Byron Deeter, Bessemer Ventures + Jason Lemkin on Cloud 100, Growing 100% at $100m ARR, & More

Hey everybody at saastr, super excited today to have one of our OG and favorite friends, Byron Dieter from Bessemer Venture Partners. Byron's been part of the Saastr community since the very beginning. He's done the state of the cloud both digitally in the real world at Saster annuals for six years or something like that. Been all over. His partners have come to Saster European, done the same. Byron and I have worked together in some capacity since I started in SAS and wanted to bring him on today. Talk a little bit about his event coming up, the Cloud 100 Awards and then talk about really as we come into these last seasons of COVID and a brave new world, what's really going on in SAS with unicorns being minted hourly. Can't even keep up with my newsletters. What's going on? Seems like everything's just going up, but not really. So I want to dig into all these things with Byron for a few minutes. First of all, Byron, thanks for, thanks for joining us today. It's great to have you back.

Jason, you always make it fun anytime and I appreciate you not putting years to the tenure of our relationship as I think there's now a two decade handle on that, which is scary.

So let's first just talk for a minute about the Cloud 100. This is for a couple reasons, but this is an award you've been doing for six years for 100 of the top cloud and SaaS companies. First of all, when is it this year? It's digitally? Is it sold out? Can I still get a ticket? Give me the deets on the Cloud 100.

You bet. Thank you. I mean this has been an outgrowth of a lot of the cloud education and community development we've done for years. We do it in partnership with Forbes magazine each year and Salesforce Ventures and, and the shift we made last year forcibly so because of COVID was we took an offline event and moved it online. It used to be a very intimate event with the top 100 private cloud CEOs, the public cloud CEOs, who are the judges and then a small community around that, but sub 200 people in a room going really deep. We flipped that on its head last year and open it up to the external community, used the content that we used to have internally and had some very focused discussions and sessions that ended up, you know, attracting tens of thousands of viewers and over a million kind of video impressions. And so we're going to roll forward with that format again this year. My hope is next year that we can do a combination of the in person and the digital. But the great news is it in the digital format, it doesn't sell out. And so if folks go to thecloud100.com you can sign up for the free virtual summit and the content is available to all. It's going to drop on August 10th where we're going to publish the list in conjunction with Forbes of the definitive rankings. And then you'll see the speakers ranging from Melanie at Canva and Chris at Toast to Ally Databricks. There's a number of folks that have been wildly successful.

Reese Witherspoon. Let's be clear. Reese Witherspoon.

We've got some superstars from other areas. Absolutely. Reese and Larry Fitzgerald, Kelvin Beecham.

So not that Canva and Toast aren't excited and I want to ask you about in a second, but Reese Witherspoon will be@thecloud100.com you can hear thoughts on entrepreneurship, which I want to hear.

It's awesome. Like it is so impressive. These superstars in other fields that also have real interest in tech and they're building tech businesses and participating and it's just fun when you get discussions going with interesting people across fields. And so I mean Reese is fully engaged. The discussion is great. I can't wait to release it to the world. Similarly, Larry Fitzgerald, who's investor with us at a number of companies, loves tech and is engaged and you'll hear his thoughts on team building and leadership and the role of tech. And it's just, it's interesting, fun, relevant content to business builders and entrepreneurs out there. The Saster audience, it's like a perfect overlap.

It is. I'm excited to do it. And so tell me like six years in, I do remember when the Cloud 100 launched. I think you and Alex talked about it a bit backstage at Saster Annual. I think it was a little bit of work to figure out to find 100. I mean there are obviously 100 great SaaS companies, but I remember being work like you had to hunt how the heck now literally we have 700 cloud unicorns, right? And so there's probably 2,000 unicorns to be. This is my view, for every one unicorn, there's three in every VC's portfolio that will be there right? If things. So how do at least 2000. How do you pick 100 today?

