← The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Do Margins Matter in AI? | Is Defensibility Gone For Good? | Is Vertical SaaS Dead in a World of AI | What SaaS Rules Are BS and No Longer Apply in a World of AI | The Future of Venture: Why Chanel vs Walmart is BS with Byron Deeter
01:21:03
Byron Deeter is a Partner at Bessemer Venture Partners, and one of the most renowned SaaS investors. Byron has led 19 unicorn investments, including IPO successes like ServiceTitan, Procore, Twilio, Box, Gainsight, Intercom, DocuSign, SendGrid. His...
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- [00:00]
Byron Dieter
The stakes are way higher than they've ever been. I thought we understood this next phase we were going into how big this was going to be and very sincerely, we've probably added a zero to everything. I think there's going to be a lot of trillion dollar businesses that are created from this. The game is on, it's coming. Definitely.
- [00:18]
Harry Stebbings
This is 20 VC with me, Harry Stebbings. Now today we welcome an old friend of the show, Byron Dieter, one of the best SaaS and cloud investors of the last decade. Check this out. He's got 19 unicorn investments. Eight of his companies have gone Procore, Service Titan, Twilio, Box sendgrid. The list goes on. Byron is this incredible sage of SaaS cloud wisdom. This was so much fun to do. Reflecting on how SaaS is both different and similar to the AI wave today and how he and Bessemer think about really being a frontrunner in the next wave of AI investing. But before we dive into the show.
- [00:54]
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- [01:53]
Harry Stebbings
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- [04:31]
Byron Dieter
Harry, you big stud. It is great to be back. It is awesome to see you. It has been too long, but it is amazing to see what this thing is built into. So congrats and thrilled to be with you today, my man.
- [04:43]
Harry Stebbings
Do you know what? I'm as surprised as everyone else to be honest. I do want to start there. We were chatting before and you said, you know, a couple of years, but now it feels different and it feels great. This was not in this beautiful agenda here. I wanted to start there. Why does it feel different and great now? And why are you optimistic, bouncing into work today.
- [05:05]
Byron Dieter
I mean this AI stuff is just awesome. I'm a tech geek at heart. We all look a little taller and sound a little smarter when there's an uptrend in the market. But this one's different. Like this is, this is going to be the type of thing that we tell our grandkids about and that generations talk about. This transitional moment, it's absolutely awesome to be a part of it. I think great businesses will be built and money will be made. But just from the technology side, what we're going through is so damn cool to see and I'm just loving it. It's neat to see mind blowing demos again and to be part of discussions of what can be and things that you couldn't have conceived of a few years ago. And so it was tough. It felt like a steady gut punch coming out of the, you know, the 2000 2000s and with the market pullback and people questioning tech and so many board meetings doing layoffs and just having to survive and it's just awesome to be back on offense again.
- [05:56]
Harry Stebbings
I agree in many respects. The challenge that I have though is the transience of wow, so to speak. And what I mean by that is wow. That demo is amazing. This company's great. Three weeks later, new demo from new company and oh wow. Really is quite average. It seems like the defensibility is completely gone. The commoditization is almost across everything and so it's very difficult to know where to play. How do you think about just playing the game on the field, being aggressive because you have to versus kind of pausing to see what shakes out.
- [06:30]
Byron Dieter
So I would phrase it a little differently. I would just say that the pace of innovation is incredibly compressed right now. The best teams are using that for their advantage, iterating at mind boggling rates. The marginal companies are getting passed faster than ever and we're going to keep seeing that because the tech and the enabling tech is so damn good. I don't worry about commoditization, the sense of price erosion which is often implied, it's often used as a derogatory term. But sure, you can think of perhaps foundation models as commodities in the way that hyperscalers are. And by the way, the best business in the history of software is sitting there with AWS in what people refer to as a commodity. And so I think the same playbook is going to be run in the foundation models. I think that the layers on top of those models are going to extract phenomenal value because they're going to deliver phenomenal Value and I think we're going to see great businesses built at multiple layers in the stack.
- [07:21]
Harry Stebbings
To what extent do you care about margin when investing Today? A lot of people are denigrating a lot of the specific app layer companies for having shitty margins. How do you think about the importance of good margins early when investing?
- [07:36]
Byron Dieter
So it was interesting how you worded the question how do you think about margins when investing today? And I would separate, I would add some words in there which is I care a lot about margins on investments we make today. But the margin profile of the future and a lot of these businesses that are doing transformative things may have really crappy certainly net margins. But more importantly, where I think the question was going, gross margins because of an investment profile that involves massive capex, et cetera. And so you can look at a business like a snowflake that had negative gross margins very late in their in their life cycle. And that was a precursor to the LLM world where these businesses have had very tough gross margins in the early days and you're now starting to see the leverage kick in. And so we are investing for the future. None of the investments we make are cash flow based in the short term and in fact very few of them are gross margin based in the short term. But a lot of them do require you to look over the horizon and see what can happen. And in a business like a Stripe or a Twilio or Shopify, they went through those journeys as well. Many businesses have this really intense capital intensive investment horizon even outside of Frontier Tech, when we think about.
- [08:48]
Harry Stebbings
You said they're the capex required. These are in large part very capital intensive businesses. Even on the app layer to the extent that we haven't really seen before. How do you think about the dilutive nature of these businesses given how early we both are and how much cash is going to need to go in.
- [09:04]
Byron Dieter
We talk about this a lot and I'd say we're excited in many cases to be small investors. In very large companies you look at an anthropic or perplexity or a canva. We have nine figures into each of these companies and yet we are still well below historical venture standards where you aspire to own 20% or something. In these businesses, it's a long journey where billions more will probably be raised by at least a couple of those. And so it is a different venture.
- [09:34]
Harry Stebbings
Why did you decide to break the rules there, my friend? Because there's always an opportunity cost of cash and you can put that nine figures somewhere else and that multiple is just getting short. One of my friends in Canva and they did not Canva Anthropic and they did it at like 4 and when it was done at 60 they had like a 3.8x because of the dilution. And that really struck me. And my question then is, well, amazing businesses and yes, generational defining. But the opportunity cost on that multiple.
- [10:01]
Byron Dieter
Is pretty high if you believe that's the end state. Sure. But current reports suggest Anthropic may be raising at 170 and people are buyers at that number believing that they could be one of the next hyperscalers in a trillion dollar business. So 3.8x will keep you in business for a long time, but the reason to do it is because you believe it could be a 30x. That's the basis of our anthropic investment is we believe that it is a generational company. Now there aren't going to be many of those. And so you have to be right. And that's the scary thing right now is that the stakes are way higher than they've ever been. These businesses in some cases could still go to zero. And so you've got these hyper power law outcomes that are scary. It is changing the nature of the game. I do think that scale matters for venture firms to be able to play over this arc of private life. On the flip side, the outcomes are going to be bigger than we've ever conceived of. I sold my company years ago for hundreds of millions of dollars and that felt like all the money in the world and was the top outcome for our software cohort in that vintage back in 2005. Now that's a seed round for some of these businesses.
- [11:11]
Harry Stebbings
One of OpenAI's rounds is about the size of the entire SaaS funding market for that quarter. So don't feel too bad. My question to you is, I was chatting to Jason Lemkin before this, our mutual friend. Well, he said what I'd love to understand with him very much on this point is when we look at the concentration of value, the concentration of funds, is there any point in investing outside of the mega top 10 deals today given 40% of venture funding went to 10 deals?
- [11:38]
Byron Dieter
Yeah, it's a big landscape and so there's a skew with the dollars raised stats because of that concentration. I think the numbers right now, the top three LLMs, if you include anthropic, OpenAI and x in there, are going to raise $100 billion in this six month period, which is just an inconceivable number by any historical standards. Obviously people are betting that there'll be eventual return there. However, there are hundreds of other really compelling venture businesses that will be created in and around those ecosystems, and I do believe there will be great venture outcomes from a number of companies in and around those businesses. And so the power law will play into the premium outcomes of those returns. But I also think There's a lot of 10 Xs and many hundred Xs that are going to exist in and around those businesses. And so I do think that the economy is still vibrant and healthy. It's just skewed much more than we've ever seen or literally could have believed just a few years back.
