Tomasz Tunguz
@ttunguz
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Venture capitalist at @theoryvc . Student of Startups. Author of Winning with Data . Author of
San Francisco, CA
Joined November 2007
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After more than 14 years at Redpoint, I’m starting a new chapter.
I’m filled with optimism for the future.
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Constellation Software is a $30b+ publicly-traded software holding company employing more than 25,000.
A former venture capitalist, Mark Leonard started Constellation in 1995 with $15m of outside investment & a goal of buying vertical software companies.
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Every year I make a list of predictions & score last year’s predictions.
Here are my predictions for 2023.
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ServiceNow, a $150b market cap company, made this statement yesterday in their earnings call :
“In Q4, our gen AI products drove the largest net new ACV contribution for our first full quarter of any of our new product family releases ever, including our original Pro SKU.”…
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What was the most profitable software company in Q1 2024?
Ethereum.
Ethereum generated $370m in profit on $825m in revenue for about a 45% net income margin.
The chart above shows both the historical performance & also explains how web3 blockchains like Ethereum generate…
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This morning, Coupa announced its sale to Thoma Bravo for $6.2b. The acquisition is notable for three reasons.
First, the premium to the public price is 31%.
Second, the multiple is 8.4x NTM revenues.
Third, it’s the biggest this year since Figma’s sale to Adobe.
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Over the weekend, Tobi, the founder and CEO of Shopify, discussed the major reason investors passed on Shopify in the early days : market size.
I remember that financing round, & I remember having the same concern, & making the same mistake. Living in the valley & driving on…
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Founder-led sales are sales engineering sales, not account executive sales.
As a company scales, founders transition sales to others. The default behavior is for founders to pass sales to account executives. What if they passed it to sales engineering?
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Just how big is the current web3 B2B SaaS total addressable market (TAM)?
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If it wasn’t clear before, AI is the single biggest revenue driver in cloud.
Microsoft’s Azure is winning share directly from Amazon. In Feburary, Microsoft grew 2% & Amazon lost 2%. Google is also taking share - 1% in the last year. A one percentage point share shift represents…
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Rubrik, a Palo Alto-based data security company, filed their S-1 yesterday. At $784m in ARR, growing 47% with 130% net revenue retention across 6100 customers, the company should be one of top 10 fastest growing software companies alongside Klaviyo, ZScaler, & Crowdstrike - in…
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I can remember at each career inflection point the person who took a bet on me.
When I joined Google it was Kim. When I moved to product, Marissa. Then to Redpoint, it was the early stage team : Geoff, Tim, Chris, & Scott. Lloyd & Frank at Looker for their Series A. Today, it’s…
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The database is being unbundled. Historically, a database like Snowflake sold both data storage & a query engine (& the computing power to execute the query). That’s step 1 below.
But, customers are pushing for a deeper separation of compute & storage. The recent Snowflake…
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Last week, Databricks announced their Series I financing at $43b. At the same time, they released quarterly figures similar to a public company’s reporting.
Those numbers provide the first public view into one of the most valuable private companies in the world. It’s also an…
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In “Do software companies actually have good margins?”, Benn Stancil makes a case for a counterintuitive point : Software companies are much less profitable than they might seem.
Why?
Because the research & development costs associated with software should be part of their cost…
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Last week, Reddit filed their S-1 to go public. At least 10% of their revenue - about $60m - comes from selling data to train Large Language Models. Reddit’s data sales revenue will likely be much more than 10% by the end of the year. Quoting directly :
We expect our growing…
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The hardest round to raise so far in 2023 is the Series B. Although, all the early & mid-stage rounds have fallen to levels not seen for 5-10 years.
Q1 volumes by year show broad declines across early-stage venture capital.
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Which Categories of Seed Startups are Thriving? Which Aren't?
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Earlier today, New Relic announced its sale to Francisco Partners & TPG for $6.5b.
The acquisition is notable for two reasons.
First, it accelerates the momentum within the technology buyout space.
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AI will transform software sales. Most of the discourse so far has focused on how AI upends the sellers’ worldview. But the buyers’ process will also evolve. When researching software, operational buyers & procurement teams alike will use AI to research different offerings.…
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Which database generated a -$1.8b loss & within a year produced $130m in profits?
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Every company will be an AI company. Every startup needs an AI strategy - not just for fundraising or press appeal.
User expectations have changed.
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Selling software will evolve to selling agents, AI that acts on behalf of users.
The efficiencies for rote work are too massive to ignore for many uses. As the technology rapidly evolves, so too will the sales strategies.
Sellers & the startups they represent will need to…
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The Rise of Data Lakes in Software Architecture
Historically, software-as-a-service (SaaS) has been built on databases with structured data, as you might find in an Excel spreadsheet.
