20VC The Twilio Memo Bessemer's Byron Deeter on How a $125K Initial Check Became Bessemer's Largest Position, What The Influx of LateStage Capital Means For Venture Today & Why The Incumbent Advantage Is Now An Incumbent Disadvantage

Summary Notes


In this episode of "20 VC," host Harry Stebbings dives into the remarkable journey of cloud communications platform Twilio with Byron Dieter, a leading SaaS investor from Bessemer Venture Partners. Dieter shares insights from his early investment in Twilio and the strategic moves that led to its success, such as a focus on tight product execution and a commitment to customer satisfaction. Despite concerns about market size and competition from incumbents, Twilio's vision for a developer-centric, API-driven communication service proved revolutionary. Dieter also discusses the challenges and rewards of scaling a startup, the role of strategic funding, and the importance of founder humility and market paranoia in driving continuous improvement. The conversation touches on the benefits of product-led growth and the decision-making behind when to scale sales teams and enter enterprise markets. Dieter's anecdotes highlight the tenacity and foresight that have characterized Twilio's ascent in the SaaS industry.

Summary Notes

Introduction to the Show

  • "The Memo" is a segment where the investment lead discusses a specific investment.
  • Previous episodes covered consumer companies such as DoorDash, Snap, and Pinterest.
  • This episode focuses on the SaaS company Twilio.
  • Byron Dieter, a leading SaaS investor, is the guest to discuss Twilio's journey.
  • Byron has a track record of successful investments, including 19 unicorns, ten IPOs, and notable companies like Twilio, ServiceTitan, HashiCorp, Canva, Intercom, and DocuSign.

"And what better company to cover than the incredible Twilio journey? And who better to have me on the show for that journey than the master of SaaS himself, Byron Dieter, one of the world's leading investors in SaaS, mass and cloud."

The quote highlights the focus of the episode on Twilio and introduces Byron Dieter as a prominent investor in the SaaS space, setting the stage for the discussion of Twilio's investment story.

Byron's Background

  • Byron Dieter was an entrepreneur before joining venture capital.
  • He raised a Series A from Bessemer and scaled his company to profitability before selling to IBM.
  • His entrepreneurial experience provided insights into the SaaS industry.

"Venture, Byron was an entrepreneur, raising a series A from Bessemer and scaling the company to be one of the first global SaaS companies reaching profitability and selling to IBM."

The quote outlines Byron's entrepreneurial background, emphasizing his firsthand experience in scaling a SaaS company, which is relevant to his investment expertise.


  • The host thanks Scott Rainey, Albert Wenger, Jeremy Levine, and Matt Garrett for contributing question suggestions for the show.
  • Their input is valued and appreciated for the episode's content.

"Thank you to Scott Rainey, Albert Wenger, Jeremy Levine and Matt Garrett for some amazing question suggestions today. I really did so appreciate that."

The quote acknowledges the contributions of various individuals in formulating questions for the episode, demonstrating the collaborative nature of the show's preparation.

Sponsorship and Advertisements

  • Alt offers investment in sports cards similar to stocks, enhancing transparency and liquidity in alternative assets.
  • Revolut Business is promoted as a financial super app for business needs, offering multi-currency accounts and integration with other business apps.
  • Pilot, a startup financial services company, is highlighted for its recent $100 million Series C funding and services in bookkeeping, tax, and R&D credits.

"But before we move into the show today, question why can you not invest in sports cards like you can stocks? Well, with Alt, you can."

The quote is part of the advertisement for Alt, implying the innovation of investing in alternative assets like sports cards, which parallels investing in traditional stocks.

Twilio's Early Investment Story

  • In 2009, Byron and his team at Bessemer pursued Twilio, leading to an initial $125,000 seed investment.
  • The investment was part of a seed extension round led by Mitch Kapoor.
  • Bessemer's investment in Twilio became one of their largest in terms of dollars and returns.

"The initial investment started with David Cowan leading a $125,000 seed investment. As part of this seed extension round that Mitch Kapoor led."

The quote describes the beginning of Bessemer's investment in Twilio with a modest seed investment, which was part of a larger fundraising effort led by another investor, Mitch Kapoor.

Market Size and Segmentation Concerns

  • In 2009, there were concerns about the market for voice apps, which was practically non-existent.
  • The challenge was understanding if a platform for voice apps was necessary and if incumbents like telephony providers or companies like Skype or Google Voice would dominate the space.
  • Bessemer's leap of faith was based on the belief that a third-party platform like Twilio deserved to exist.

"We had kind of market quality and segmentation concerns. Meaning, if you step back and think about communications, it's one of these immense multi hundred billion dollar tams."

The quote explains that while communications is a vast market, the specific segment for voice apps was unproven, leading to concerns about the quality and addressability of this market segment.

