20VC Bessemer’s Byron Deeter On Lessons From Investing in 14 $Bn Companies, What The Heck Is Going On In Cloud Today and Why Cloud IPO Floodgates Are About To Burst Open

In a dynamic episode of "20 Minutes VC," host Harry Stebbings interviews Byron Dieter, a partner at Bessemer Venture Partners and a prominent figure in SaaS and cloud investments. Dieter, who has been pivotal in 14 companies valued over $1 billion and 8 IPOs, shares insights from his journey as a founder-turned-venture capitalist. He emphasizes the importance of backing visionary entrepreneurs, the irrelevance of market timing in early investments, and the significance of strong founder-VC relationships built on trust. Dieter also discusses the current state of cloud computing, highlighting the rise of private cloud unicorns poised for public markets and the strategic moves by incumbents like IBM and Google Cloud. He attributes his own investment success to a heavy emphasis on team dynamics and offers advice for new board members, stressing preparation and strategic focus. The conversation wraps up with Dieter's latest investment in Scale Factor, a promising startup in automated bookkeeping.

• Byron Deeter is a partner at Bessemer Venture Partners.
• He is recognized as a leading investor in SaaS and cloud computing.
• Authored the iconic laws on the state of cloud computing.
• Has a track record of 14 investments valued above $1 billion, including 8 IPOs.
• Byron was a founder before entering venture capital, establishing Trigo Technologies, which was acquired by IBM.
• He has been a constant source of support to Harry Stebbings.

"I'm thrilled to welcome back to the show Byron Dieter, partner at Bessemer Venture Partners there by Byron has established himself as one of the leading investors in SaaS and cloud, authoring the iconic laws on the state of cloud computing."

The quote introduces Byron Deeter as a notable figure in the SaaS and cloud investment space, highlighting his significant accomplishments and contributions to the field.

• Byron was a founder first, with firsthand experience in the early cloud business.
• Worked with Bessemer Venture Partners as a CEO in their portfolio.
• After a successful outcome with his business, he joined Bessemer Venture Partners.
• Has been leading cloud efforts at Bessemer for the last dozen years.

"I was a founder first and have a lot of empathy and scar tissue from founding an early cloud business back in wave."

This quote explains Byron's background as a founder and his transition to venture capital, emphasizing his empathy for founders due to his own experiences.

• Byron has seen multiple market booms and busts.
• Believes great companies can be built in all markets.
• Advises against trying to time markets; instead, focus on great people with big visions.
• Recognizes the benefit of megatrends as tailwinds for companies.
• Market timing does not factor into entry strategy but is relevant for exits (acquisitions and IPOs).
• Best companies can afford to wait for ideal timing.

"My biggest takeaway, having now seen both the 2000 blow up and then also the eight housing based recession, is that essentially great companies are built in all markets."

The quote summarizes Byron's perspective on market cycles and the resilience of great companies, regardless of economic conditions.

• Incumbents in the cloud space are making bold moves in response to competition.
• Pure play cloud companies are experiencing a second wave of market recognition.
• IBM's acquisition of Red Hat is a strategic move for hybrid cloud leadership.
• Google Cloud's leadership change is an attempt to strengthen its enterprise strategy.
• Microsoft's successful cloud transition under Satya Nadella serves as a model.

"We have a few very fascinating dynamics where you see the incumbents in some ways acting like cornered animals and lashing out."

Byron comments on the aggressive strategies of established cloud companies trying to maintain or regain market position in the face of new challenges.

• Public cloud is experiencing aggressive growth and gaining share in the enterprise segment.
• Legacy vendors are facing risks, and some may not survive the competition.
• Infrastructure as a Service (IaaS) layer is benefiting pure-play companies.
• There is a renaissance of innovation in private companies that will soon impact the public market.

"And so there's this macro battle of risk going on with the legacy vendors, and there will be some fatalities there. But it's enabling the infrastructure service layer that now the pure plays can continue to benefit from."

The quote highlights the intense competition among legacy vendors in the cloud space, which may lead to some companies failing. However, this competition is beneficial for pure-play companies that focus on IaaS.

• There is a current lack of clear and impending cloud IPOs.
• This may be a temporary situation, part of macro cycles, or due to extended periods of privatization.
• The private cloud landscape is robust, with many unicorns poised for IPOs.

"I think that that's a point in time comment, and if we did this podcast three months from now or six months from now, it would be an entirely different discussion."

Byron Deeter indicates that the current state of cloud IPOs is not a permanent concern but rather a snapshot that could change rapidly in the near future.