But the ability of large language models to extract insights from unstructured information…
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The public software market continues to compress. Enterprise-value-to-forward-revenue multiples are now below 2016 levels for the first time in 6 in years.
How low could they go?
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1. ML propels SaaS into a massive second wave that increases workers’ productivity measurably. Machine learning models predict code, synthesize images, author blog posts reducing composition time by a factor of 2 or 3. ML becomes a requisite feature in most workflow SaaS.
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The average startup saw a 24% increase in sales cycle from early 2022 to 2023. 60 day sales cycles are now 75 days.
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The typical software startup raised their Series A 15 months after raising their seed at 2x their seed valuation.
A year ago, that Series A would have been raised three months earlier at 3.5x the valuation.
Here’s another way of visualizing the data. The red dot is 2023 - the…
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Every year I make a list of predictions & score last year’s predictions.
Here are my predictions for 2024.
1. The IPO market remains closed through the first 6 months of the year. But a few mega issuances, especially Stripe & Databricks in the summer or fall, re-open it for…
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I’ll share more on my plans soon. In the meantime, I’ll continue to be a student of startups, writing this blog, hosting Office Hours, investing, & partnering with founders.
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A year ago, AWS, GCP, & Azure averaged 44% annual growth. Today, that figure has dropped to 27%. Amazon also guided to lower growth rates in the future.
A thread on what that means
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Ten years ago, Nvidia’s market cap hovered around $4b, down from its previous high of $13b in 2008.
Today, Nvidia is the fifth most valuable technology company in the US, worth nearly $1t - just 20% less valuable than Amazon.
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Congratulations to
@frankbien
@lloydtabb
and the rest of the
@LookerData
team! It's been a marvelous journey and for
@redpointvc
it's been a privilege to work with you throughout the journey
Google has entered into an agreement to acquire
@LookerData
and we look forward to welcoming the team to Google Cloud →
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I’m watching public company earnings to identify early weaknesses in the software market. Yesterday, Microsoft announced earnings.
Microsoft is a Mirror of What We Can Expect for SaaS in 2023
The earnings transcript highlights the 5 major trends in software of 2023.
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While possible to build a business selling exclusively to web3 companies, the bigger market today is selling web3 technologies to web2 companies. Solutions in gaming, marketing, & financial services where decentralized databases or virtual wallets solve a core business need.
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Will AI sofware companies operate with better or worse profitability than a classic SaaS company?
Initially, I thought worse since the expense of serving AI as a product is signficantly higher.
But now I’m not so sure. AI SaaS may be much more profitable than the -10% average…
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Every year I make a list of 5 predictions and score the 5 from the previous year. Here are my 5 for 2022. Let me know if you agree or disagree.
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Profitability or net income margin has become the most important correlate to public software company valuations. But public companies are less profitable today than a year ago. Surprisingly, PLG companies’ profitability has suffered more than sales-led businesses.
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At
@DuneAnalytics
conference, I shared a presentation on the state of crypto in 2022. I aimed to characterize the health of the crypto ecosystem: quantifying the number of active wallets, active developers, & other dynamics within the ecosystem.
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Open source software has evolved from a movement into a big business. Gitlab, Confluent, Databricks, MongoDB, Elastic, Snyk, Hashicorp, Mulesoft, have become huge companies using open source software.
Across, just these they have generated about $100b in market cap.
Early on,…
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First Round’s Product Market Fit Framework adds dimension & texture to a concept we all use - Product Market Fit (PMF).
PMF isn’t attained permanently, but sustained over time as companies & complexities grow. As they scale, startups move up-market, expand into new geographies,…
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Earlier today, Cisco announced its intention to acquire Splunk for $28b , a 30% premium to the closing price.
Reviewing the financials, we see Splunk is a very healthy business.
$3.6b in revenues growing at 37% places the business in the top quartile of public software…
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If you were to watch three videos on YouTube Shorts - one on Italian cooking, one on chess openings, & a third on crypto trading, YouTube Shorts’ recommendation algorithm combines the video descriptions with your dwell time.
Watching the osso bucco video to its end would trigger…
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The Three Frameworks You Need to Create Powerful Presentations and Tell Compelling Stories
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As we’ve been researching the AI landscape & how to build applications, a few design patterns are emerging for AI products.
These design patterns are simple mental models. They help us understand how builders are engineering AI applications today & which components may be…
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The fastest growing software category in the public markets is security. Data follows.
Security companies as a group average 29% expected revenue growth in 2024, compared to 23% for Data (or DaaS which stands for data-as-a-service). Fintech & SaaS (horizontal) average ten…
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In short, 2023 will be the first year of a new-normal era. The go-go days of 2021 & the pandemonium of 2022 ebb, leaving a year of sobriety at low tide: longer diligence processes, fewer rounds, lower entry & exit valuations.