- [12:35]
Harry Stebbings
Can you help me, my friend? I'm a vertical SaaS nerd. Not quite as good as you, sadly. Otherwise I would own sports teams too. But my question being, give it time.
- [12:45]
Byron Dieter
Harry, you're far too kind.
- [12:46]
Harry Stebbings
I feel like an old man, if I'm honest, like looking for the next service titan or the next pro core when everyone else is shooting around with these incredibly cool companies. Is vertical SaaS as we know it dead in the way that honestly kind of who gives a shit?
- [13:04]
Byron Dieter
I think it's a legitimate question. Our view is no, but it's an area of debate and frankly alpha comes from not only being right but contrarian, ideally because you're going to get some counter cycles in there and our belief is that it's going through another cycle and AI is a foundational part of what vertical SaaS is ahead. Data models matter much more than they historically did. Connectivity and collaboration up and down the supply chain matter much more. Marketplace capabilities are a defensible moat. There's a lot of attributes that matter a lot. And as I think back on our vertical SaaS investments like a Shopify or a service titan or a Toast when they added payments, it became that big Next Horizon unlock for them and really doubled the TAM and the market caps for these businesses. I think AI is going to do the same thing that what it can do with service titan as they talk about automating the technician experience and the ability to go out there and have a co pilot alongside of you. I was at the Maintainx board meeting yesterday. They're doing the same thing on the factory floor. When you look at luxury presence in real estate, what they can do for the real estate professional to interact with their clients. And so the competitive landscape is heating up in the sense that more entrants are able to come over from horizontals and come up from infrastructure layers to try to make a run at these spaces. But I do believe great vertical software will still win. These are big markets. These practitioners deserve great tech and they will get it. And so in many ways I love that it's not as sexy right now and people are distracted because we're going to stick to, you know, our core and work with great founders and great markets and I think that those will be rewarded over time.
- [14:41]
Harry Stebbings
A couple of kind of questions off the back of that. You mentioned that you know some great businesses but some businesses that are already at scale, that's different versus a company that's at sub a million in revenue with next to no distribution and next to no customers.
- [14:54]
Byron Dieter
Absolutely. We're doing both.
- [14:56]
Harry Stebbings
Harry, does it favor service titan more or your pre seed company more?
- [15:01]
Byron Dieter
Okay, so that's a great question and I will confess we're in the challenger business and AI gives the incumbent some advantages that didn't happen in cloud one. So in cloud one you had a business model dislocation going from license to subscription and you had a delivery model dislocation going from on prem to single instance multi tenant cloud delivered in this AI wave. It's really the next horizon of cloud. And so you're layering intelligence on top of cloud delivery and business models. You're moving maybe to a token model or some other monetization of value. But essentially it's an extension of cloud and the incumbents have platform advantage, data advantage, massive distribution advantages. And so the fast moving incumbents are absolutely going to make a run at being the leaders in the next cycle, which hurts the challengers and that is a reason to be scared. I still believe that the high execution challengers will beat them over time and they also have some inherent advantages and innovators and all of them and some of these things still exist. But when I look at our own portfolio, I look at a company like a Canva or I look at a company like Intercom that's at a scale where in some ways they're already becoming an incumbent in those markets and yet they're disrupting themselves at awesome rates and have AI products that are already deep into the hundreds of millions in revenue. And it's just fantastic to see what they're doing, which then I think will be an indication of what the public incumbents may be able to do if they're nimble and act fast.
- [16:32]
Harry Stebbings
I think Intercom will be actually a case study for the most aggressive rejuvenation in a world of very changing technology.
- [16:41]
Byron Dieter
And the team have done with this fin product and It's a great use case for AI to be clear, like where you have the customer data, that interaction. But I was at one of our portfolio company board meetings the other day and they mentioned that they had switched from, you know, human based interventions to the fin product from Intercom and they showed the stats of deflections went up, I forget to, you know, 90% automated now and their NPS went up. And I said okay, I get the deflections and costs are going down, but it makes no sense to me why is a robot better than a human in interactions? And they said, look, they're giving faster and more comprehensive answers. And so the recipient, the customer who has the question is getting, you know, they're getting links and references and more information back than our humans were providing. So it's a better experience. And that was an unlock for me where I realized like actually this can be a win, win, win on so many levels and it's starting to happen. And so you know, customer support and service and messaging and help desk and ticketing and these things is one of these killer use cases that's just starting but it's going to roll through. So I think the fundamental question that.
- [17:42]
Harry Stebbings
Rory Odriski at scale, I don't like to tell them but they actually make me quite a lot smarter by hanging out with them. But one thing that he's really taught me is that really the real question we have to grapple with in this next wave is will AI fundamentally transition the technology that we sell and create into the labor budget, not just the technology budget or will it remain in the technology budget if it does move? Amazing. We open up a multi trillion dollar market. If it doesn't, much less exciting. How do you think about that fundamental question of the ability to move to the human labor budget?
- [18:18]
Byron Dieter
Oh, that question's already being answered. It's not even a debate anymore, Harry, it's over. These tech solutions are absolutely addressing software, hardware and services budgets comprehensively and they're doing it in a very successful way. And if you look at early adoption in categories that skew this way. And so are we still doing early stage vertical sas? We're going down accounting and legal and medical. We're going through these sectors where there's a lot of frontage humans doing busy work and paperwork and we're supercharging them. We're taking away a lot of the manual transcription and summarization and error prone laborious processes and we're freeing them up. Abridge is freeing doctors up in their patient interactions. To actually interact and talk with a patient than having to turn around and type things into the computer for most of the meeting.
- [19:09]
Harry Stebbings
Okay, that's a really interesting topic because what struck me there was EPIC coming out and saying, hey, we're going to offer transcription. And I think you're seeing this more and more where the incumbent is fighting back. How do you think about that fight back from the 30 year old incumbent?
- [19:26]
Byron Dieter
The game is on. And I think that, you know, EPIC has had this, this wonderful state endorsed Monopoly for a long time. I hope that they're going to continue to be forced to be open as a system and I think you're going to to see a thousand flowers bloom in the medical ecosystem because that is one of the most important areas for AI to address. If you read Dario's essay from Anthropic Machines of Loving Grace, I highly recommend everyone reads it. But it's a tech optimistic outlook of what AI can do. And one of the great statements he has is that 100 years of medical research is about to be pulled forward in the next decade. And so this certainly goes into diagnostics and treatments, but it also goes into patient care interactions. AI can be so damn powerful when you use it to help patients at the point of treatment, at the point of care, for follow ups for preventative medicine, those sorts of things. And Epic holds the key in terms of patient data that we need unlocked. We need that treasure trove to be accessible for these apps and for innovation to happen. And I think it's going to happen. And I'm very bullish on the potential for AI in medical use cases in healthcare more broadly to, to be utterly transformative into quality of life and the treatment processes for patients.
- [20:38]
Harry Stebbings
We mentioned about moving into the human labor budget. We've seen, I mean, one of your companies, Shopify, unbelievable. Like 91% revenue growth in the last few years with a 30% reduction in workforce. You're seeing Alex Karp say the same thing at Palantir. Reduction in workforce, massive growth in revenues. Are we seeing the era completely where it's dramatic reduction in workforce and optimization of revenue more with less ruthless leadership on this behalf, we are.
- [21:09]
Byron Dieter
I just would push back on the, on the ruthless leadership point in the sense of I love the statements these executives are making, which is we're going to give you all the tools in the world to supercharge your daily job so that you're doing the cool stuff again. You're doing the strategic, the architecture, the direction. Tech is going to work for you. You're not going to be a slave to tech. We're going to grow the business, but we don't need to grow the workforce to do it. We're going to supercharge what everyone's doing. And so I think we're going to see the era of the micro business. I think that we're going to have 10 person companies that are crossing billion dollar valuations and kids in schools are going to be able to launch businesses in real time in ways that haven't been possible before. I think that is great for the economy. I've got, got three kids that are at various stages of entering the workforce and so there's going to be disruption and that's scary. And I absolutely admit that we're going to go through this cycle that we all need to understand in terms of what entry level jobs mean, the training, the enablement, those sorts of things. But society's been through this many, many times before and I believe that we will work through this cycle quickly and positively.