• Public market performance is seen as a lagging indicator for venture investors and founders.
• Venture investors aim to predict and invest in trends that will be relevant 5-10 years ahead.
• Awareness of public market trends is tactical for companies transitioning from private to public.

"For us to be successful as venture investors and partners with entrepreneurs, we need to be five to ten years ahead of what the public markets are seeing, or we're just going to be too late by the time the company is at scale."

Byron Deeter emphasizes the need for venture investors to be forward-looking, focusing on long-term trends rather than the current state of public markets.

• Valuations for enterprise companies are at an all-time high.
• Despite high multiples, investing in the right companies is believed to yield high rewards in the long term.
• The macro trend of cloud computing is too significant for investors to ignore based on current valuations.

"I absolutely believe if we get the right companies, we will be handsomely rewarded for it, and we'll believe it ends up looking cheap in the end."

Byron Deeter expresses confidence that investing in the right companies, even at high valuations, will be justified as these companies grow and succeed in the long term.

• Founders should maintain an even keel, not getting too swayed by highs or lows.
• Efficient business models that scale without excessive capital are highly valued.
• Efficient businesses are rewarded in all market conditions and provide a form of insurance.

"Efficient businesses will be rewarded, meaning businesses that can scale without needing to consume lots of capital are going way out on their ski tips in terms of customer acquisition."

Byron Deeter advises founders to focus on creating efficient businesses that can scale sustainably, which will be attractive to investors and provide stability across market cycles.

• Team dynamics and alignment are the most critical factors for investing success.
• Experiences with companies that struggled often involved misalignment with the team.
• Over time, Byron Deeter has increasingly prioritized team assessment in his investment decisions.

"And where we've lost money, or where we've had very painful experiences along the way, is where we just got out of sync with the team, or didn't fully understand where the team was headed."

Byron Deeter reflects on his investment experiences, noting that the most challenging situations arose from a lack of alignment or understanding with the company's team.

• Trust and transparency are essential for a strong VC-founder relationship.
• Frequent interactions and over-communication can help build this trust.
• Personal connections beyond the professional level can strengthen the relationship.
• Comfort with saying no to a VC's suggestions without guilt is crucial for trust.
• A founder-VC relationship can evolve into a long-lasting personal friendship.

"It's just that style and tone and trust needs to be there between her or him and myself in a very compelling way."

This quote emphasizes the importance of having a compatible style, tone, and trust between the VC and the founder for a compelling working relationship.

"A lot of it's around time early on and over sharing and over communicating."

Byron Deeter suggests that spending quality time and sharing information generously in the early stages of the relationship is key to building trust.

"I tend to still go on trips with these folks...swap holiday cards and go grab a beer when they're in town or when I'm in town with them."

Byron Deeter describes the deep personal connections that can form between a VC and founders, which often continue beyond the professional engagements.

• Prior experience as a founder can influence a VC's level of engagement with their companies.
• Empathy for the founder's role leads to a more cautious and respectful approach to involvement.
• Balancing the provision of opportunities with respect for the founder's time and focus is essential.
• Strategic engagement is prioritized, with an understanding of the ripple effects of requests on the company's time.

"In some cases I'm less active because there's more empathy there for the role."

Byron Deeter acknowledges that his own experience as a founder makes him more empathetic and sometimes less active in his engagement with portfolio companies.

"My job as CEO then was in some ways acting as that buffer."

Byron Deeter reflects on his past role as a CEO and how it informs his current approach to being a supportive but not overbearing VC.

"That team time is the most valuable asset that the company has, far more valuable than cash."

Byron Deeter highlights the importance of respecting the company's time and not distracting them with unnecessary tasks.

• Preparing thoroughly for board meetings is crucial for effective contribution.
• Speaking less and focusing on key issues during board meetings can be more impactful.
• Continuous learning and improvement are part of evolving as a board member.

"Prep more and speak less, maybe a loose Alexander Hamilton reference there or something."

Byron Deeter shares his approach to board meetings, emphasizing the importance of preparation and being concise in contributions.

"And that's where I continue to push myself and hopefully I continue to learn in that way."

Byron Deeter acknowledges that he is still learning and striving to improve his effectiveness as a board member.

• Observing different executives and CEOs provides valuable perspective.
• Experiencing the evolution of businesses and management styles is educational.
• Learning from technical and management strategies enriches a board member's knowledge.

"It is so impressive to see this early vision...pioneered entirely new go to market models."

