Investing in Growth Stage SaaS Companies

Mary D’Onofrio @ Bessemer Venture Partners, Loralyn Mears @ Grid Daily, and Amaryllis Liampoti @ BCG Digital Ventures
Main Stage
Ascent Conference 2020

Loralyn Mears [00:00:06] Well, hi there, everyone, I’m Loralyn Mears with Grid Daily, I’m a journalist and have some other gigs on the side. But here, for today’s purposes, I have the good pleasure of being able to interview these two gals, seasoned investors. We’ve got Mary D’Onofrio. She’s the vice president, Bessemer Venture Partners, which is one of the oldest firms in the US. And we’ve got Amaryllis Liampoti. She’s a partner and managing director at Boston Consulting Group Digital Ventures. So why don’t we begin, ladies, with you each introducing yourselves on a personal level.

Mary D’Onofrio [00:00:39] Great. Nice to meet you and thank you for having me. I’m married snow for you. As you said, a vice president, Bessemer Venture Partners, which I joined in twenty eighteen to start the firm’s growth investment practice. I spend almost all my time in sass and cloud investing, some in developer tooling with investments in Launch Darkly and Zappia in automation with an investment in hyper science data privacy with an investment in Big ID. And I also spend a lot of my time thinking about Cloud broadly maintaining the Bessemer Nasdaq emerging cloud index, which is a benchmark for public cloud companies and have authored pieces like the 10 Laws of Cloud and State of the Cloud. So I’m thrilled to be here discussing one of my favorite topics. And thank you for having me.

Amaryllis Liampoti [00:01:22] Oh, yes, and also a warm welcome from my side, very excited to be here, accompanied by this . My name is Amaryllis and my partner also leading the growth function within Boston Consulting Group Digital Services. So we are actually focusing on and building and scaling companies with some kind of corporate investors. My specialty is on SaaS B2B and also in driving the companies from the seed face to to scale up. Before joining BCG, D.V., I was with Froggatt Internet, the German incubator where I was having a similar function leading the marketing and growth team in technology to help the incubator companies. Before that, I have spent most of my career in startups and software companies. So also very excited to be here to discuss about investments and growth for.

Loralyn Mears [00:02:28] Perfect. Well, let’s jump right in, since this is talk all focused on SACE investments, so what’s the allure of investing in SACE tech companies and if each of you could take that question? I think our audience would appreciate it.

Amaryllis Liampoti [00:02:42] And maybe I can start, I think, when when we talk about says they’re actually quite some interesting aspects for from an investor standpoint, first of all, I would say predictability is the number one. So, I mean, this is cooption behind us businesses is actually something that gives, I would say, reassurance to a lot of investors in terms of projecting lifetime value for customers and beyond. The obvious kind of the subscription, the predictability of revenue. I think there is something around go to market by having that kind of lower cost. I think it’s easier for a software to be to penetrate a certain market. So there’s definitely there’s definitely that. And then I think on the customer side, from those who are actually enjoying the software, I think receiving updates and kind of centralized hosting for for software is that, I think a huge advantage. So all in all, I think is a very interesting business model in terms of revenue generation, but also it has an easier go to market approach as opposed to other software services, other.

Mary D’Onofrio [00:03:55] Yeah, I’m a realist and touched on a lot of the core things that I would also echo, but I think SACE, as opposed to on premise software, has cost savings with reduced upfront spend, reduce switching costs and costs, or move from CapEx to OpEx, faster implementation, better product delivery, since there’s only one version of software that’s usually maintained. And then then from the metric side, the only thing I would add to what she said already is SaaS companies tend to exhibit better retention dynamics, lower churn, and then that kind of adds to the predictability of their recurring revenue growth. And their model tends to create operating leverage where there’s a lot of upfront investment and customer acquisition and product delivery and building. But then over time, you get leverage from that model and can monetize your customers over a long period of time. And SAS companies tend to exhibit great cash flow dynamics at maturity and beyond those dynamics themselves. I think also, especially in the past few months as the public markets have appreciated so dramatically for SAS companies, I think even that has triggered the private market feeling, which is a great place to invest as well. And at maturity, as I was mentioning, I maintain the the best McCleod index, the average public. That SAS company is still growing 30 percent year over year with five percent cash flow margins. And so I think SaaS companies, more so than even a lot of other tech companies, have exhibited the ability to predictably grow and not have material growth decay over time, which is obviously alluring to investors.