- [22:12]
Harry Stebbings
You said that at the beginning when we chatted. You know, I hope you've still got that kind of useful naivety. Sadly no. In Europe we say a la poo belle to the trash. I'm really concerned that there's this generation of 23 to 30 year olds who don't have a passion for the craft, who aren't experts in the craft, who are about to get hit by, I think it's this completely naive utopian view of like, oh, we're just going to give you tools, you're going to do more with them and how beautiful. It's a reduction in force, Byron. It's not like, hey, just do more. Toby's cut thousands of people which has been a good decision for the business. But these, these 23 to 30 year olds are about to get hit with a train. Do you disagree?
- [22:55]
Byron Dieter
There's this awesome history going back to Bessemer Venture Partners namesake, the Bessemer steel process, which many people don't know. You look at newspaper clippings from 100 years ago and there's these great headlines and articles about the coming workforce dislocation and factory workers being displaced because the Bessemer steel process is so much more efficient and the, the struggles the economy is going to face and society is going to face and yet literally fast forward a few years later. And buildings are built into the sky because skyscrapers are now possible with stronger steel and railroads are built across the US and transportation and connectivity and commerce unlocks. You read the articles about the phone operators and I think it was 4% of the female workforce was doing manual switchboards. And this idea of this huge dislocation of the workforce when that was automated. You know, there's hundreds of these micro cycles that have gone through with different tech disruptions and things. It's coming, definitely. And at the same time, more opportunity is going to be created as a result. And the potential for these new workers to leverage technology to do amazing creative things. The micro film producer that can now release a movie that they can create on a laptop. The ability to do apps, the ability to do fundamental research with agentic PhD level supporters in new areas of biology and physics and chemistry. We're looking at fusion investments now that I think will be supported and accelerated by AI. There's just this whole different wave of innovative unlock that will be possible that will favor the nimble and the reactive and the dynamic. But society at large will benefit.
- [24:36]
Harry Stebbings
We mentioned kind of the naivety that I've lost or the cynicism that I've gained, whichever way you want to put it.
- [24:42]
Byron Dieter
It's sad to see you, Harry. Come on.
- [24:44]
Harry Stebbings
Yeah, sorry, Dud. Dario's writing is brilliant, but, you know, optimistic to say the least. I think it just raised a new round when he wrote it. But my question to you is, I have been raised in this business and as part of that, there's rules that are ingrained in you. Now, one of those rules is treble treble double double. You know, the SaaS compounding growth journey. And I look at that and I worry that what we've told founders for treble treble double double is no longer enough. Do you think that is correct? And we have now misled founders and that isn't enough.
- [25:21]
Byron Dieter
Now, don't get me wrong, it's still pretty damn good business if you ride that arc and scale it. But unfortunately, yes. We just released a state of the AI report that broke this down and quantified it. We referred to these AI ecosystems as galaxies and talked about some of these supernovas and shooting stars that are emerging where there we're seeing businesses go from 0 to 100 million in 1.5 years. That's the supernova profile. You know, Dario at Anthropic's now been open with it. They're well past it, so I think he's more comfortable sharing the numbers. But 0, 10 million over 100 million, over a billion the next year. He's openly said there's a chance to cross 10 billion in the next year. It's a curve that goes like this. We used to have this chart in our state of the cloud report that that had a seven year journey and those were centaurs to 100 million that.
- [26:16]
Harry Stebbings
Has, I remember it was zero to 10 million in like 18 months.
- [26:19]
Sponsor/Ad Voice
Was like holy shit, go deliver the.
- [26:22]
Harry Stebbings
Term sheet with you know, a dog and a golden, you know, yeah, that's cute now.
- [26:26]
Byron Dieter
But it's off by an order of magnitude. This is a rare class of company and a rare breed. A small subset of even the companies we back nonetheless all the companies that are started meet that profile. But we thought it was important to document and share it and say like this is actually possible. Now consumer like growth for enterprise businesses is happening where adoption curves can pull through great products in inconceivable rates of adoption and speeds. And the supernovas then yield to the shooting stars, which is kind of a four year profile. And I would say that's the fatter part of the curve for businesses we're fortunate to work with where you see a pretty good number of companies going from 0 to 100 million in 4 year arc. Again that gets to this quadruple, quadruple type cycle where the businesses are just scaling really steep curves. You had asked earlier about margin profiles. Some of these early on are needing to invest at heavy rates, but far from all of them, you see a large number of these businesses that are doing it in pretty capital efficient ways. And that gets incredibly exciting. You know that you're a data nerd like me. We talk about the rule of X and these trade offs between growth and efficiency and all that. And ultimately we do still believe that all businesses should be valued as a sum of their future free cash flows and that that ultimately is the mark of a good business. And the incredible thing is that these businesses still have those fundamental economic profiles in most cases where they can throw off real cash flow at scale.
- [27:56]
Harry Stebbings
But if I'm a founder now, listening to you, what you're telling me is hey, take as much money as possible, invest in fucking growth as fast as possible and don't worry about margin.
- [28:07]
Byron Dieter
So actually no. And that's why I wanted to make that second point that efficiency still matters. We do think that trade off comes into play and we quantify it. The rule of X mathematically shows it's about a two to two and a half x multiplier value of growth over efficiency at mid stage scale. Call it 50 million ARR or so. Early on the math doesn't matter much. It's hopes and dreams and you're just trying to get in market, market so it's an infinite multiple of anything. But when you actually get the engine going, there should be math underlying the fundamental assumptions. And I assure you one of the coolest things about the profile of anthropic and perplexity and Canva and these businesses is the math actually pencils out. You'll hear these founders talk about in the foundation model phase, it's a bit misleading because the P and L doesn't match beautifully. But you should think of these model releases as a product in and of themselves and there's a healthy life cycle to that product. And so you're monetizing last year's training in this year's revenue line while you're investing in next year's model, which is going to be monetized in next year's release. And so there may be these order magnitude step functions where each atomic unit of product is highly successful and profitable. And yet the P and L looks upside down because of this hyperscale, no pun intended, growth rate that they're enjoying in that forward investment cycle. And so even though it seems crazy, I believe it would be economically imprudent not to forward invest when you have that market demand there and when you can show the unit economics working at each fundamental level.
- [29:44]
Harry Stebbings
Can I ask you, a lot of people think that the excitement, although very real, will plateau in some respects and that maybe GPT5 is the first instantiation of that kind of incrementalism in terms of development. Do you agree in terms of that incrementalism coming or do you actually think, given what you see today, we're still so early on the curve that actually more compute in the way that we're seeing Elon and Dario require, it will lead to actually continuous exponential gains for the near 18 to 24 month future.
- [30:15]
Byron Dieter
It's going to be fits and spurts. And I think that was part of the people being underwhelmed with the 5.0 release and discussions. But, but we've had these cycles before and there will be breakthroughs, but fundamentally I do believe.
- [30:26]
Harry Stebbings
Does it remind you of other cycles? The thing I love about you is your wisdom. Honestly, you've seen so much. Does it remind you of other cycles?
- [30:34]
Byron Dieter
It does. And there have been some hard miles here. We've been through a lot, Harry, but the curve is still up into the right, without a doubt. And I do believe that we will cross over this term. People use various different terms about levels of reasoning and awareness and, and AGI and the like. I have no doubt if we're not there we're going to blow past it very soon and that we will get to this notion of higher level reasoning that does mirror the world's smartest scientists. And I think that's coming in the next 18 months and that these curves are going to continue. How we harness that, how it instantiates itself, will be the opportunity for us all to figure out and monetize. But I don't think it's slowing down. I do think that we're also getting many more hardware approaches and solutions out there so that it's not as wonderful as Nvidia is. It's not just in Nvidia world anymore. And the chipsets from Amazon and Google and AMD and others are becoming quite capable. You're also going to see different approaches, different optimization paths, innovations in technology that unlock leap aheads in terms of training capabilities and cost to deliver inference. I do think that we're going to continue to see innovation there and these scaling laws continue to hold.