I mean that's a wild thing. So to Clarify, there's over 700 unicorns, not cloud unicorns, but we, as we predicted, with our state of the cloud report for it at Saster last year that we anticipated the Cloud 100 for the first time ever, crossing over to where the entire list was 100 unicorns. And so, at the risk of spoiling some of our own news, I'll share that the cloud unicorn list is staggeringly large, has never been more impressive. And you're absolutely right. Back when you were building Ecosign and when you were launching Saster, it was almost inconceivable to think of the ecosystem that we have today and the strength of this community with multiple trillions of market cap for the publics and hundreds of billions of dollars of private cloud market cap. And so our judges have never had a harder challenge. And I'll tell you, there are unicorns that didn't make the list. Whereas when we started this, as you said many years back, that getting to the billion dollar status was the win, that was the IPO or the exit. And these days that's the series B or series C financing often.

And let me a few of the speakers. I've been curious. Let's talk about a few things in the broader portfolio, because I remember when you invested in Canva in particular, and a little bit of Toast, when you invest in Canva, I'm like, listen, I've been using Canva for years. I'm a power user. I always considered it our second or third designer. I'm in it every week. So no question, iconic company. I was surprised at the time that that would be in the Bessemer sweet spot. It seemed a little late. You already invested at a billion or two pre money, didn't you? Whenever it was. And obviously you've probably made more money on that than a ton of other deals at lower valuations. What was in your team's mind of getting conviction around these Canva and Toast multi billion? Because when you invest at billions, you're making a Decacorn bet inherently, right?

It's got to be very much.

So how did you evolve your thinking and why were these Decacorns to be Canva and Toast when you guys did them? Because I thought they were expensive at the time, but they weren't, right?

Yes. And very different answers with the same common underlying themes, which goes to scale of the potential opportunity. But Toast, I have to credit my partner, Kent Bennett, who actually seeded and incubated the company. So they were literally based in our Massachusetts office in the early days. And so that was like early hands on, exciting venture work. And then we supported them through subsequent rounds and also invested in Their billion dollar financings, I think they are the probably, well currently they are certainly the Most valuable vertical SaaS private company. They should also be the largest vertical SaaS IPO when they choose to go public in history and certainly one of the top three software IPOs in history when they go. It's an immense business. But that was very much from an early venture bet and then the subsequent bet aligned with Canva, which we weren't good enough to find early, but we did see the opportunity and invested in multiple of their rounds more recently. But it was to this idea that the scale of these SaaS companies is a multiple of what we envisioned early on and the impact that they're having is immense. It is now absolutely possible to see businesses in the 60 to $600 billion range Shopify. When we invested, the top end of our outcomes table was a $400 million IPO because that used to be success. They're 200 billion or so now. My partner Jeremy, still on the board, still works closely with them. Similarly Twilio, for me they're whatever 60 or 70 billion dollars today in climbing. Same thing that was almost inconceivable back then. When you look now at a business like Canva and say they've got a real shot to be the next Adobe at 300 billion plus and by the way, they're also approaching the number of adjacent markets, you can look at it even today and say there's still a venture return possible where a 10x could be had if you invested at whatever the current valuation is. And that's just the amazing thing when you get great people and Melanie and Cliff and the team, be clear, are great, they are extremely unique, exceptional individuals. But you combine it with amazing product and a massive market. These things can be Amazon and Apple scale, which is inconceivable to think of several years back when thinking of software businesses alone and what was possible for cloud.

Well, that's an interesting insight from a late stage perspective. You're saying, look, there's a shot this could be Amazon, Apple, Adobe, Microsoft scale. That alone, if you believe it, that can more than just by the 10x at any late stage valuation, right?

Completely. And to be clear, our growth investments are held to the same hurdle that our venture investments are. Meaning we want to see that 10x potential and you're aiming for at least the 3 to 5x type of thing. We're not taking a base hit mindset of let's raise a lot of money and go for two X's and those things we have a very concentrated approach where we do growth investments. It's where we believe these things can be platform companies of the next decade. And we actually our internal name for our growth fund is Century Capital. And it comes from two things. One, it's a hat tip to the Cloud 100 and this notion 102, it's companies that are going to be the defining companies of the next century in tech. And so by definition there aren't a lot of those. But where they exist, they can be massive. We are seeing a long, long list of the billion dollar cloud companies today and we're seeing dozens of decacorn companies and candidates that are emerging. And we definitely think this will define the future of the tech landscape. This is the single most exciting trend within tech and tech is driving global gdp, which makes it one of the most compelling investment themes more broadly.