Loralyn Mears [00:05:31] And now one of the key things is that, you know, over the years, there’s been an increasing number of investment options and players in the investment markets. So maybe in a few words you could each highlight the exact kind of like stage market and fit. So anyone listening in the audience can say, oh, I should talk to at Bessemer or no, I should talk to Amatyllis ABCDs the.

Mary D’Onofrio [00:05:56] Sure, sure, I can take that one first. I invest in growth stage company, so I would say anything kind of round series B, C and beyond. I’ll look at almost anything at the growth stage. But there are a few areas where I spend a disproportionate amount of time, developer software and developer platforms, data privacy and automation. We’ll also look at vertical fast. But at Bessemer, the growth team is small but mighty. There are only three of us. So we will look at basically anything at the growth stage in fast.

Amaryllis Liampoti [00:06:31] Yeah, I think on our side, we actually follow a slightly different approach. So we actually focus much more on early stage. So that meaning we together with, I would say, the most prestigious companies in the world, we innovate, we create companies, we launch them in the market. And I think from from the main difference from what I was describing is the operational support that we’re providing. So not only we are incubating the company, but we help them to succeed from the seed stage to market leadership with all Mehring, all the functions that a company has, like from a growth product and technology talent, you name it.

Loralyn Mears [00:07:18] And let’s just dig just a little bit more into that remedies with respect to how different things are at GDV in that you even personally take a very direct and hands on approach in your portfolio members. Can you just elaborate a bit further on that beyond what you just said?

Amaryllis Liampoti [00:07:35] Yeah, of course. So so that our approach is actually identifying an opportunity in the market, validating this market, this opportunity through rigorous delisting and testing. And once we have actually identified an interesting opportunity, then we go in and we invest. We built the company and then we help in scaling the market. Then all of this we actually do in-house. So in other words, you would actually put a label on us as a business incubator, an investor, not only just the funds, but also making sure that we also have the operational powerhouse behind that to make this company successful in the market. So if you are a corporate investor who’s looking into innovating in the US in a business model, that we are the right partners to make it happen.

Loralyn Mears [00:08:32] Thank you. And so now, Mary, I mean, looking at BP, right, one of the oldest VC firms in the country, and you’ve taken a very different, I think, a unique approach to growth. You hinted on some of that because like, you know, you’re the manager and the originator of the best MURLAK index with the cloud index. Can you tell us a little bit more about that? That I don’t know if everyone knows that you established that the growth fund’s investment, kind of what you’re doing in that direction, please.

Mary D’Onofrio [00:08:57] Sure. Thank you. So Bessemer is one of the oldest venture capital firms in the United States. We think it’s the oldest, but depends on who you ask. Historically, it’s been focused on series A, Series B earlier stage. But two years ago at the firm decided to invest more in growth stage and kind of be able to support companies throughout their life cycles. And that’s where I fit in. I was hired to start the growth fund and since then we’ve raised five hundred and twenty five million dollars as a dedicated growth fund and we also invest out of our two billion dollar main fund. Our our approach to growth is to invest behind the themes that we also invest in in the early stage, but just to be able to get in later and help companies get throughout their lifetime. So things like remote work or the rise of the developer and what we are able to pitch to entrepreneurs that that is different than some other firms is that we can continue to fund you and partner with you as time goes on. So, for example, we led all but one round of Twilio, ceded it, but then also did the same for a current portfolio company off zero. We try to partner with companies over the long term and the growth stage. We generally partner with our early stage partners to kind of have a more holistic approach to companies and are able to have built relationships with them far above, a lot of times far earlier than we actually invest.

Loralyn Mears [00:10:21] So now just switching over here. So, like Khedive investing, there’s a lot of letters to keep pushing out there. At one point I’m going to end up getting the letters in the wrong order. So heads up for that. So you folks, you invest in a number of different industries, right? I mean, from energy, health care, consumer, automotive, and one that’s sort of near and dear to my heart, which is life sciences. I noticed that you recently invested in Lab Twin and actually launched Letwin in partnership with Sartorius, who is a big biopharma supplier, one actually that I’ve personally worked with in bioprocessing. So and it’s with loved ones doing right now is really timely with their SaaS solution. With respect to covid, maybe you could tell us a little bit more about this exciting investment.