- [31:48]
Harry Stebbings
You know what I find really interesting that's changed a lot in my 10 years investing is levels of competition. I'm sure you remember when 10 years ago there'd always be one other competitor and you'd like hate them silently because it's rude to hate them publicly and there'd be one or two. Now there's 15 in every single thing. How do you think about and how does that factor in to your thinking when making an investment?
- [32:16]
Byron Dieter
The social graces are gone, aren't they? It's kind of a bummer.
- [32:18]
Harry Stebbings
Yeah, it's like the way, the way to win. Rory says this really well, which is like the way to win in AI. Enter a space and just like scream the fricking loudest and then like deliver on customer promises afterwards, but scream so loudly and raise as much freaking money as possible, then suck all the air out of the VC room and then deliver from there. But Harvey is a good example of that.
- [32:42]
Byron Dieter
Yeah, I think that works in some spaces. I think that's counter to my earlier point though, which was the great products are being pulled through. People are finding them. You know, ChatGPT didn't scream from mountaintops. They delivered world changing user experience and people showed their friends Perplexity is doing that in search and answer engine world. And these models, you know, at the API layer are doing this for business users who are looking to connect them. And so I think that the capital is important in terms of building and forward investing as we talked about for the business model. But I actually think marketing and sales have less of a role in this new economy than they did before and that these products in many ways are selling themselves. And product led growth and innovation is the unlock for this supernova and shooting star aspirational growth profile. Because you can't put human sales reps against these things. Just the sales learning curve that Mark Leslie talks about when we backed him decades ago in Veritas is no longer applicable because you just can't possibly throw the bodies at a 0 to 100 growth curve inside of two years. Just the sales models don't support that.
- [33:58]
Harry Stebbings
One of the things I love about Bessemer is your discipline actually. And I think you've seen it play out across multiple cycles. I think people consistently think you're a very disciplined player, be it in terms of temporal diversification in price. You've had to break that discipline in a new cycle. I'd just love to understand how do you think about breaking pricing discipline today where respectfully you have in the names that you mentioned and how you think about when you're willing to versus when you're not. Is it clearly just an outcome scenario planning game?
- [34:29]
Byron Dieter
So thank you for the I think what was meant as a compliment but I'll also say that we spend a.
- [34:35]
Harry Stebbings
Lot of time that turned into a bit of a negative. I'm so sorry.
- [34:39]
Byron Dieter
It's fair. And what I would say is, I mean we're certainly not value investors. We pay market clearing prices, we lean in where we believe it's there and we're buyers again at some of these top pegged rounds deep into the hundreds of millions. I think it's very clear that we play to win. I think though the distinction there is that we do fundamentally want to understand how the businesses become self sustaining and scaled and we will walk from a lot of things that we don't see the unit economics penciling. One of the most famous and most painful for me was Tesla early on. It's on my anti portfolio. If you go to the Bessemer website we have a page dedicated to our screw ups and that's one of mine. And it was because I couldn't fundamentally see how the unit economics of the Roadster were ever going to work. And to be clear, they didn't. And without the DOE bailout loan and things, Tesla wouldn't have existed. But what I missed was that Elon's a force of nature, a generational entrepreneur and he put that company on his back and powered through so many subsequent layers that the next arcs of the model worked and pulled everything else through it. And that's one of my big regrets is that our job is to see that potential in entrepreneurs to create those unlocks. And that's the challenge that I put back on myself is how to break this notion of short term discipline for the long term horizon of what's possible.
- [35:59]
Harry Stebbings
At what price is is GG perplexity at then?
- [36:02]
Byron Dieter
I mean we've done the last several rounds, so I forget the valuation of the first round. I give Pete Cincini, by the way, a lot of credit, who's a good friend and a great investor. He also did databricks but he was very early with Arvind as that business was being formed. We did, I believe what was technically the second round. So I think that was branded a B. It may have been technically an A and then subsequent rounds, but again I wish we were earlier and larger shareholders and still regret that we didn't see what Pete saw early in that business business.
- [36:31]
Harry Stebbings
Do you think about taking chips off the table at any point? You know we're seeing the extension of private. I'm not talking about perplexity here, but just generally we're seeing the extension of private markets in a way that we've never seen before. You know, Horsey Bridge taught me that, you know, fundamentally ventures are very challenging category or asset class unless you know the small windows of hyper liquidity and can recognize and act on them. Do you think we are in one of those small windows of hyper liquidity in these assets today and do you act on them?
- [37:01]
Byron Dieter
I love that question and I hope you continue to ask that question to lps and later stage investors as well. Because it's looked down upon right now. You know, it's sort of a dirty word. If we went and sold part of our position in some of these companies, people might think there's signal risk there, there's issues and to be fair, Bessemer has, you know, this awesome history and we've generated billions for our LPs and so we don't have DPI pressure that some emerging funds might or whatever. But, but I think that stigma is wrong. If these businesses went public as they used to. My very first IPO cornerstone on demand went public with 50 million of ARR and I think with 700 million market cap and they traded up to billions over time. But that used to be a really successful IPO back many years ago and now you look at Canva 40 billion plus and anthropic at 170 billion plus and perplexity deep in the decocorn stack. Madison, like these businesses aren't going public anytime soon. And yet from an investor standpoint, there's an argument that they should be handed off to later stage investors and hedge funds and things. I do hope and believe for the industry that liquidity in the secondary markets is viewed more favorably and more active. This is a change in my view. I'll confess that I was pretty hard lined against this. Not for founders and teams. I always feel that taking some pressure off for them is good. But I didn't love it when our co investors were looking for liquidity early in businesses. But I do think that in these mid stages when people are staying private so long that an outlet's healthy and I do think that LPs deserve that. I think for emerging funds it's important that you have these options and that the world doesn't judge you negatively for it, but actually understands that there's some economic necessity in a healthy ecosystem and capital flows both ways.
- [38:49]
Harry Stebbings
For years you've had a pricing premium in private markets which has led in large part to the extension of these private markets. Now you're seeing that move to the public market and you're seeing your figmas pop in the way that they do. Your core weaves, your circles, your bullish pop. Yesterday my question to you is will we see this mass movement towards public markets given the reception that this first wave has had?
- [39:15]
Byron Dieter
Oh, I hope so Harry. God, I hope so. Definitely. The discussions are heating up again. I do think we're going to have a healthier IPO market at the end of this year and in particular going into next year. But in many ways we have to. It has been record lows and record bad in the last several years and that's not sustainable for the capital flow reasons we just talked about, this liquidity discount hasn't made sense. If you go back in the markets a decade plus private markets traded at a discount discount because they were illiquid and there was uncertainty and less disclosures in those things and logically they should. Now it's a growth adjusted discount. Of course when private companies are growing faster you have to normalize the multiples accordingly. But rationally there should be a discount for the lockup characteristics and the information flows and those things and we haven't seen that in many years. I hope and would love it if the public market markets return to premium multiples and the private markets price off of those. I'm not convinced we will, but I am optimistic that we are finally going to see more IPO activity. When you look at our Cloud 100 list which will be released here shortly. I'll give you a little bit of a spoiler piece of news there. We're over a trillion dollars in private market cap now among just the top 100 cloud AI companies right now. Just a astronomical number number to consider. And so there's a trillion.
- [40:40]
Harry Stebbings
How much of that is legitimate, do you think?
- [40:42]
Byron Dieter
What's that?
- [40:42]
Harry Stebbings
How much of that is legitimate versus synthetic hype?
- [40:46]
Byron Dieter
I think this is entirely legitimate, Harry. And that's the, that's the crazy thing. Now of course it's skewed towards the top. I think OpenAI X anthropic, you know, canva, databricks, stripe go down the list. I think those are incredibly high quality companies that essentially are, are tradable public entities in a private wrapper today. So I think that those are entirely accurate marks and very real. The quality level of this list has never been higher. I think there's buyers and sellers at the marks all the way down the top 100. Now you can make a case that 101 to 300 may have some walking wounded, some last round prices that are artificial and the like. But I think we've cleared most of that out of the system. When you look at Mr. Irrelevant, if you use the NFL draft analogy, number 100, it's an awesome company on the list. It's a great business that certainly people would be buyers at or above the last round marks and I think you're going to see that across the list. And so again there's a trillion dollars of enterprise value sitting there that's not yet in the public markets and should be soon.