Revenue Concerns and Market Timing

  • At the time of investment, Twilio's revenue was small and even declining month over month.
  • The decision to invest was based on faith in the market and the team's execution ability.
  • There was a risk of being too early, which in venture capital is akin to being wrong.

"Not only was the revenue tiny, but it was actually down month over month."

This quote emphasizes the financial risk associated with Twilio at the time of investment, as the company was not showing traditional signs of growth, challenging the decision to invest.

Jeff's Understanding and Vision

  • Jeff Lawson's experience as a CTO and his understanding of the challenges in communications were convincing.
  • The thesis that communications enablement would be foundational to mobile and internet infrastructure seemed tangible.
  • The fear of incumbents entering the market was ever-present, but they were ultimately outperformed by Twilio's focus and execution.

"The thing that kept resonating with us was Jeff's first hand understanding as a former CTO."

The quote highlights Jeff Lawson's credibility and the importance of his personal experience in convincing investors of Twilio's potential despite market concerns.

Incumbent Disadvantage

  • Byron now views incumbent companies as having a disadvantage due to their lack of focus and agility compared to startups.
  • Startups with a small, dedicated team can often outperform large incumbents in innovation and execution.
  • Discussions with Jeff Immelt of GE and Jeff Lawson of Twilio have reinforced this belief.

"I firmly believe now is an incumbent disadvantage."

This quote reflects a shift in Byron's perspective, where he now sees incumbent companies as disadvantaged when competing against nimble startups in the tech industry.

Evaluating Incumbent Threats

  • When evaluating companies, the focus is now on other challengers rather than incumbents.
  • Incumbents have shown a consistent inability to effectively compete against startups focused on specific problem sets.
  • The agility and product decision-making of startups are often superior to those of incumbents.

"I think very little about incumbent competitors now. I think about other challengers and we focus on those."

The quote signifies a strategic shift in evaluating investment opportunities, with less concern for potential competition from incumbent companies and more attention to other startups in the space.

Customer Churn Concerns

  • There was a fear that customers would build on Twilio's platform, then churn off as they scaled.
  • This concern is similar to that faced by other service providers like Algolia in their early days.
  • The focus of the discussion shifts to how Twilio managed to retain customers despite the potential for churn.

"I think the other concern though, here, not only that incumbent threat, but it was also the fact that the customers themselves and the developer teams would build on top of Twilio, use it, leverage it, and then with scale, they would actually churn off it."

The quote brings up the issue of customer churn, which is a common challenge for platforms like Twilio as customers grow and consider building their own solutions.## Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) Insights

  • The PaaS and IaaS markets have been unpredictable, but companies like Amazon Web Services (AWS) and Shopify have shown that with a strong product and rational pricing, customer retention is achievable.
  • Concerns about "graduation," or customers leaving for in-house solutions as they scale, have been less frequent than anticipated.
  • Third-party services are often more efficient and of higher quality than in-house solutions, especially in specialized areas like global telephony networks.

"So this has been an awakening for all of us in the platform as a service and infrastructure as a service arena."

This quote emphasizes the unexpected learning curve experienced by companies in the PaaS and IaaS sectors.

"And the pleasant surprise there is that if you continue to deliver awesome product and walk people down a rational price curve, you should overwhelmingly be able to keep them."

The quote highlights the importance of product quality and pricing strategy in customer retention.

"And when you think about Twilio building this global low latency network that now comprises hundreds of telephony providers...then you're going to go with Twilio..."

This quote discusses the complexity of building a global network and the competitive advantage it provides to a company like Twilio.

Customer-Focused Decision Making

  • Companies like Shopify still choose to use third-party services like Stripe due to the economic and platform benefits.
  • The distinction between proprietary customer-facing elements and non-proprietary infrastructure is crucial.
  • The advice for CEOs and boards is to leverage APIs for non-proprietary aspects and focus on proprietary customer interactions.

"I think the most striking case is actually with the Bessemer portfolio company, which is Shopify, still using stripe."

This quote is used to illustrate a major company's decision to continue using third-party services despite having the capability to bring it in-house.

"Meaning if it's a UI, if it's part of your product, if it's your app, if it's behind the scenes, if it's plumbing, if it's infrastructure, it's platform, et cetera. You could make the case that it's not proprietary."

The quote distinguishes between customer-facing proprietary elements and non-proprietary backend infrastructure.

Market Dynamics and Product Evolution

  • The market and product adoption can be unpredictable; for example, video communication adoption was slower than expected.
  • New communication channels like video and push notifications do not replace older ones like SMS, but rather complement them.
  • Continuous product development and market response are key to success in the tech industry.

"I certainly have expected video to take off faster than it did...and what you find is that they layer on each other and these markets keep expanding."

The quote reflects on the unexpected growth patterns of different communication channels within the market.