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There are 27m software developers in the world. Only 18k of them, or 0.07%, work on crypto. They have created $2 trillion in market cap - $112m of value per person. With such massive potential impact, why are there so few engineers working on web3?
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These ten were my favorite books of 2022. I was seeking parallels or theories to frame a mental model which explains why economics & history dominated the list.
What were yours?
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This past weekend, I opened Done Deals again for the first time since I started in venture, some sixteen years later. It was surreal to read the interviews again because some of the quotes, particularly the ones about competition aptly describe today’s environment. And other…
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Snowflake announced Artic, their open 17b model. The LLM perfomance chart is replete with new offerings in just a few weeks. Overall knowledge performance is asymptoting as expected. It’s hard to discern the most recent dots.
One thing stands out from the announcement - the…
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Yesterday, at the Monte Carlo Impact Summit I shared my 9 Predictions for Data in 2023. Here are the slides:
& each of the key points below
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The $1m ARR figure used to be the benchmark in 2018 & early 2019 for raising a Series A. But the data shows how much the market differs from a few years ago.
Series A round size standard deviation has grown by between 4-5x in 4 years.
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2. The hangover from web3’s raucous 2022 extends into 2023. Most categories slow down meaningfully, including Defi. More than 100 web3-enabled games launch. Virtual wallets ensconce themselves into web2 applications. Marketing becomes the first broad use case of web3 after Defi.
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There are 4 questions a startup should ask themselves about building a startup that uses generative AI.
I presented those questions & my views on their answers at Saastr’s Workshop Wednesday.
I had a blast putting this deck together
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A funny thing happened along the way to Sand Hill Road in the last decade : startups stopped talking about how much runway a Series A would buy them.
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4. Private equity acquires 10% of the 70+ publicly traded software companies by the end of the year. With hundreds of billions of dry powder, plenty of healthy cash flows generated by SaaS publics, & the leverage of the inevitable shareholder lawsuit if a board rebuffs an offer.
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If we assume some basic productivity gains in a typical SaaS company from AI in the next 12-24 months, how much more profitable will the business be?
Sales development, content marketing, & software engineering strike me as the workstreams that will benefit immediately.
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Open source models have become a critical part of the AI landscape.
I was curious about the trends in the open source ecosystem, so I analyzed HuggingFace data on the top 300 open source models, both by overall usage & also the top of the trending list.
Open source models are…
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We’re entering a new pricing environment for software: AI vs non-AI. It’s only happened in the last few weeks.
Recent earnings have pushed some of the most important companies to all-time highs.
This dynamic doesn’t favor everyone.
Theory created a public market AI index to…
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The Azure ML business is roughly on a $900m run rate (by my rough estimation), with customers growing 10x. Azure’s AI products could achieve a multi-billion dollar run rate by the end of the year, a data point which underscores the idea that AI grow GDP 1000x more than the PC.
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For many startups today feel like they are operating under dark skies. It’s supposed to be hard - you’re changing the world.
Reflecting on the last three quarters :
Startups have parted with colleagues to extend runway in a difficult fundraising market.
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Why Revenue Isn't the Most Important Financial Metric for Startups
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3. The Fed tames inflation. We exit 2023 with inflation below 2.5% but a Fed Funds rate of 5%. Forward software multiples touch 7.0x forward, up from 5.8x today, on the relatively strong growth rates of most public software.
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Stability, Facebook, & Microsoft top the creator list of open source models by count. So does TheBloke, an engineer who quantizes (or compresses) open source models.
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Airdrops may be one of the most prevalent forms of marketing in web3.
Recently, Dune Analytics published an analysis of the Uniswap UNI token airdrop.
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Startup burn multiples have changed markedly in 2023.
Burn multiple measures the capital efficiency of a startup. Burn multiple calculated like this : net burn divided by net new ARR.
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For web3 startups to thrive, their marketing teams will need to spend marketing dollars to acquire users .
There’s an entire marketing ecosystem for startups to build. Here's my mental model.
If you're working in this space, I'd love to chat.
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5. The fundraising market thaws, but at materially lower prices than the first half of 2022. The early stage market prices seeds at $10-15m post & Series As at $50-60m post (with about $500k in ARR). The mid-stage market for Bs, Cs, & Ds rebounds but chaos reigns.
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Designing a Sales Quota Structure at the Earliest Stages of a SaaS Startup
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The US startup M&A market in Q4 2022 was one of the quietest in the last 20 years. It rivals the dotcom bust & Global Financial Crisis for its paucity. In percentage terms, last quarter dropped the most since 2000, falling 94% year-over-year.
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I’ve been tinkering with LLMs.
First, I created a chatbot using all my blog posts. Then I created a model to produce blog entries based on my writing.
As I went through this process, I asked myself some questions along the way :
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