- [41:48]
Harry Stebbings
You said we're not going to see your canvas go out soon. Why? I said this to Cliff. I messaged him after the FIGMA ipo. They should go public.
- [41:58]
Byron Dieter
They should and I think they will. So I'm not scooping any news. And I put them in a general basket of very short term meaning, you know, in the, in the Q3 window or the like. But clearly they could have been public long ago and they're in no rush. And they of all founders out there are thinking incredibly long term the ultimate giving pledge that they did, giving away 30% of their economics for public good, including you know, a lot of initiatives in Africa I think shows.
- [42:26]
Harry Stebbings
I told him he could have just done the giving pledge to my funds.
- [42:31]
Byron Dieter
You would have absorbed the, the 30 billion house.
- [42:33]
Harry Stebbings
See Harry, the power I would, I would help a friend. Byron. Okay, I'm here.
- [42:39]
Byron Dieter
You couldn't have deployed more than 29 billion, Harry. Don't get greedy. Come on.
- [42:43]
Harry Stebbings
Well, I could. Sam, do you want it? Yes, please.
- [42:47]
Byron Dieter
It's Amazing how many SPVs have popped up with that exact value proposition.
- [42:52]
Harry Stebbings
Oh, my God. It's like there's a wrapper on a wrap on a wrapper and my dentist is doing it now.
- [42:57]
Byron Dieter
I'm like, I have no doubt when. And that is probably another sign that things may be a little heated. But I do think that great companies ultimately like Canva, deserve to be public, will be public. They've hired a great CFO in Kelly. They're certainly giving indications that they're headed that direction. But they continue to think long term and they've made it clear to investors that they do not want a short term mindset. And we bought in. It's one of our largest investments in our firm history. We're hundreds of millions in and we're thrilled to be part of it. And so, so they keep building value and we believe that it will be a great public company when they choose to go public. But the urgency level there is moderate.
- [43:39]
Harry Stebbings
What is your largest investment? When I had Founders Fund on, they said it was Anduril. It was their first and their second largest check. I was like, whoa, one thing to be your first, but your first annual second. What's yours?
- [43:53]
Byron Dieter
That's awesome. So it used to be Twilio, then probably StubHub, Canva, Anthropic, probably that bucket. We're very comfortably go deep into the hundreds of millions. We understand that these rounds have grown to a point where scale does matter and we need to be able to support our companies all the way up. And so we've added growth capabilities to be able to do that.
- [44:19]
Harry Stebbings
Did you have to learn to get comfortable doing that? Byron, you're my friend. If I was right, the transition from a 20 million doll check, which is an awful lot of money and we're both very grateful to have the luxury to write them. But that to a 200 million, it.
- [44:33]
Byron Dieter
Is a very different muscle. And I'll tell you also, as you're alluding to it goes against your instincts when you have a business that's cranking and you own a lot and it's marked up 10x and another round comes up that's also at a big forward multiple, this mental disconnect of, of, hey, let's let someone else now come and mark it up and price it. Let them run. I'm already sitting at a 10x. That's great versus this. I want to be a buyer again and reset everything. Put in 200 million that now I need to go back to work and prove that I can dig out and get a return on again, et cetera. It's intimidating and we've actually added people and processes to make sure that we don't get subject to this kind of mental inertia. We invite in, you know, another partner to look at it and our best deals. We're constantly saying, you know, okay, we have the century team, which we call it, which we believe will be the iconic companies of next century. And it's also a bit of a riff on our Cloud 100 is a team that'll come and help and basically partner with you on a deal and say, okay, let's take a fresh look at this, let's re underwrite it and let's make sure that we believe there's a 10x here ahead that can be there. And in which case, you know, let, let's double down. We're trying to break that, that, that mental trap of being comfortable with success and being afraid to, to really back up the truck. And so you'll see us doing that more and more.
- [45:54]
Harry Stebbings
I think where I fucked up is like when you do a deal at 20 million at seed and then four months later it's crushed and it's at 100 and I've been like, why would I pay 5x what I've just paid? And actually you have to be willing to pay up fast in your best companies and don't think about it in the why would I pay more than what I've already paid? Very dangerous mind.
- [46:15]
Byron Dieter
It's incredibly hard, especially when, you know, we're all investing at big numbers to begin with and we have a lot of times where literally the day the round is announced, someone will offer them a 2x step up. You know, that could still be a great investment. And so it's not bad.
- [46:29]
Harry Stebbings
I remember Pat Grady saying to me, dude, the biggest challenge that I have is that I do a deal and the next day someone offers them three times the money at three times the price. And what we forget is that actually capital foie gras companies and can distort the journey in a negative way.
- [46:46]
Byron Dieter
I think there's a real risk of overfunding businesses. And so there's a good in there, which is, I do think that there's a positive when you get great firms and partners in there, there's a signaling benefit and there's an impact. I do think that we actually can help move the slope of the line a little bit for these companies and add Value. And so one of the ways that we add value is that it makes it easier to raise downstream capital. And I think that's totally true and a good thing. But there is an excess and the people showing up the next day with huge markups pushing more capital can be seductive to founders. And so part of the discussion is, look, if you had that additional capital, the critical thing is not to spend it in a disruptive way. And that's the foie gras analogy where you choke on the capital and you don't want that. And if you execute on the plan every day, you're going to be adding value. So let's make sure we're fully capitalized to play out this next horizon of risks and goals and investment we want. And if we could take a little extra capital to that, maybe we do. But what's more likely is, is let's actually go out and execute and let's put this first wave capital to use and let's build more value. And those investors are going to be there at even higher prices downstream. And the important thing, and we try to get alignment with our team members and things is we want to build a ton of value and that if the round gets so frothy and runs away that it's even too highly priced for us to double down, that's okay. That's a good thing for the company. And if your cost of capital goes down a ton, then we're your partner. We'll go out and raise at a very high number and take very little dilution and everyone wins because we're shareholders and we're aligned.
- [48:15]
Harry Stebbings
Peter Thiel always says his biggest investing mistake is not doing the next round of Facebook. If I were to ask you what's the biggest mistake you made when you didn't double down again, what would it be and how do you reflect on that personally?
- [48:28]
Byron Dieter
Oh, I mean, not only do I have the anti portfolio of the Mrs. That we didn't do that, you know, the Tesla and Atlassian and companies like that front and center. But yeah, doubling down on, on every one of our winners. I mean, I'm fortunate. I think Service titan was my 13th IPO. You know, have, have a couple do unicorn investments. And so mathematically every one of those, I should have done every subsequent round and wish I did, but I would.
- [48:52]
Harry Stebbings
Is that one that comes to mind more?
- [48:54]
Byron Dieter
I would say on the positive, Twilio, we did exactly this. I would say with a company like Procore or Service Titan, we still were very large shareholders, but we had a Lot of, a lot of people come in and follow and I think this was one of the things actually you talked about vertical SaaS. So there is a good lesson in this. We underestimated Tammy TAM and weren't sure these could be $50 billion businesses because we didn't yet unlock the payments expander. And so we misassessed the total TAM and therefore got weak need investing into the billions and we should have. But we left a lot of money on the table. We owned 28% of Shopify and Twilio IPO and we owned well less than that of Procore and Servicetitan just because we included a lot of other investors down downstream.
- [49:38]
Harry Stebbings
Market size misunderstanding, misestimation is the single greatest reason why great investments are not made. Do you bother doing outcome scenario plans given for your best? You wildly misread them.
- [49:52]
Byron Dieter
Not only do we do it, we require it. Every one of our IRS investment recommendations is our memo terminology has a scenario analysis at the end. And we also have actually published many of these on our website where we'll go back and publish them and memos. And it's kind of embarrassing when we do because you look at the just goes nuts upside scenario and they're embarrassingly small. And it's not because as investors at the time we don't believe that they could be much more. But we're trying to be rational and we're trying to bracket it in a medium term horizon that our partners will understand. And yet the tiebreaker of these deals is always the one that you and your gut believe can just go nuts. And where the 100x scenario is there it's always this amusing back and forth where the vast majority of our deals that we put Forward solve to a 3x. And you're sitting there and you look at these scenario analyses and it's like, why is it that every memo I'm reading solves to a 3x? It's because people are trying to balance and be rational and talk about capital loss and all these things. But at the end of the day, the deals that get done, it's the ones where the partner is sitting there sitting saying I'm pounding the table, that the high end and more is possible. That really is the qualitative overlay that has massive quantitative implications.