Shift to Enterprise Sales

  • Twilio's shift to enterprise sales was a learning process, with the need to balance product-led growth and outbound sales strategies.
  • The transition involved challenges, including changes in go-to-market motions and sales leadership.
  • The COVID-19 pandemic accelerated the need for nimble solutions like Twilio's communication platforms.

"And so he approached it with a solutions mindset. And that's when you go to ing bank and say let's reinvent your call center."

This quote describes the strategic approach taken to sell enterprise solutions to large clients.

Hiring a Chief Revenue Officer (CRO)

  • The timing and profile of hiring a CRO are critical and depend on the company's stage and sales team structure.
  • The first sales executive should be a player-coach, directly involved in sales to understand and refine the process.
  • As the company grows, the sales executive can progress to higher roles, creating opportunities for internal promotion.

"This is definitely the art more than science part of company building."

The quote acknowledges the nuanced and individualized approach needed when deciding to hire a CRO.

Sales Playbook Development

  • The founder should develop the initial sales playbook before hiring a head of sales to ensure a deep understanding of the sales process.
  • The playbook should be refined and proven by the founder to provide a strong foundation for the sales team and future sales leadership.

"You mentioned repeatability there. You mentioned Playbook. I always say that before you hire your first head of sales, the founder themselves needs to be the one to develop, to hone, to Finecraft that sales playbook."

This quote stresses the founder's role in creating and refining the sales playbook before delegating sales leadership.## Product Led Growth

  • Companies are adopting product led growth as a new cycle, different from traditional outbound sales.
  • The executive team must understand the product-market fit and cannot rely solely on the sales team for this insight.
  • Early reliance on the sales team can lead to misalignment and loss of critical insights.
  • Prioritization is essential when multiple opportunities present themselves, as was the case with Twilio.
  • Direct outbound sales motions are critical when dealing with enterprise customers, especially when customer references and repeatability are limited.
  • The gradual handoff of sales processes is a strategy in product led growth.
  • Founders, especially those with a product background, envision customer needs and allow the product to be pulled through the market.
  • Jeff Lawson of Twilio exemplifies a founder who understands the customer perspective and drives product-led growth.
  • Twilio's approach evolved to include account management and outbound sales to cater to larger customers seeking human interaction.

"But the executive team is absolutely going to be the best position to do that. Fit to understand, really what is the product market intersection, what's the pull through."

This quote emphasizes the importance of the executive team in understanding the intersection of product and market, as well as the dynamics of customer demand.

"Most of our companies aren't that fortunate. And you have to be pretty good at getting really refining the right go to market motion."

This quote indicates that while Twilio had the luxury of multiple successful avenues, most companies must be more precise in refining their go-to-market strategies.

"More and more of our founders are product people, or their co-founder is a wizard on the product side and they're envisioning what the customer wants and they're building it, and they're letting it be pulled through."

The speaker is highlighting a trend where founders with a strong product focus are driving their companies' growth by anticipating and creating what customers want.

Scaling and Leadership

  • Jeff Lawson's ability to scale from founding to IPO and as a public CEO is notable.
  • His humility and market paranoia are seen as positive traits that contribute to his success.
  • Lawson's continuous pursuit of self-improvement and his disregard for external validation are key to his leadership style.
  • His commitment to San Francisco and the Pledge 1% initiative demonstrates his dedication to social responsibility and community impact.
  • Lawson's approach to philanthropy is strategic, aiming for leverage rather than traditional methods.
  • He has been proactive in supporting San Francisco during difficult times, rallying other CEOs and contributing personally.

"So I would look at probably his humility and a little bit of market paranoia as just amazingly positive traits, almost in the Andy Grove sense of only the paranoid survive."

This quote attributes Lawson's success to his humility and a healthy sense of paranoia, drawing a parallel with Andy Grove's philosophy.

"And yet he's constantly saying, how can I be better?"

The speaker admires Lawson's relentless quest for self-improvement, even amidst significant success.

"He reached out to London, breed organized ceos to come together. He donated quietly, personally. He organized Twilio support, very like, the community stuff is super real for him."

Lawson's commitment to community and social responsibility is highlighted, showcasing his efforts to mobilize support for San Francisco.

Investment Strategy

  • Bessemer Venture Partners has adopted a strategy of supporting companies throughout their private life and even through IPO.
  • The firm raised a dedicated fund, the Century Fund, to support what they see as the next century's iconic tech companies.
  • Bessemer aims to be a global platform, with a presence in multiple stages, sectors, and geographies.
  • The rise of preemptive rounds from crossover funds and hedge funds has created challenges for venture capital firms when deciding to double or triple down on investments.
  • Bessemer advises founders to be strategic with the influx of capital and to use it responsibly to build their businesses.
  • The firm has a positive outlook on the availability of downstream capital as long as it is used wisely.