So just a nerdy or niche question, but if you have this concentrated growth investment for the next Apple or Adobe, each one should be a fund returner. I mean it has the potential to be a fund returner. Do you think about growth the same way as early stage? Like you want it to be a fund returner?

That's the hope. Mathematically there are times where we may only invest 25 million and a 10x could return 250 million and our fund is larger than that. But conceptually, yes.

Okay, let me ask you another way to think about these massive a more tactical way to think about it. So let's take someone like HubSpot, right? You could pick a lot, right? But HubSpot crosses a billion at ARR growing 41% accelerating like growing from 30 to 41. Do you even. How do you think about compounding 41% growth at one billionaire? It's almost. It breaks your brain, doesn't it? And what does that mean for outcomes?

It is absolutely spectacular to see the performance of the leaders in the industry, both late stage, private and public. And what we often look at is the relationship between cash flow and growth rate. And that makes that those stats even more impressive, which is to see that you have across the cloud industry both the BVP NASDAQ Emerging Cloud Index on the public side and on the private side. You time and time again see companies at scale growing at 40% plus and many of them are generating very positive free cash flow in the process. And so you could argue what's a fair multiple for these businesses. And certainly we're at historical highs. And so there's anxiety that, that these numbers may be rich, but the flip is if you put it in a drawer and think many years out. It's also pretty logical to see that the power of compounding, as you note, will make these businesses more valuable in a few years. And they may go through some ups and downs and they will probably be sitting at lower multiples a few years out than they are today. But at the same time, the stock prices will likely be higher because they're growing at such an insane rate and they're building value every day.

Yeah, every 1 billion ARR CO I talked to before an event or a podcast or whatever, they all have their 10 billion plan already. It's not perfect. It's not perfect, but they can see it, right? They can see that 10 billion, which is just an awesome force in SaaS.

Isn'T is absolutely Einstein's word. The most powerful force of the universe is compounding interest. It's the same thing. You get these subscription models, they are brutally hard to build up, but when the flywheel's spinning, they also the growth decay is very modest. And it's not just HubSpot, the average public cloud company and I think there's 56 in our index today, plus or minus 1 or 2. The average is growing 40.2%.

Yeah, I saw that on the index today. Yeah.

It'S just awesome. And so with interest rates in low single digits, I don't know something else that I can invest in that can compound at 40% plus. And I have complete conviction that this is the future of tech and software. So you're also like history is going to be on your side in terms of the tailwinds.

So do you think if you look at the broader investment ecosystem, the insight tomo bravo tiger strategy, which is just in some ways to invest in all the good ones.

Right.

To simplify it, you can take shots, but really their strategy is look, all the good ones, if times remain good, should be. Is that a good strategy for all of us? Are there any flaws in that strategy that you can see to invest in all the good ones?

So the index approach absolutely has its merits. And we literally since 2011, which by the way, we first released at Saster years ago, this notion of attracting index, the BVP cloud index at the time, and I forget the current stat, but it's up 12x or something over that time period, probably more at this point. We then formalized it with NASDAQ and then WisdomTree licensed that data set. And so there's a tradable ETF WCLD which tracks us. It was literally the Top performing ETF on NASDAQ last year. Worldwide, yes, the public index has been a fantastically good vehicle. The late stage private index has also been an outstanding vehicle, but doesn't exist. And so it's theoretical. And so that's what a lot of those entities are doing is saying, look, if I can get a 40% CAGR in the public markets and these companies are staying private longer, how do I get access to the late stage private ones? I need to go direct. And so that's what's caused a lot of these hedge funds to cross over. Because companies used to go public at 500 million, now they're going public at 5 billion or 15 billion and they want the earlier access. And so I believe those returns will also be quite good. You've got this dynamic where valuations are now running up and at some point the capital markets will level out and settle at their 15% IRRs instead of the 40% IRRs. But it's working for them. There's also a nuance from the private equity folks. Specifically, they're becoming majority buyers and exit alternatives to these companies, which never existed in history for growth assets of this scale. And yet there were a number of companies from the Cloud 100 last year that chose to sell the private equity buyers as an alternative to going public in the short term. And I think we're going to see more of that. There's SPACs, there's all sorts of things, but very directly, private equity as an exit alternative, as a successful exit alternative is now also on the table.

