to create a pricing model to maximize growth in account and account capture and so that’s why you need a simple model.
Nick: So software as a Service has experienced exceptional growth and in 2014 Venture capital funding to SaaS companies hit 11.7 billion 77 percent increase year over year according to CBN sites. What are your thoughts on the growth of SaaS to date and the trajectory going forward?
Tom: I mean, I think it’s going to continue to increase. So we did this analysis for, an internal analysis and the founder is basically 1.5 half trillion dollars market cap of enterprise companies and only two percent of that market cap is #Cloud or SaaS and so even if you think only about a third of that 1.5 trillion of enterprise market cap is going to shift to Cloud, you still have half a trillion dollars It’s going to shift and you know… So, I think there’s sunny skies ahead for SaaS, right and probably the best manifestation of this or the most recent manifestation of this is the rise of vertical SaaS, rights? So vertical SaaS are software companies that are dedicated to only serve a particular kind of business like a real estate business or financial services company or a general contractor and we really haven’t seen very many, there are some exceptions but we haven’t seen very many of those kinds of businesses but now we’re getting to the point where lots of these industries that haven’t really champion the use of software, starting to realize that software is a competitive advantage and adopting it and that leads to new markets that suddenly open up.
Nick: Yeah, any sort of founder that’s pitching shelfware today…
Tom: Yeah…
Nick: … I always scratch my head and I’m saying, “Why is that the business model? I mean, if there’s real value here wouldn’t people be willing to pay on a recurring basis?”
Tom: Yeah. That’s exactly right and so you know because you’re paying on a recurring basis you need to have ongoing value and so puts a greater onus on the company to actually get to a true product market fit which is really good thing for everybody.
Nick: Tom, any other thoughts or suggestions regarding must have characteristics for either start-up investors or for founders?
Tom: The last one I’d say is an ability to recruit, right? It’s incredibly competitive for talent and ultimately the people that you hire are the ones that are going to building the company and so people who can recruit or have incredible networks of people to recruit from are going to be at a huge competitive advantage when they’re building their startups.
Nick: Tom, can you talk about some of the things you’re currently most focused on over at RedPoint?

Tom: Yea. I’ve focused on machine learning in SaaS. So, recommendation systems and online detection and the application of those within workflow tools. The second one I really like is software enabled marketplaces. So there are lots of interesting examples here. It’s a business model or go to market where you have, let’s just use an example; so, one company that does this really well is a company in Canada called Joist. They provide free software to general contractors to help them run their businesses better. So that’s invoicing, scheduling, client communications. And then they also provide a free application to consumers who remodel their houses, so they help them plan the project. And then at the point that the consumer is ready to move forward with the remodel, they hit a button and they’re introduced to the general contractor. And joist is able to… That’s the marketplace part. And Joist is able to understand, here are the needs of the consumer and here is the expertise of the general contractor, this would be a really good match. And that’s only enabled by the fact that you have software on both sides. So I really like those models. Some of them give the software away for free to supply and demand. Some end up charging. Quartzy is a lab management tool that ends up charging for the software. And then also does replenishment for lab supplies. There’s lots of different models. But these SaaS enabled marketplaces create those moats that we were talking about. Those network effects, just because of the way they go to market. So that’s a really exciting segment.

Nick: If we could address any topic in venture, what topic do you think should be addressed and who would you like to hear speak about it.

Tom: One of the things that I’m constantly asking myself is how venture capitalists can serve founders better. Right? And I think the industry is obviously changing very quickly. There’s a huge advent of convertible notes as an investment instrument as opposed to a bridge instrument is a great example. But, i think we’re in the financial services business with an emphasis on services. So, I’d like to hear a panel of a bunch of different founders at a bunch of different stages talk about how venture capitalists can improve to serve them better.

Nick: What do you see as your biggest contribution when you’re serving on the board of one of your portfolio companies?

Tom: I think the most basic contribution I can make is decision-making auditing. So, being on the board of a company, I’m never going to know as much about the business as the founders who are working in it every day. Right? So, I don’t think there’s very much that I can teach them. Right? Even sharing stories of other, what has worked at other companies, is conceptually really interesting but largely not applicable for businesses because they’re just different. So, I think the most basic thing we can do as board members or as venture capitalists is really have a discipline around, hey let’s talk about, what are key strategic questions for the business. Let’s talk about all the different alternatives and let’s talk about the decision you guys made. And let’s see if I can test your conviction or ask you questions that can make you rethink that conclusion. And if I can’t that means that the company is probably making a wonderful choice.

Nick: Just to wrap up here, Tom, what’s the best way for listeners to connect with you.

Tom: Twitter or email, both of which are on the blog at tomtunguz.com.

Nick: Tom, again, thank you so much for making the time to do this interview. I look forward to more of blog posts.

Tom: Thanks so much for having me, Nick. This was a real pleasure.