Mar 7, 2016 · 24m · 20vc
20VC: Tom Tunguz on Why Now Is The Best Time To Be Investing and The Effect of Late Stage Valuations on Startups
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews Redpoint Ventures Partner Tom Tunguz about SaaS valuation shifts, investment criteria, blogging methodology, and key technology trends.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 28.5% of the talking time here. How this is scored →
Harry as informed peer 2.2 Guest teaching 2.5 Guest disagreement 0.5 Harry pushing back 0.5
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 7:16 Reframing forward growth valuation logic
Tom directly challenges Harry's question premise that VCs suddenly realized paying for future growth was unsustainable, explaining that investors still pay for forward growth but the benchmark multiples shifted.
Hardest push from Harry ▶ 7:05 Challenging venture investor rationality on valuationsHarry pushes back on VC behavior during market peaks, asking why investors willingly paid for years of tomorrow's growth today until market conditions forced a correction.
Biggest teaching moment ▶ 7:16 Explaining forward revenue multiples and risk deltaTom educates Harry on public versus private valuation mechanics, demonstrating how public multiple compression from 7.7x to 3.3x extends private 15x forward multiples from a 1-year bet to a 3-year risk.
Harry holds his own ▶ 12:34 Identifying free SaaS-enabled marketplace modelsHarry demonstrates strong industry knowledge by introducing the specific concept of free SaaS-enabled marketplaces and asking Tom to break down its strategic distribution benefits.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Tom Tunguz's Career Journey to Venture Capital | 1 | 1 | 0 | 0 | Harry asks an introductory background question, letting Tom deliver an extended narrative on his journey from South American software projects to Google AdSense and Redpoint. Harry offers no pushback or technical commentary. | |
| The Impact of Late-Stage Valuations on SaaS Startups | 3 | 4 | 2 | 2 | Harry asks why VCs accepted paying for future growth until recently, prompting Tom to clarify that VCs still pay for forward growth but public market multiple benchmarks compressed from 7.7x to 3.3x. Tom gently corrects Harry's question premise with market data. | |
| Investment Philosophy and Characteristics of Great SaaS Companies | 2 | 2 | 0 | 0 | Harry asks open-ended questions about investment strategy during downturns and key startup characteristics. Tom details Redpoint's criteria including go-to-market technology advantages and founder domain insight in a collaborative tone. | |
| Analyzing Zenefits and Free SaaS-Enabled Marketplaces | 3 | 3 | 0 | 1 | Harry prompts Tom with topical case studies on Zenefits' missteps and the mechanics of free SaaS-enabled marketplaces. Tom breaks down regulatory factors and how free software bypasses high SMB customer acquisition costs. | |
| Content Creation, Personal Branding, and Blogging Methodology | 2 | 3 | 1 | 0 | Harry asks audience-submitted questions about Tom's personal brand and daily writing routine. Tom humorously downplays the brand praise and explains his structured workflow using the Minto Pyramid Principle. | |
| Quickfire Round: Books, Productivity Tools, and SaaS Trends | 2 | 2 | 0 | 0 | Harry leads a rapid-fire session covering books, voice dictation tools, SaaS blogs, and future trends like AI and conversational UIs. The exchange is highly complementary and fast-paced. |
Statements from this episode (10)
Tunguz: Google's Intent Ad Model Failed to Monetize Social Networks
“For Google, they were interesting because they generated huge numbers, huge amounts of traffic, but they didn't actually generate that much revenue. And that's because the intent model that Google was so predicated upon didn't really apply in social networks, …”
Tunguz predicts average seed valuation caps will drop to $5M–$7M
“Seat valuations, from what I've seen, are falling. I remember maybe like a year ago, you know, the high watermark for like Y Combinator companies was something like a twenty million cap or an unlimited cap, and I think you'll see maybe one or two of those, but…”
Tunguz predicts SaaS Series A round sizes will drop to $7M–$8M
“At the Series A for SaaS companies, I suspect you might see like a 10 or 15% reduction. I mean, I ran this analysis for SAS in early 2016. The average Series A for like a premium SAS company was about ten million dollars. And I suspect that will probably fall …”
Tunguz: Paying 15x forward revenue for private SaaS is unsustainable
“So it used to be, like, premium companies in the SaaS market would command the 15 times forward multiple. That was in the privates, and then the publics were at 7.7, and now the publics are at 3.3, so if you're still paying 15 times forward, that means you're …”
Tunguz: Great SaaS startups turn tech innovation into distribution advantages
“The first is a technology innovation that translates to go-to-market advantage. One example of that is, You figure out the mobile app store better than anybody else in a particular category. All of a sudden your cost of customer acquisition relative to your co…”
Tunguz blames Zenefits' troubles on media magnification and regulatory missteps
“No, no company's execution is perfect, but if you have the media's microscope on you, your imperfections or your errors in judgment, or they get magnified. And so I think that's what happened in this case. Compounding factor is that Zenefits operates in a regu…”
Tunguz: Free SaaS marketplace models bypass costly inside sales in SMB acquisition
“You know, historically, SMB acquisition is really expensive, and the payback periods don't work. They get around this by having three-year contracts with their SMBs, just to make sure that the United Economics work, but you can't do three-year contracts everyw…”
Tunguz: Vertical SaaS investments require winner-take-all dynamics due to market size limits
“And so as a venture investor, when we look at vertical SaaS, we really want to find companies that have winner-take-all dynamics there. Because if you choose a vertical approach, the trade-off that you're making is, You say, I'm going to take a smaller slice o…”
Tunguz uses the Minto Pyramid framework to write 500 words easily
“There's this book that's called The Pyramid Principle, The Minto Pyramid Principle, that's taught to every consultant at McKinsey, and it's just a way of structuring arguments. It's this woman who wrote it named Barbara Minto, and she has this thing, it's a si…”
Tunguz predicts a massive ecosystem will be built on top of Slack
“You know, I think there will be a couple of, I think there will be an ecosystem built on top of Slack. And then I think there will be a handful of companies that that take that UI metaphor and become really successful outside of Slack.”