Yeah, that's a great. To me, as an ex founder, that's one of the biggest changes of all time. Right. Is that your exit options have increased. Right. What would you say at a gut level, if you look across the whole Bessemer portfolio, if you get to say, 20 million ARR and you're growing not even 150, let's say you're growing 70% or more at 20 million ARR. What are the odds some sort of PE firm will give you a half decent offer to buy your SaaS company? In today's market?

Yeah, quite high. It's how you define decent. Now, a lot of folks look at the public comps and say, I want a 40x multiple on that because I'm in top decile, or I wanted a 25X because I'm at least average. And they're of course comparing themselves to the best in the world average of the 50 plus public cloud companies. But private equity both is interested in the flagship asset to consolidate around as well as the assets to consolidate around their other large platforms. And so whether it's 20 million or 120 million, there is likely a private equity shop out there. If it's a strong business that would be a bidder. And then your alternative becomes do I hold out for the IPO or do I do an alternative financing structure? The vast majority are still going to play for the long ball and go public on their own or ultimately sell to a strategic that will pay a strategic price above the financial price. But private equity as a very viable buyer is for the first time credible. And we had two companies in December alone with Gainsight and pipedrive that chose to sell to Vista. Both of those were super high quality businesses. They could have gone public then and they probably will go public in the short to medium term. And yet they thought that that was a compelling interim step for very rational reasons. And so far so good in the sense of their positive references to our other CEOs saying you should consider this as one of your many options.

And what's the certainly if you want 40 or 50 extra ARR sometimes it can be tough from PE, right. The other thing I've seen a little bit is companies where their growth rate is middling. No criticism. This stuff's hard as you and I both know. I am surprised that the PE valuations are often decent. A 10x air are for a company that has scale, it has a brand, but the growth could be quite in the 30s or 40s whereas a VC can't touch that past that point. You just can't do it. And even a strategic probably won't buy it because of the multiple arbitrage. But sometimes what's going on there, is it a roll up strategy or why will they pay decent prices for companies with middling growth?

Yeah, so I actually think that's the power alley of private equity and you nailed it. And for the listeners out there that are running businesses that probably aren't going to be public but they're building value and particularly if they're capital efficient, break even or generate free cash flow, those businesses should be combined with other businesses to get scale to then go public. And what private equity firms are very good at is consolidation strategies and frankly unlocking business efficiencies. And so one of the things that you have to have an upfront discussion with them about is are you comfortable taking costs out of the business? And sometimes that will be part of their playbook. But the reality is that is a valuable business. It's probably to your Point just not the venture big home run, swing type of business. Because that's the nature of our model is every shot needs to be the 10x opportunity in our mind. But those businesses clearly have value and I think you hit it on the head. You can get a 10x for those companies often and it can and both sides can win. Meaning the private equity firm will be able to extract value and get their 3x on that with some work and with some other assets and bring it together. And at the same time you can realize this interim milestone and in some cases CEOs will say hey, I don't really want to run the business that has to go through some cost efficiencies or that's going to be consolidated in and often they're totally fine with that. You have the open conversation and they'll say great, we're going to we've got a CEO who is more of that operational CEO. You go back to your next growth thing and burn your venture capital dollars going after the 100% growth. You have your fun with that and there's different answers for different stages of life and different parts of the capital stack. And it's unlocked now because of the scale of the outcomes and these assets. That option is extremely viable and can be an outcome that wasn't previously possible for these hundreds and maybe soon thousands of businesses that are really solid companies but aren't going to be, you know, $10 billion public companies.

Yeah, my gut is. And then I want to ask you just two more things and come back to Glad 100. My gut is this list. This increases the odds you get a decent M and A outcome. When you hit double digits of ARR by like 10x over just five years ago, you literally could be right. It at least DE stresses your life as a founder. If you're running stripe from day one, who cares, right? But most of us, even great ones Procore was a slow start, right? And glad they IPO'd right? But we can go look at so many that had and Avalar I just wrote up they had a slow plenty of us had a slow starts, right? And to know that yeah these overnight.

Successes take time sometimes.

Sometimes. And to know that at least in the back of your mind you can get a 10x outcome instead of a crappy 2 to 3x outcome or nothing from P like years ago can DE stress your life because you know at least it's there, right? You're going to get this door, you're going to get knocked by some associate or principal at all these firms to see if, right, they'll do these deals.