Amaryllis Liampoti [00:11:04] For sure I think it also connects a little bit back to what Mary was saying about the impressive growth we’re seeing in most of the businesses. And I think that’s also connected to a lot of kind of science businesses that they’re fitting very nicely. A customer need. And I think this is, I would say, our unique differentiator in a way we always start from the end user, the end customer and everything we do and all the companies we built around a very concrete point and friction a customer has in the market. And I think lapwing is a great example of and we have nothing to do with covid. And I think it’s a great timing for the company. But beyond that, the scientists, we’re actually struggling with the commenting experiments in the laboratories and there have been many different approaches to actually mitigate that problem. But none of them has actually employed that technology. So what we did is developing an AI algorithm is like a voice, a system for lab, where scientist, for instance, where they have their hands busy, they’re able to document experiments and actually increase not only fees, but also the accuracy of their experiments. And Solectron has actually global scope and has been extremely successful in the market is a typical example of a Sask, which is exactly meeting a very, very concrete need in the market. And I think that’s what makes a successful.

Loralyn Mears [00:12:33] Oh, I would have loved that back in the day when I was at the bench day after day, like glove on, glove off, like hot with radioactivity, switch them out and then have to, you know, record the notes. That would have been lovely, but that was a really long time ago. And they didn’t.

Loralyn Mears [00:12:46] Believe me. It’s up to today because we did a lot of research, a lot of scientists where operating exactly as you described. So not so much to say ever since.

Loralyn Mears [00:12:59] Yeah, that’s true. And it hasn’t been that long. Like, you know, back in the day when I was at the lab, you know. So Mary Sue, BP has been around for a really long time, as we’ve talked about. OK, fine. Debatable if they’re the oldest or not, but they’re up there. And can you tell us if identifying, conducting due diligence or investing has changed over the years for the firm?

Mary D’Onofrio [00:13:21] I think in an ideal way, probably not. We prefer to canvas this space we find interesting, identify the company we think is going to be the winner, then spend weeks going to the company, getting to the management team, doing deep due diligence, product, technical, financial, legal, and then coming to a partnership. I think now that something that has changed, though, is the deal, especially in fast, is picked up so materially that we have to make decisions on really tight timelines, sometimes a week, sometimes two weeks. What that’s really forced us to do is get to know markets and companies a lot before they’re coming to market and wanting to raise. It’s not a structured fundraising process anymore. It’s a lot of preemptions and a lot of quick decision making. So I think that that’s kind of how we’ve we’ve changed our approach is we’re doing a lot more preempting. We’re doing a lot more market mapping ahead of companies raising so that we can make a really quick, decisive decisions. The other thing that has changed, which is just specific covid, is that we’re having to get to know owners in a resume. And that kind of remote environment is definitely a different dynamic to get to know teams.

Loralyn Mears [00:14:34] So what are the things that, you know, I guess most companies and founders in particular are interested in is, you know, everybody sees the criteria that is necessary in order to have an investment, you know, move forward in a positive way. Right? Of course. Right. So that revenue growth, ideally the hockey stick, you know, blah, blah, but maybe let’s kind of turn it around and say, what are some of the reasons that you both reject investment opportunities and start companies?

Amaryllis Liampoti [00:15:07] I was thinking about them so well, I would say the same crudo that I apply for, I would say going for investments are the same criteria for rejecting, because I wouldn’t say there is a big difference there. I would say, well, obviously, CPI’s is in my protection is the number one that I would say at least grabs the attention. And as you quickly look through companied sexually, I would say the first thing that you would look at. But on a personal level, I would say the market, the team could be a make or break on actually detecting a specific company. But as I said, like for us and the way we go is always from the market. Need the starting point with these. First of all, the problem to solve. And secondly, and significant market to to address and then comes afterwards. And that’s actually our process. Super interested in seeing what he has to say.

Mary D’Onofrio [00:16:06] Yeah, I think I think the metrics matter a lot, especially at the growth stage. In fact, I think the one thing that’s really difficult to get over is a high churn dynamic. You’re paying a lot of money to acquire, acquire customers and you’re hoping to monetize them over time. And if you pay for them and don’t retain them, it’s a really leaky bucket. It’s difficult for a lot of companies to overcome. So from a metrics perspective, I’d say, see, churn is there is a reason that some some companies won’t meet the bar. Obviously, that those churn dynamics depend whether or not you’re an enterprise solution, in which case higher retention would be expected or an SMB solution where lower retention might be expected. I do agree, though, with memorialized on the team piece, and sometimes it’s not even what their qualifications are. Sometimes it’s even fit with me, with me or or with another partner that we’d be looking to invest in the company because depending on the stage you’re investing in, you’re buying into on both sides a five to 10 year relationship. And you want to make sure it’s, first of all a problem. It’s a it’s a team you want to help and you want to partner with. And second of all, it’s a problem that you’re interested in helping them solve. And I think if those things don’t perfectly align, it’s it doesn’t mean that the company won’t be massively successful. It just means there’s probably a different partner that would make better sense as of it.