Byron Deeter expresses admiration for Jeff Lawson's leadership at Twilio and the innovative strategies implemented under his direction.

"I've learned a lot on the technical side, but also on the management side as Jeff continues to evolve."

Byron Deeter speaks to the comprehensive learning experience he has gained from observing Jeff Lawson's technical and managerial growth.

• Preparation is key to effective board participation.
• Strategic discussions should be prioritized over routine updates.
• The goal is to make the most impactful use of board members' time.

"Just spend the time going into the meeting so that you can be aligned on what the issues are and try to make the discussion as strategic as possible."

Byron Deeter advises new board members to prepare thoroughly to ensure strategic and aligned discussions during board meetings.

"Preserving the time for the strategic stuff is the most important actual use of the boardroom members."

Byron Deeter emphasizes the importance of focusing on strategic matters in board meetings to have a meaningful impact on the company.

• Byron Deeter reflects on the significant impact of Jack Clark, his rugby coach at Cal.
• He credits Jack Clark for teaching him about team building, leadership, and feedback.
• The Cal rugby program's motto, "entitled to nothing, grateful for everything," is a guiding principle in Byron's life.
• The lessons learned from Jack Clark are applied in Byron's role as a board member and advisor to CEOs.

"Day in and day out? I constantly look back on Jack Clark in the Cal rugby program. Absolutely. He's the winningest coach in collegiate sports history." "I learned more about team building and leadership and feedback there than I did in the classrooms." "I literally have a Cal motto printed out in my house, which is this notion of entitled to nothing, grateful for everything."

The quotes highlight the deep influence of Jack Clark on Byron Deeter's approach to team building and leadership, as well as the significance of the Cal rugby program's values in his personal and professional life.

• Byron Deeter recommends two books: "AI Superpowers" by Kaifu Li and "Legacy" on the New Zealand All Blacks.
• "AI Superpowers" discusses the impact of AI and China on the tech industry.
• "Legacy" focuses on team building, echoing the lessons from Byron's rugby background.

"I'll give you two recent ones. I like all the old business ones, but AI superpowers by Kaifu Li and legacy on the New Zealand All Blacks."

The quote provides specific book recommendations that reflect Byron's interests in AI, China's impact on technology, and team building principles.

• Byron Deeter shares his experience of being rejected by venture firms that doubted the SaaS business model.
• He chose to believe in the model and has been involved in it for 19 years.

"Being turned down by many venture firms as a CEO and specifically because they didn't believe the software as a service business model would ever make a penny of money."

This quote emphasizes Byron's early challenges in securing venture capital due to skepticism about the SaaS model, and his commitment to the model despite the rejections.

• Founders should always be building relationships with investors, partners, employee candidates, and potential acquirers.
• Establishing these connections well before needing to raise funds can lead to raising capital without formal processes.

"True in the sense that they always need to build relationships with investors, partners, employee candidates, acquirers."

Byron confirms the importance of continuous networking and relationship building for founders, which is a strategic part of their role.

• Trust, transparency, and candor are crucial for successful venture partnerships.
• Personal friendships can enhance these long-term professional relationships.

"Partnerships radical trust and transparency in the discussion around the information sharing both ways and the candor, it just takes out so much friction."

The quote outlines the core values that Byron believes are essential for the best venture partnerships, emphasizing mutual trust and open communication.

• Byron discusses the concept of an "anti-portfolio" to highlight missed investment opportunities.
• Missing out on Tesla is a notable example for him, which he attributes to underestimating the impact of government support.

"On the Bessemer Venture Partners website we have an entire anti portfolio that highlights our crimes of omission. Tesla is the one that is front and center for me."

Byron candidly shares his experience of missing investment opportunities, using Tesla as a prime example, and how it is reflected in Bessemer Venture Partners' anti-portfolio.

• Byron's experience as a founder helps him advise others during challenging times.
• He emphasizes the importance of reminding teams of the big vision and not overreacting to short-term issues.

"This is where I think being a founder helps a lot because I had a lot of them going through a recession and customer cancellations and employee resignations and all of that."

Byron's quote reveals his approach to supporting teams during crises by focusing on the long-term vision and resilience.

• Byron's most recent investment is in Scale Factor, a company in automated bookkeeping.
• The product vision and the team's energy and vision were key factors in the decision to invest.

"So the most recent announced one is a small company in Austin, Texas, called Scale Factor, which I firmly believe will be a household name in the coming years."

The quote expresses Byron's enthusiasm for Scale Factor's potential and the reasons behind his investment decision.