- [51:06]
Harry Stebbings
Get it? But if you think about the mistakes that have been made in terms of the misreading of markets and TAMs, is it not actually detrimental to the quality of your investment decision making if we consistently misunderstimate or underestimate them?
- [51:21]
Byron Dieter
It's incredibly detrimental. And you go back and look at the Facebook. If you did a TAM analysis on Harvard hot or not, it would have been pretty small.
- [51:32]
Harry Stebbings
But then I go to what Jason Lemkins taught me, which is like, don't do it, don't do it. He's like, hey, you know what you do? You go, is the founder world class? 1 and then 2, can I see a 3x by the time of the next round? If I can do the deal. World class founder and I can see it. Don't try and think, is Twilio going to be a $10 billion business? Because no one thought Twilio would be a $10 billion business. Now it's much bigger. Just do the 3X.
- [51:58]
Byron Dieter
Yeah. So I don't fully concede that. Maybe the tiebreaker here in my mind is I look for at least exciting adjacencies. So you've got to have some killer unfair advantage to get started. You've got to have this mindset of, okay, they know what they're going to go attack first. They're going to build a killer product, they can get into some vortex of growth and launch. I may have a lot of questions about the tam, but there's enough adjacencies, enough things that could go right that they could layer things on. And so, so I want to see the three dimensional cube of segments and products and users that can flex over time. And we don't have to have it figured out, we don't have to know exactly what it's going to be. But I have to believe that they're playing in a big enough pond where good things can happen. I think that's the difference. And I will totally concede that there are times where we're not imaginative enough to go after it. And great founders will break through at times, but I think that combination is still powerful. And the investments that we're making today, and certainly that I'm making personally, tend to still overweight massively. Those two things, team and tam, and at least our vision of the TAM horizons. But I would say, like the analogy, we were talking about a vertical SaaS before where you go through workflow automation, then you go into payments, now you go into AI and you go into services. Even what seem like small market markets can unlock massive dollars when you're creative about the horizons. And that's what great entrepreneurs will do. They'll go attack those markets, suck up the value and really deliver awesome product and can build great businesses. And as long as you price things rationally at each Step and walk it up. It probably backsolves into Jason's math also. But from a top down rather than bottoms up point of view, I think.
- [53:39]
Harry Stebbings
The unwavering lesson is truly great. Founders always find the second that the payments for Toast, which completely unlocks a business that was never there before. You said about 28% of Shopify at IPO. My question to you is famously you guys sold pretty early. The outcome since has been so astronomically larger than anyone anticipated there. Do you sit and reflect on that as a partnership and change your go forward stance on liquidating positions once public as a result?
- [54:11]
Byron Dieter
So importantly, we distributed early, we didn't necessarily sell. So what we did is we gave people the choice and a lot of our LPs mind you do sell pretty quickly after getting stock by mandate. That left a lot of money on the table for a lot of folks. We absolutely wish that we had held on to Shopify and not distributed when we did. Hopefully some of our LPs and certainly some of my partners have held and been able to benefit from the run up. But the end of the day, you know, it's a fantastic company. I think there's still a long journey ahead and that's why you see people still buying even at these valuations.
- [54:45]
Harry Stebbings
Crushing. Absolutely.
- [54:46]
Byron Dieter
Toby is one of those force of nature generational entrepreneurs as well.
- [54:50]
Harry Stebbings
Do you agree with Sequoia's evergreen fund structure?
- [54:53]
Byron Dieter
I agree that there's a lot of positives to it. This idea that you have incentives to manage all the way through Bessemer actually has a heritage where many decades ago we had some evergreen competition components to it. But I do think it's hard. I think that public management's a different beast. I do think that the economics should be different. And the end of the day, especially in a DPI world, our LPs get paid to manage capital and do the allocation and a lot of them want the capital back. And so the merits of consistency and fund flows and those things have some trade offs with hold periods and public duration. And I love innovation in capital markets. We're seeing other firms adding asset management businesses and debt products and roll ups and doing all sorts of, you know, there's, there's some kernels in there that we agree with. There's a lot in there we, we probably aren't going to pursue. But as a fan of capital markets and innovation, just, I applaud creativity and pushing bounds.
- [55:46]
Harry Stebbings
Capital markets and innovation, baby, is venture a game of just pure scale? We're seeing general catalyst, we're seeing Lightspeed. We're seeing Andreessen. You need money to play this game. Now it would seem. Do you agree with the world that is being often articulated? I call it Chanel and Walmart which is boutique provider with special customer and then Walmart, enormous provider, wall of cash sells everything. Do you agree with that or not?
- [56:13]
Byron Dieter
Do I agree with the Walmart analogy? No. But do I agree that scale is important? Yes.
- [56:19]
Harry Stebbings
So why don't you agree with the Walmart analogy?
- [56:23]
Byron Dieter
Well, actually the direct analogy of the low cost provider, lower cost of capital, you know, sort of push the bottom. I think you're seeing a maturation of the asset class and I think the analogy might be the investment banking world and that you have platforms like the Goldmans and Morgans and JP Morgans that are providers of broad global, multi asset, multi stage, multi sector that can be full service shops. That's very much the path that Bessemer is on. We have nine offices around the world. We manage tens of billions in assets. We're multi stage. We want to be able to support our companies all the way through. That's very much the mindset we're in. I do also believe that there are specialists and maybe the Tiffany's analogy is maybe, I don't know, in the banking world. Maybe that's the, the catalyst or what have you where very good at very specific things. That's very much the strategy you're running. That's the strategy that benchmark continues to run. And I think that there's a lot of opportunity there and so there can be a bimodal curve in terms of approaches in particular, I think geographic firms or very specific sector firms. Healthcare has been an example where sector expertise has been really an advantage. But you need scale. And so I think healthcare specific firms have had success for that reason. Reason this maturation is going to make it tough in the middle.
- [57:37]
Harry Stebbings
How do you think about. That's an issue when I don't like thematic funds. I think you Healthcare and cyber are two areas where it really pays to be thematic because I think it's just so deep sectoral knowledge and networks that are so required. But if you actually look at the majority of great venture firms in terms of the winners that they've had, they've been in generalist funds. I don't buy the defense firm, climate firm firm, fintech focused firm actually. Do you know what stripe's been won by your general catalysts of the world?
- [58:07]
Byron Dieter
I actually agree with you for the most part. I would say that you will get alpha from some of those funds. But the important thing is not to get ossified in an approach. And this is very much why we don't hire sector specific investors and we don't give you air cover if your sector goes out of favor, meaning our job's to make our LPs money. And if you're in a sector that's cooling off, you better get the hell out and go somewhere else that's going to make money or like you should stop investing. Investing. The risk of having a semiconductor fund or a semiconductor team is that you carve out, pick a number 500 million to invest there. You bet your ass they're going to invest 500 million in semi whether the right answer was 2 billion or zero. And that's the risk. And so we have a very different approach, which is we are constantly optimizing the incremental dollar across sector, but also stage and geography, geography. And we compete for dollars. And that is a mindset that we love and it requires constant reinvention. The term we use internally is roadmaps. At every one of our off sites, partners are presenting new roadmaps and they're talking about themes, sectors, subsectors, investment hypotheses that they have that they're going after. They're getting feedback, they're sharing it, they're iterating. And if you don't constantly reinvent yourself, you don't have a future of Bessemer because the markets are moving fast. It's our imperative to get ahead of the next trend, not sit comfortably in a sector that has had a good run and believe that you're entitled to another good 10 years ahead.
- [59:35]
Harry Stebbings
Byron, I love you dude. And your track is just so good. Did you ever have a bump in the investing period? Did you ever have it? No, I'm being serious.
- [59:44]
Byron Dieter
Many I'm laughing. It's not silly question, it's a painful question.