Loralyn Mears [00:17:25] Right, and why create all that friction, especially when those kinds of, you know, contracts and investment level are harder to dissolve the marriages? Right. So make it easy on everybody. That’s what we all want. Now, I don’t know if this applies, but we get a lot of questions from the audience in and around new funding initiatives, things like crowdfunding, you know, these platforms, right? Crowdfunder, Start Engine and others. Is this, you think, impacting it all the way that you folks investor, you’re so late stage just doesn’t really impact you at all.

Mary D’Onofrio [00:17:57] It doesn’t it doesn’t usually impact my world just because the quantum of capital that we’re looking to to to put out is usually larger than I would argue a lot of crowdfunding initiatives can generate. The average growth stage check for Messemer is between 40 and 50 million dollars, but Amaryllis might have have a different perspective.

Amaryllis Liampoti [00:18:19] Yeah, I would say, obviously for a kind of squeezebox class, I think there’s no kind of competition like a company that the states would never go into crowd funding at this point. I think it’s more of an option for companies to actually secure Seether, precede funds. And from our side also, I mean, the type of investments we do are actually pretty large. So it’s very difficult to actually compare them to crowdfunding. I would say looking at the macro picture, I think crowdfunding is a very interesting trend, which at least for us, gives us a lot of kind of insights on product markets. So crowdfunding for me, especially for companies that have started that way, is a sign of an very early kind of product market, fit in a way convincing the masses of potential on the business without these masses actually having business background for me to sign a positive sign for a company success. Having said that, doesn’t have any influence in the work that we do.

Loralyn Mears [00:19:23] Now, 2020, by all measures, has been right, like an epic year, we’ve got an election going on in the U.S. Some people may have watched that last night. We’re not going to comment on that. There’s social justice, you know, calls for reform. Is this forcing any changes? You know, in a few words, in your deal pipelines and your investment strategies.

Amaryllis Liampoti [00:19:44] Absolutely. I mean, I don’t think there is any kind of anybody who would argue differently, I think they are obviously a lot of opportunities that have been created by this crazy year. Also a lot of difficulty. So for sure, there’s definitely an impact. And I would say put all together, if you had asked me that question probably some months back, I would have a very different answer. But now, being some months into the pandemic crisis, I would say it has more upsides overall if we think about digitization and how quickly it has actually accelerated everything. And now with it to the elections, I mean, I’m mostly focusing in Europe. We’re actually observing everything from a little bit of distance. But obviously there’s always something back there as well that I will leave that up to my.

Loralyn Mears [00:20:33] Right. You enjoy the entertainment over there, but OK, we’ll go on that.

Amaryllis Liampoti [00:20:40] Yeah

Mary D’Onofrio [00:20:41] I think speaking about diversity and inclusion specifically, Bessemer is really making a concerted effort to promote diversity throughout the portfolio, increase the pipeline of diverse founders. And even as board members try to promote diversity within the companies that were already board members for and then even to its own ranks. So I think there’s just a lot of concerted effort towards that, which even if even if it’s not someone’s priority from an ethical and moral point of view, it’s also the right business outcome and the right business decision. So I think as a firm where we’re all in on D and I.

Loralyn Mears [00:21:20] Fantastic, and just we’re almost close to wrapping up here, so in a couple of words, do either of you see any new emerging big trend in investments?

Mary D’Onofrio [00:21:33] Sure, there are a couple of things that come to mind. So, first of all, I think the globalization of SACE, more and more, we’re seeing transformational fast companies being developed around the world. And Silicon Valley does not have a monopoly on innovation whatsoever, whether it’s success stories like UI path in Romania, it’s Israel or even newcomers like contract book in Denmark, where we’re seeing fast growing internationally. I know we’re getting close to time, so I’ll let Amaryllis continue.

Amaryllis Liampoti [00:22:01] Yeah, I would just only highlight that. I would say data privacy is also becoming a big trend. So we see also a lot of kind of moving towards that direction. Cybersecurity data privacy is definitely trend that we are seeing.

Loralyn Mears [00:22:15] And just given that it has been an epic and horrible year and so many things, we’re going to end on a positive note and we’re going to wish both Merry and America’s continued success with your portfolio members. And just really wanted to thank you for the time and the insights that you’ve shared with this audience today at a sense. Thank you so much.

Amaryllis Liampoti [00:22:32] Thank you, Loralyn.

Mary D’Onofrio [00:22:32] Thank you.

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