Very true. If you are capital efficient, and that's the thing to layer on here. If you're burning a lot of cash, time is not your friend. If you are break even or have a path to profitability while still growing modestly, you've got infinite time and you control your own destiny and you will have valuable options. And that's I think the important nuance here. But there will be an increasing number of companies here that are venture funded, that have built real value, exactly the model you describe. And I think you're totally right. It's going to be open season for private equity firms and they're going to pay decent multiples on these things because they know that they can unlock more value. And if they can bring things together, if they can unlock more free cash flow, if they can get to scale, they're going to be able to grow that asset and then ultimately take it public for 10 to 20 times multiple at much larger scale. And everyone wins. And they may throw leverage on it if you're free cash flow positive so that they get another turn on their equity, as they're very good at doing, and so they can manufacture another multiple turn there in a way that a venture capital firm never would try.

Do you think M and A from Strategics Twilio has made some great acquisitions? Plenty companies you're a part of have, but it's not like Twilio's done 100 acquisitions. I struggle to do the math, but I'm not sure Strategic M and A is keeping up despite the headlines. Right. Zoom buys 5. 9 for 15 billion, which seems like a jaw dropper. And that's Zoom's first big deal, right? It's like one of the top deals of the year, but there's a lot of decacorns out there, Right. If that was a venture round, my jaw wouldn't even drop. Right. Have you done the ratios? Is there enough M and A to go around or does it not matter with PE and IPOs?

It's a great question on the ratio point because you're right, the headline numbers are big. And we'll Update some on August 10th to talk about the financings, the M and A exits and the IPOs. And there are a lot of records in there and some impressive numbers. But notably the IaaS, platform vendors and cloud have not been very acquisitive of big assets. Amazon Web Services, Microsoft Azure, Google Cloud have not written big checks for premier assets. And the legacy software vendors are kind of like cornered animals right now and they don't quite know how to respond. But they are not, they're not paying the multiples to clear these trades. And so you definitely have this sort of latent backlog of strategic assets that are finding outlets through other means.

Yeah. So keep going. Will there be enough MA to keep up with all these unicorns? With 1000 unicorns that we'll have soon?

The strategics haven't done their part here and part of it's been pricing evaluations where the multiples are just tough, certainly for the legacy vendors to pay 2 or 3x their own multiple to acquire scale assets. But also the Amazon Web Services, the Microsoft Azure is, the Google cloud clouds haven't strategically leaned into large scale acquisitions and that's a wild card of whether or not they will. And so that's where you see a lot more activity in the public markets via spac, traditional listings, hopefully more direct listings. That's where you see private equity weighing in more heavily. And that's where you see a lot of companies staying private longer and doing these massive financings, which in many ways are partial exits because they can get some liquidity and still build the businesses. We do think when multiples pull back, you will see some increased M and A activity. As we did in 2008, as we did in 2016. We just had such a great run that these companies have been priced out of the hands of people with big balance sheets.

They are. You do have to earn that. When you raise that great round at 40 or 60 times revenue, it can be challenging for a tech company to buy you in all but the most optimistic scenarios.

Absolutely. And I can't tell you how many times our companies get approached by buyers who come into these markets saying, great, and here's a price and you should love to work with us. And it's like that price is below what we just financed at and half of what we can go public at. What's the appeal? Why would we do this? Our founders time and time again will look at their options and say, I want to build something great. Those are the people that we gravitate towards. Those are of people we work with. And occasionally you'll have like an auth0octa situation where Eugenios says, I really buy into the Okta vision. I want to be part of this.

All right, well, good thoughts on ma. One other thing, I just want to tie this all together and then maybe let's spend the last few minutes on the cloud 140% just looking again at The BVP NASDAQ website from this morning, like you talked about 40.2% average revenue growth in the BVD NASDAQ 40.2. I mean, just a few years ago, like 20 something was pretty good, right? Once you'd IPOed for SAS, the difference between 40 and 20 is not 2x. When you compound it, it's like infinity, right?

It's massive.

It's massive. We forget the difference, right, because. So tell us, especially for founders, and then we can talk about how that fits into different bars for the COD100. But, but how has that raised the bar for venture financing? How has it raised the bar for seed A, B, C? Do you have to be growing even faster than two years ago to get a term sheet from Bessemer or in general? Because we read about all these rounds, but I think for some founders it's even harder to get funded than a couple years ago.

