Lessons from Bessemer Investment Memos
By: Roostam Tiger
Tags: Venture Capital, VC, Innovation, Startup, Business

A few weeks ago Bessemer, one of the oldest and most successful global VC investors, released 13 internal investment memos from a decade ago, of their successful investments including LinkedIn, Pinterest, Shopify and more unicorns. 10 of them are of Series A/B. 2 of those are in Israeli companies (largest geography after US) — Wix ($13B current valuation) and Fiverr ($5B). This is a highly unusual and valuable source of insights as this kind of information is usually kept private by the investors.

1. Numbers, Numbers, NUMBERS

Traction, growth, retention, churn, unit economics are the main drivers behind the excitement. Even though it’s kind of a given, every opportunity to remind it and sense the reference numbers is worth it.

Shopify: “By month 3, Shopify retains roughly 75% of its customers, by month 12, 50–60% … once stabilized, monthly churn ranges from 3–5%. Overall, Shopify’s retention curve looks quite similar to that of Wix”.

PagerDuty: “Most metrics are in the right column of our framework — 136% YoY growth, 0.5% gross MRR churn, 103–104% monthly net negative churn with upsells, and gross margin in the high 80s%”.

SendGrid: “Current CMRR is ~$850k which is up from ~$200k [a year earlier] and maps to an impressive double-digit average MoM CMRR growth rate”.

2. Everybody’s got to BELIEVE IN SOMETHING

Success in VC implies seeing the future others don’t (yet) and betting on it. If you’re pitching your startup, you’re indirectly pitching an underlying bet on a version of the future, even if you don’t explicitly say it. So make sure this future is clear, both to yourself and to the investor. And appreciate your investors that they see it and believe in it.

Wix: “Self-expression is a very strong underlying trend on the Web … the newer form of self-expression on the Web involves rich media, as evidenced by virtual worlds, dress-up dolls, imaginary pets, and animated human avatars”.

Shopify: “the consumerization of enterprise software … is a roadmap in which we have been actively pursuing for 18 months across a number of categories” .

Fiverr: “is peculiar, but fascinating, … a high-risk, early stage investment, but we believe that the opportunity to build a global marketplace for services is compelling”.

3. That Gut Feeling Still Builds on GOOD ANALYSIS

Analytics vs. intuition … human psychology is intricate. If one spent time analyzing the situation, it helps them to subconsciously believe that their decision is solid. Even if the decision was much intuitive and the analysis itself didn’t play that big role in the eventual decision. Or may be it did — who knows? Solid analytics always pays off.

Wix: “The thesis behind Wix is that there is a sizable user base that prefers the slick look, interactivity, and multimedia mash-up capabilities of Flash websites. In a sense, this is a market opportunity created on the one hand by MySpace users graduating to proper websites where they have full editorial and artistic control of content; and on the other hand by small businesses searching for more flexible and stylish web site designs than their uninspiring html-based site. … Out of the 26m small businesses in the US, 10m have a MySpace profile, which clearly demonstrated their need for web presence. However, most of them can not afford building, maintaining, and promoting their own website, and Wix is trying to solve that problem”.

Twitch: “Twitch is based on the non-intuitive idea that watching other people play videogames is entertaining. The company likes to compare this to watching poker on television which is now a massive franchise. Over the last 10 years, there has been a set of innovations that have brought audience, technology, and distribution to poker to make watching it on television entertaining … Twitch is following a similar playbook of bringing audience, technology, and distribution to videogame watching. By amassing a large number of streams, Twitch presents a new broadcaster with an ecosystem where almost 20 million monthly uniques can tune in”.

4. RISKS ARE WORKPOINTS, not Killers

There is no ideal company or investment. Every opportunity has its own weak points and risks. Be aware of your shortcomings and open to work on them. Smart partners know to “hire on strengths, not lack of weaknesses” (Ben Horowitz) and then help you overcome the weaknesses.

LinkedIn: “Though the company has an enviably long list of features in queue, if most fall flat and fail to motivate more usage, LinkedIn may get trapped in the jobs and executive search categories, which would limit the upside of our investment to very moderate returns”.

Yelp: “This is an unproven business model … though it would be preferable to invest after the business model risk is fully mitigated, I believe there are sufficiently promising signs of success here to justify an early stage investment”.

LifeLock: “Maynard has said many times that he does not imagine being COO long term and has explicitly tried to keep a low profile. Now that we understand he is bipolar, we believe that it is a risk that we will be able to manage”.

5. SCENARIOS inevitable to analyze and plan future

Prediction is very difficult, especially if it’s about the future, said once Niels Bohr, founder of quantum physics. One can learn a good deal from quantum theory and Bessemer investments and plan the future probabilistically aka differentially aka with scenario analysis as we preach for years.

Notably, the returns targeted in almost all cases is ~2.7X absolute return on the money and ~30% IRR, while VCs love to pitch higher targets when raising money from LPs. The assumed distribution of scenarios is realistic/conservative, unrelated to the excitement about the opportunity. ~75% chance for a mediocre-moderate outcome ($20–100M), almost the whole rest is a chance of failure, while the chance of big success, $300M+ is usually 1–3%. Interestingly, a unicorn outcome ($1B+) isn’t even considered in the scenarios — that’s for the VC that generated dozens of them over its history.

Startups are hard, but it’s worth the fight :)

Keep up!

Roostam Tiger