"And we raised a vehicle that we don't really publicize, but we call century funds specifically for this."

This quote reveals Bessemer Venture Partners' strategic initiative, the Century Fund, aimed at supporting significant tech companies through their growth stages.

"And I think that's part of being a global platform. And I do believe that the world is going to skew to a bimodal curve where there's going to be super stage or regional firms."

The speaker outlines Bessemer's vision of becoming a global platform capable of supporting companies across various stages and regions.

"But let's be strategic in our financings. And so within our private cloud portfolio right now, I think we have between 25 and 30 unicorns that have obviously chosen to raise large financings north of a billion."

The quote suggests a strategic approach to financing, highlighting the success of Bessemer's portfolio companies, many of which have achieved unicorn status.

Founder Advising

  • Founders must consider preemptive funding rounds carefully and focus on the bigger picture.
  • It is important not to be swayed by the immediate flattery of increased valuations following an investment.
  • Strategic thinking and long-term planning are crucial when assessing whether to accept such funding offers.

"The overwhelming response is step back, take a breath and think about this big picture."

This advice to founders emphasizes the need for reflection and strategic thinking when faced with the option of preemptive funding rounds.## Fundraising Strategy

  • Companies are being advised to raise capital earlier than usual due to high market multiples.
  • A balanced approach is suggested: raising half a round ahead instead of a full round.
  • The goal is to reach intermediate milestones for a future "positive, crazy financing."
  • Financing is not an end success; it brings dilution and doesn't necessarily attract more customers.
  • Companies are overwhelmed with unsolicited term sheets and need to maintain a level head.

"The question is, do you need more money or when do you need money? And in this environment, when multiples are at all time highs, historically we absolutely want to raise early and be ahead of things."

This quote emphasizes the strategic timing of raising funds, especially when market conditions are favorable with high valuation multiples.

Market Outlook

  • The BVP Nasdaq Emerging Cloud Index reflects the growth of the cloud industry.
  • Concerns about the sustainability of high revenue multiples, with some companies like Snowflake trading at 80 times revenue.
  • Expectation that companies can continue to grow and absorb multiple compression.
  • Anticipation of market cycles and pullbacks, but also massive exits and the emergence of trillion-dollar companies.
  • Venture capitalists remain invested despite high valuations, looking towards future growth.

"I think there's a real good chance these stock prices, in absolute sense, continue to go up, meaning these companies are growing at north of 40% on the public side and on the private side, usually growing 80% to 100% plus for the best companies."

This quote reflects optimism about the growth trajectory of companies in the cloud industry, despite high valuations.

Entrepreneurial Mindset

  • The "draw the owl" meme is used to describe the entrepreneurial figure-it-out mentality.
  • Entrepreneurs are encouraged to execute and operate without waiting for corporate instructions.
  • This mindset is crucial for early-stage business builders.

"One of them is draw the owl, which comes from this Internet meme, which is how to draw an. It's, you know, step one, draw three circles, the body, and the two eyes. Step two, draw the rest of the fucking owl."

The quote illustrates the concept of taking initiative and figuring things out without detailed guidance, a key trait for success in entrepreneurship.

Twilio's Preemptive Strategy

  • Twilio's preemptive strategy included moving up the stack and offering software-like capabilities.
  • The goal was to avoid becoming commoditized and to retain large customers.

"The commoditization of communications or the migration of their larger customers... we provided software like capabilities on top so we weren't just dumb pipes."

This quote explains Twilio's strategic move to differentiate and add value beyond basic communication services to prevent customer loss and commoditization.

Driving Success at Twilio

  • Success attributed to tight product execution, focusing on quality, uptime, and fair pricing.
  • Ignoring distractions and prioritizing building a great product.
  • Starting board meetings with customer praise to reinforce the focus on product quality.

"Wicked tight product execution... if we build a great product, the rest will figure itself out."

The quote highlights the importance of product excellence in driving company success, emphasizing that a great product can lead to other positive outcomes.

Unsung Heroes at Twilio

  • Acknowledgment of many contributors to Twilio's success, including co-founders and early team members.
  • The contribution of individuals across various roles is recognized as integral to the company's achievements.

"Wow, that list is super long... This list should be 50 names long."

The quote acknowledges the collective effort of a large number of individuals who played significant roles in the success of Twilio, beyond just the most visible figures.

Favorite Twilio Moments

  • Memorable moments include the NYSE building event and a bike accident involving the CEO.
  • These stories reflect the culture and behind-the-scenes experiences that shaped the company's journey.

"One was Jeff standing outside the NYSE building on Market street waving the API flag... Jeff upside down on Woodside Road on a bike."

The quote shares anecdotes that capture the spirit and memorable experiences within the company, illustrating the human element of business building.

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