A couple of weeks back Bessemer Venture partners (BVP) published their old investment Memos, this gave a rare peek into how VCs think when they are investing in future of technology.
BVP has made some serious returns from companies like Shopify, Twilio who are now public or other technology giants like Linkedin which got acquired
In my past post we discussed how traditional metrics can’t be used to invest in high growth loss making technology start ups.
In this post lets look at some patterns to look for when investing in such companies. All items are in italics below are directly from various Memos
1. The bet is on founder/s
One pattern that consistently emerges is that Bessemer’s best investment decisions centered on people. In retrospect, the early products themselves are barely recognizable today. Rather, passionate, analytical and relentless founders zigged and zagged their way to that elusive “product-market fit”, and these memos provide a glimpse of those winning entrepreneurs before they were famous.
Find intelligent, enterprising and ethical founders and once you find them stick to them
2. Growth is easiest and early sign
However unlike traditional models of looking at growth in cash, revenues. Look for things like
– No of users of service
– Page views / Installs of App / Time spend on service
– Community uptake & Early influential adopters feedback
Twitch has grown viewership at an average of 9.6% month over month to 18m monthly uniques watching nearly 4B minutes of live gaming.
Since January 2008, Mindbody has grown recurring revenues at a 56% CAGR.
LinkedIn User Growth was mind numbing
3. Win-win solution
Thats the only way a small start up would be allowed to stay and grown in the ecosystem, they need to find that win-win spot for all participants in the eco-system
The Twilio product makes the process of building a voice application extremely simple for web developers without any specialized training or need to deal with telecom companies or specialized integration service providers.
Shopify – A typical customer signs up using their credit card and is up and running in a few hours with no long-term contract.The product is simple enough so that anyone can set up a fully functioning online store in a matter of hours.
Twitch creates value for all constituents by allowing them to transact in a low friction environment and handles all monetization on their behalf. As a result, the company is able to capture the majority of the transaction value
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4. Remove pain or Increase pleasure
The fundamental reason for a business existence remains same – remove pain or increase pleasure. All starts has some or other flavour of above in their solution
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
Life Lock’s product features manage fraud alerts for the consumer by handling interactions with the CRAs every 90 days. They also take the consumer off of most junk mailing lists. In addition, they provide telephone customer support if the consumer needs help explaining credit fraud alerts to confused creditors.
5. Create LEGO pieces and let the world build on top of it
Many a times these companies were small lego pieces on which corporation or individuals can build complex things
The non-profit group needed to change some of the underlying logic of their voice application but didn’t have any of the original developers on staff. Rather than paying to get it reprogrammed, their web team rebuilt the entire application in less than a day using Twilio.
A customer can click and install an “App” that extends the functionality of their online store beyond what Shopify provides. To make the “App Store” possible, Shopify exposes an open API that allows third party software developers to integrate into its platform. This approach is a big competitive differentiator for Shopify. The API’s breadth and ease of use has resonated with the development community. For Shopify this is great—it can offer capabilities necessary to support larger customers without having to invest in building out these features itself. Roughly two-thirds of Shopify’s customers utilize at least one app from their “App Store”.
Fiverr has many of the favorable characteristics that marketplaces exhibit, including quasi recurring revenue, a strong community of users who promote the site, a scalable model and a natural barrier to entry that grows over time.
6. Don’t be overly worried about FAANG (read BIG TECH)
I have seen many promising ideas being shutdown by saying that google can replicate this in days if not weeks. but the fact is it SELDOM happens
Twitch vs Youtube
They are focused on catching up, however at the same time predicted that they wouldn’t prioritize building the necessary live gaming features to do so effectively because of conflicting corporate priorities (e.g., YouTube is primarily focused on getting high quality entertainment content onto their platform).
PinInterest vs Amazon
This feature is a bit hidden, and in fact, the top links in Google for Amazon Listmania are broken, suggesting Amazon isn’t focused on lists. That said, Amazon has a huge audience of buyers and a great community of reviewers with which to seed a competitive community of curators.
Shopify vs Large ecommerce software providers
Incumbent enterprise software vendors have proven themselves unable to compete as they are fundamentally not oriented to sell to or serve SMBs.
7. Follow cash
Some of the best ideas are so good even at the beginning that there cash from operations can run the ship. if you find something like that – pause and take notice
Twitch – This is one of the key reasons for management’s increased negotiating leverage and interest in the company – as they could theoretically forgo fundraising altogether and run the company off of the proceeds from selling Justin.tv.
Shopify – The business is profitable and largely bootstrapped, having raised just $1mm to date and having $1.3m of cash on its balance sheet with no debt.but their organic growth and profitable business was hard to ignore
Linkedin Most of the typical early stage risks have been mitigated as the company is already nearing cash flow profitability
There are many more patterns to pick up from these Memos, do yourself a favour and go read them
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