The bar of awesome is higher. And that's the good and bad news. Meaning the range of possibilities is much bigger, but the competitive set is spectacular. And time is the limiting factor for active venture firms. And I think this is one of the distinctions. There's a lot of passive money out there now. There's a lot of different ways to finance. But at least for the earlier rounds where you're saying, hey, I want a board member, I want someone to be helpful, I want someone who's seen this before, et cetera, there is scarcity of time. And the companies that we're funding early on tend to be the ones that are growing north of 100% and can be $10 billion plus companies. Me, Byron Dieter, can do one or two of those a year and my partners can do their one or two a year and we can do some growth investments, we can do more seed investments, et cetera. But in terms of the core venture activity. And so that's the same answer for other partners at other firms that you want on your board. And so yes, the hurdles higher. But wow, when it's working, you can build something freaking spectacular and massive and world changing. And that is now possible in cloud in a way that had never been conceivable just a few years back.

Let me simplify it to maybe one thing. I'm shocked. The number of companies, startups, I guess we can't really call them startups at 100 million or more that are growing 100% or more. I'm shocked. Right? And some of these were Covid boost.

Right?

We can talk about a bunch of folks in the collaboration Software that crossed 100% at 100, even 200 million last year and they got a Covid boost. But when you look at companies, routinely is probably the wrong word. But that regularly grow 100% at 100 million, right? What does that mean, a 10 million ARR? What if you're going 100%? Like that's not nearly as good. 100% at 10 million is not nearly as good as 100%. Does that mean it's not good enough to get like, what is? How does it change the bar? Let's just simplify to one thing and then how does it change the bar at 10 million ARR. To pick a line, does it not change the bar? Has the bar gone up? Is it 1.5? Is it 150%, is it 200?

It's awesome that you ask that exact question because literally I've had two board meetings in the last week where the team was wrestling with this exact question. And they're pushing for the triple, which is the 200% growth over the coming year. We've got a baseline plan at the double, but that is very much the mindset now, which is take out capital as a resource team. Bandwidth is really the resource market. TAM really isn't for most of these companies anymore. And it's all about what can we do. And us as a service provider here, so much of our energy now is around team building and recruiting because that tends to be the bottleneck. But we are definitely seeing more of these triple, triple, double double models. A hat tip to Neeraj and the battery folks, I think coined it. But that's now possible later in their lives. And you're seeing businesses that 10 million-plus that are completely capable of tripling for another year or two before they decelerate into the 100% growth double in those out years. And Covid definitely gave some businesses a boost, but this work from home stuff is going to continue. These hybrid models are continued. Cloud is the way of the future for software. And I, you know, my rough guess is probably 25 of our Cloud 100 companies this year at least are above 100 million, growing over 100% right now.

Okay, well, maybe that's what we could almost wrap up on of the Cloud 100. About a quarter of them are growing more 100% or more at 100 million in revenue.

That would be my guess. That's not a slice I've done directly. We'll show all sorts of slices of metrics, benchmarks, et cetera on August 10th when it drops. But just estimating based on the valuations and the other metrics. I know that wouldn't surprise you. I'd take the over on that. Yes.

For folks that should be both inspiring and intimidating. That 100% growth at 100 million ARR isn't even top decile. It's not even top decile. It's only top quartile. I don't know what that means for venture returns. What should top decile venture returns be then?

Well, exactly. If the public index has produced a 12x plus return, then that, that should be what we're all benchmarking our funds to. So the bar has been raised for awesome there as well.

Okay, well, let's wrap on that. Come learn. Come to the Cloud 100. Learn how Top Quartile is growing 100% at 100 million in revenue. You'll meet digitally Reese Witherspoon again. What's the date, Byron, for the Cloud 100?

August 10th. You can sign up at TheCloud100.com the Cloud and then the number100.com get your link there. And as always, look forward to coming back to Saster where we'll release the new state of the cloud and pull in a lot more of this data and go deep and love and appreciate the partnership. And the Saster community has been such a big part of my life and our company's lives. Lots of gratitude for the content sharing and the education that you've done for entrepreneurs everywhere.

Thanks, Byron. We'll talk to you soon.