- [59:48]
Harry Stebbings
13 unicorns. I was shouting to my mother before this and she's like, oh, what are you doing this afternoon? I'm like, I'm interviewing my Byron and I told her about you and 13 unicorns of like 30 companies. I mean your hit rate is like ridiculous. Did you have a moment of self doubt, crisis of identity as an investor like many are having post the 21zer P era.
- [60:08]
Byron Dieter
Oh Harry, I've had so many. I mean in our industry you just wake up and you read TechCrunch or listen to some of your podcasts and you're reminded how bad we are at this job because there's so Many cool things happening that, that we've missed. My first roadmap at Bessemer was RFID. Radio frequency identification was and is a $0 trillion market. It was a total dud. Thankfully I only made one investment there and it also had a SaaS underpinning. So we ended up pivoting and making a few bucks. It was a stupid idea. What I credit my partners with is one, patience but two direct feedback. And so we iterated and pivoted and because I wasn't hired as a radio frequency identification investor investor, I was given the opportunity to pivot. My secondary roadmap was Cloud, by the way, which ended up being a pretty nice second act, but it was a really bad idea. And so I had my first three investments were all very bad. My next two ended up being billion dollar IPOs.
- [61:07]
Harry Stebbings
I spoke to Douglione about this where you have young people who make bad first investments. I certainly did the same. I thought WhatsApp for doctors and nurses would be a good business business. How did you get out of the trough or not get in it?
- [61:20]
Byron Dieter
Three bad is patience and support from the partnership to make enough shots on goal to get some statistical relevance out of the sample size. I remember one of my great senior partners, Feld Hardeman, who's a professor at HBS for years and I would go sit in one of his classes and have a long dinner or lunch with him and he drew on the board my career, which is basically, basically the straight line, you know, with some bumps and then like a little bit of a tick up with cornerstone on demand and eloquence of my early things. But he's like, he's like, just give it time, dude. Like you're, you know, you're wandering in the desert a bit. I know you're anxious, you're type A, you want success. But like this business is all about, you know, building a portfolio and putting yourself in position to be successful. Don't, you know, shoot out of the gun. You know, crazy big checks out of the gate. So if you go over three, you're doing done, you know, ease into it. And, and that was hard to take at the time because you know, we're all aggressive and enthusiastic in this industry, but it was the right feedback. Resetting and learning and trying to get better allowed me to be in a good headspace for subsequent investments and, and to keep going and to have some confidence. And I do remember back when I was an entrepreneur, one of my board members was Robin Vassan. He was at Mayfield at the time And I went to see him when I was going back into venture and joined Bessemer and getting some advice and he said, your first investment's going to suck, it always does. So I was talking to him about a deal specifically and he basically said, well, so don't do it. And I'm like, but Robin, by definition then I'll never do an investment because you have to get over that first one. And he's like, yeah, but this one really sucks. Unfortunately he was right on both. My first investment did suck and I shouldn't have done that one. But I think the point kind of applies which is it's a learning game. So, so just you need to be in it to have enough shots on goal to score some. And cycles matter a lot. I really feel bad for great potential investors who joined our industry with checkbooks in 2020, 2019 and they did great deals but at market prices which were way too high. And many of those people got washed out of the industry and never got a chance to make their fourth and fifth investment like I did did. And we may never know if they could have been great investors. And so cycles matter a lot. And having enough bullets in the gun to hit a target matters a lot.
- [63:34]
Harry Stebbings
I think that's why temporal diversification is so important. I look at our first fund, a lot of it is high priced in good companies, but high priced and then the second half is much more reasonably.
- [63:44]
Byron Dieter
Priced, very much so. I mean time diversification is one of the few things we can manage in our industry. You mention it in terms of exits with the LP comment where concentration matters, that tends to be true, but it's not something we can control because there tend to be IPO, Windows M& A Windows and our job is to try to take advantage of them and they'll cluster but we can't usually create those when markets are closed. However, entry diversification we can create. Few of us are good enough to actually play the markets counter to trends and be most aggressive when things are cool and to really pull back when they're hot, which is probably what you should should do. But at least some notion of smooth and consistent to weather those storms so that you can take advantage of. The cluster of exits tends to be about the most successful model for time diversification and venture.
- [64:35]
Harry Stebbings
We've seen a shit ton of young people start their own firms. You've seen people even leave Bessemer. Do you think though that the spin out time is up? We saw this compressed time where a lot of fricking spinouts very Quickly, do you think that was a new normal or do you think that was a compressed time where people realized that carry would be less than they thought and it would actually be better to be a solo GP or a GP of their own fund?
- [64:58]
Byron Dieter
The latter. I do think that this was a point in time where people were looking for that reset where for positive or negative reasons, they wanted a fresh start. Because in venture, I do think partnerships and platform matter ultimately a lot of those goals are to then go out and build up another firm. And. And so you're either running from something or to something. But the end of the day, I think the best firms are pretty flat at the top. And so you're not seeking better economics, you're really seeking a better environment or better structure. And so I do think that a lot of great partners were able to launch out and get funded and kick off and we'll see platforms then built out of some of those new funds and probably more reinvention in the industry than we'd seen before. But it is one of the few asset cycles where past performance is an indicator of future success. Private markets are very much networking ecosystem based and you see very analytically I referenced my partner Feld Hardeman, who taught at Harvard before he would quantify this and he wrote the private equity and venture capital textbook and would do the data, but I forget the exact numbers, but it was something like 8 out of the top 10 firms in one cycle would repeat in the next because there was this virtuous cycle. And so the challenge is which of the new funds are going to break in in and be those next two that disrupt and there's opportunity there and maybe it goes up to three or four. But I also think that there's a benefit to being a consistent, stable platform and many of those will persist.
- [66:21]
Harry Stebbings
Final one, before you do a quick fire, everyone's always saying like PE is going to come save the day, there's going to be a wave of PE acquisitions. Do you think PE will come in and save the day, number one? And do you think number two, the roll up strategy that they're trying now with your sales loss and your clarity worries will actually work?
- [66:39]
Byron Dieter
I think the next wave of liquidity is going to come from a combination of several buckets. I think PE will be one of them. It's going to be a pretty fun time for pe as these companies are long in the tooth. Vast majority are not going to get public. Consolidation will make sense because at the core a lot of these businesses are very high gross margin and are run pretty inefficiently because we've got a growth mindset and we're certainly not optimizing for cost in the early days. And so there will be a lot of opportunity to work through those portfolios and I think private equity will have a run there. I also think big M and A is coming back. I do think that the incumbents responding to the cloud AI imperatives are going to need to get back in the buying game. The FTC is finally taking a more rational posture on antitrust and blocking deals and these things. I think they're going to let market forces operate there again. And so there will be this buying imperative that rolls through the public markets and companies like SAP and Oracle and IBM need to buy or they're going to get crushed. And then I do think that the IPO markets are going to open up again and we're going to see a pull through there. And the big wild card, this fourth bucket, is what we talked about briefly and I thought that one of the great questions you asked was will secondary liquidity start to flow through from different capital providers and will crossover investors be comfortable doing more secondaries and things? And I think yes, I'm not totally sold on these exchanges for private markets or these sorts of things, but I do think incrementally we're going to see people get more comfortable with secondary transactions, stop looking for signal risk in that and we're going to take pressure out from all these sources which will then get capital flows coming back which ironically may then just feed the engine at the front end even more.
- [68:26]
Harry Stebbings
Did Tiger do more to help or to hurt the ecosystem?
- [68:29]
Byron Dieter
Oh boy. The foie gras analogy comes back to me there incredibly mixed. I think that there was a lot of happy disruption and big thinking and creativity that I applaud and there was a lot of reckless overfunding and deal work and non governance that we're gonna have to clean up for quite a while.
- [68:51]
Harry Stebbings
I think their returns will be better than people give them credit for. When I look at scale, when I look at OpenAI and I look at quite a few that actually they're in with me, they're at the top of the pref stack and they're in like 50, 60 million ARR companies at 3, 400 million prices with three to five years of Runway, I'm like, they're not going to lose money on those deals, they're not going to make huge money, but they'll be okay.
- [69:15]
Byron Dieter
I mean that's the amazing thing over these Cycles in index of the venture industry industry may be fine. Historically it has underperformed the S and P and probably will again in this case. But you'll make money. That very well could be the case there. It certainly wasn't an optimal portfolio construction but at the end of the day I think you're right that they're going to have some home runs in there more than make up for a lot of the zeros. And then in the middle of the pack there's going to be a lot of one to three X's that carry.
- [69:42]
Harry Stebbings
The load, my friend. Are you ready for a quick fire round?
- [69:44]
Byron Dieter
Let's do it. I'm in your house hands.
- [69:46]
Harry Stebbings
Who's the best sourcer in your Bessemer team?
- [69:49]
Byron Dieter
Oh boy. Everyone in our partnership is constantly outbound. I would probably put Jeremy Levine there in terms of just his ability to see unique deals that are contrarian and I think part of sourcing we think of it as just hey, outbound, aggressive, creative, et cetera. But I think the insights to see what others don't is the essential part of that that's often overlooked and, and I give many of my partners credit for that. But you asked for one so that'd probably be my answer.
- [70:19]
Harry Stebbings
Best picker who do you think? When it's the accuracy of shot they're good.
- [70:24]
Byron Dieter
David Cowan steadily finds great people in weird places doing bizarre things. I mean Rocket Lab is one, you know Peter Beck sitting in New Zealand, you know recently or auth0 or some of these things. He just has incredibly high conviction and will pound the table at times. Things that may seem non obvious and just has an incredible nose has been doing this a long time.
- [70:50]
Harry Stebbings
One seed firm, one series a firm and one growth firm that you can invest in as an lp.
- [70:57]
Byron Dieter
Oh boy. And to be clear, you gave me no prep so I'm going to give this on reaction Seed fund. I mentioned Pete Cesini before what they're doing at Lodventures. I've got immense respect for where they're going in at inception stage they're literally sitting in the classrooms and labs at Cal and Stanford working with professors. Pete's done this many times already with Perplexity and Databricks and many others where I mean he literally was there at the inception stage of these Decacorn businesses. Any one of those deals would be a great firm run or a great career for an investor and he's done multiple. So from a seed stage I think they're going to do some really special things. Early stage. Oh God. There's so many. I think that the first round folks, I think, oh, this is horrible. I'm forgetting Uncork's new name. Remind me. Oh, no, sorry. Uncork is a new name. That's right, the predecessor. I think Uncork does awesome things and actually is very aligned in kind of investment style and approach. You mentioned Lemkin and what he's done in very selective ways. I have a lot of appreciation.
- [71:58]
Harry Stebbings
I mean, it's nice. I mean, it's nicely. I love those people. Jason's like my dearest friend, dearest. None of the new guard there. Those aren't the sexy names you chose. First round, Uncork and Jason, again, I love them. I agree. They're all 10 year plus firms. They'd all be kind of long in the tooth. You didn't mention, ironically, Yossiro Guo's the hotter names. That was interesting.
- [72:22]
Byron Dieter
Harry, you suggest that history is a negative. Quantitatively, history is a positive. I think the data shows that you actually benefit from some pattern of success in platform and each of those firms has to go through some cycle. And both first round Uncorke are certainly going through generational transitions. But I think the next generation are incredibly promising. I think the founders would even say they're proud that they'll carry on and exceed them. And so I think those firms are getting stronger, not weaker.
- [72:50]
Harry Stebbings
Please, no disrespect to them. I didn't mean it in any horrible way. I love all three. Jason, if you're listening, especially huge love. Don't disown me. I love you so much, dude. And Josh Koppelman. Don't eat me.
- [73:04]
Byron Dieter
That takes nothing away from another of the upstarts that you highlighted. I think they're less proven. And so we're also trying to work with them, but we're figuring that out.
- [73:12]
Harry Stebbings
Which growth fund would you do like? Mine's Maritech.
- [73:15]
Byron Dieter
I mean, Maritech's fantastic. I love their culture, I love their style. I mean, quantitatively, I think that, you know, Sequoia continues to, to mint platinum records and so, you know, probably some combination of the two.
- [73:27]
Harry Stebbings
What element of your investing style would you most like to change?
- [73:32]
Byron Dieter
Boy, my partners would probably say I should be more detail oriented. I am much more team and gut. And so I'll confess I don't intend to change it. But. But I do miss some of the small things at times. Like I'm not a guy that's going deep in documents and details and things like I'm not. I'm not going to be Hung up on some usually deal, term or financial thing or whatever. Like I, I'm all about working with great people. This phase in life, it's too short. I love this job but I just, I want to have fun. I want to do big things with great people and, and that'll get me in. Sometimes I'll do crimes of commission where I'll just fall in love with some things and miss some details. But I don't think I'm going to change that.
- [74:08]
Harry Stebbings
I asked one of your biggest competitors who said can this be remain nameless what I should ask? And they said the dude is just one of the only people who's done insanely well, respectfully, financially and it seemingly just doesn't matter to, to him. Like he's just as hungry as ever, doesn't kind of give a shit. He just wants to win more and more. Does the money not matter after a point and it's just about winning. How do you reflect on that comment.
- [74:34]
Byron Dieter
From your competitor 1 I wish you'd name him because that's incredibly flattering. I appreciate that and I love hearing that. I do think I try to live by that. I mean I'll confess when I sold my business long ago, my wife and I sat back and said okay, like hey, it's not life changing money but actually we could retire on that money. Do we want to move somewhere, raise a family, unplug? And I couldn't conceive of doing that. We are all so damn fortunate. Like there's a lot of great economics in this industry and we get paid way more than we deserve. It's just so damn fun to be in the middle of what we're doing. I can't imagine not doing this. It's an incredible privilege to sit down with awesome people who want to change the world and help them do is the coolest job on the planet. And so I have no intention of stopping anytime soon. And the money is a nice byproduct of it's a cool gig.
- [75:22]
Harry Stebbings
Final one. What have you changed your mind on most in the last 12 months?
- [75:28]
Byron Dieter
The what can be from the scale of the opportunities. Like I thought we understood this next phase we were going into how big this was going to be and very sincerely we've probably added a zero to everything. I think there's going to be a lot of trillion dollar businesses that are created from this and I said it was kind of embarrassing. When you look at our scenario analyses and our memos that we publish on our website before because, because we talk about a Billion dollar outcome as a big deal and the great success case and these businesses went on to become 10 or $100 billion companies. That exact thing is going to happen where we talk about some of these investments and we hesitate and we get really close and we invest but we're anxious and nervous and whatever and the end of the day these things just blow through everything that can be and we're seeing it real. When you actually see the anthropic numbers that he's now shown sharing this is real, you know, their path to billions and billions in revenue and really compelling unit economics. We have never seen this in the history of our industry and it's playing out.
- [76:25]
Harry Stebbings
I'm going to ask you an unfair question. Anthropic over or under a trillion within a three year period.
- [76:32]
Byron Dieter
I mean we put our money where our mouth is. We've been a buyer so over and that's again like we a year ago when we were buyers we still wouldn't have didn't conceive of that. We thought that where they're at now would be the exit, not enough entry point. And that is incredibly awesome.
- [76:47]
Harry Stebbings
I will never forget having Vince on from Thrive when He led the $30 billion round and I was like dude, what are you doing? And he's like Harry, if it's a trillion dollar company we'll make money. And I was like that is the weakest investment rationale I've ever heard. And now I feel like a total moron.
- [77:06]
Byron Dieter
One of the beauties of this business is you can and fortune favors the bold and there will be those outcomes ahead and obviously we placed our bets where we think they'll happen and there'll be many more.
- [77:16]
Harry Stebbings
Dude, I so appreciate you. I so appreciate the friendship. Thank you for joining me. Stay man.
- [77:21]
Byron Dieter
Great to see you again. Great to be back. I look forward to seeing you in person. But until then, thank you.
- [77:27]
Harry Stebbings
I mean what a fantastic guy. As I said at the beginning, Byron was so kind and helped me when I was starting out and really had nothing. That was so much fun to do. What an incredible guest. If you want to find more you can find it on YouTube by searching for 20VC where you can find the full video of the show there. But before we leave you today, I.
- [77:44]
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Harry Stebbings
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