10 Laws of Building a B2B SaaS Unicorn with Byron Deeter, Partner at Bessemer Venture Partners

Share this post

 

There is still a role for faster, better, cheaper or the SaaS version of X. We’ll readily admit that. You look at a great company like Workday and fundamentally they admit that they are the Cloud version of PeopleSoft and increasingly going down the ERP playbook but with a Cloud mindset. And we have many of our Cloud businesses that have done exactly that.

Byron Deeter is Partner at Bessemer Ventures Partner (BVP), a leading VC firm that has invested in 1 in 4 of the 43 pure play public cloud companies. Byron’s investments at BVP include an impressive 6 Unicorns, no less. 6 early stage investments in companies that become $Billion dollar businesses. As well as having a sixth sense in investing in future Unicorns, Byron also authored the seminal Bessemer’s 10 laws of Cloud Computing. The experience in picking B2B SaaS winners and penning the ’10 Laws’  inspired me to invite Byron onto The SaaS Revolution Show podcast and discuss the ingredients, or Laws if you will, to building a B2B SaaS Unicorn.

You can listen to the full podcast below, alternatively subscribe on iTunes or Stitcher and never miss an episode.

10 Laws of Building a B2B SaaS Unicorn with Byron Deeter, Partner at Bessemer Venture Partners by The SaaS Revolution Show

Byron Deeter, Partner at Bessemer Venture Partners, has invested in no less than 6 Unicorns. So we invited him on the SaaS Revolution Show and presented Byron with 10 Laws of building a B2B SaaS Unicorn. Listen to the show to find out what those laws are and if Byron backed all 10.

 

Hi Byron, I read today that the chances of building a unicorn are 1 in 5 million. In another article in First Round, it was 0.00006%. Seems pretty tough, right? But more and more I’m hearing these days from early stage entrepreneurs that are talking the unicorn talk that they want to build a unicorn. That they want to build a billion-dollar business. Do you think this is a good thing?

Well, if you read TechCrunch every day, it seems like the data suggests the opposite that a new unicorn is being birthed by the hour or certainly by the day, but it is rarefied air and I do think that we take these things for granted. But the art of actually building a long-term great company remains the hardest thing to do in business and there is probably too much hype and energy around these short-term milestones particularly the artificial funding milestones achieving these valuations.

But I certainly believe the climate has never been better for building great businesses and, hopefully, people are keeping their heads down trying to build real value. And over time, we will see that a number of great, built-to-last type businesses are being minted despite this crazy environment.

I want to break that down in terms of what are the ingredients, what are the laws, if you will, of building a great, lasting business? Building a billion-dollar business? I thought today, for this episode of the podcast, we could look at the 10 Laws of Building a Unicorn, if that’s all right with you?

Sure. You’re going to corrupt Bessemer’s 10 Laws of Cloud Computing and really play into the unicorn storm. So go there if you dare, I guess.

These are my suggested laws as a kind of working paper to start with. What I want to do is go through them one by one to see if you agree or disagree, whether we keep them in or throw them out, replace them with something else. And for each law, I’d like to understand why it’s important. And if you can give me some examples from your portfolio companies on each one, that would be great. Here we go:

 

Law #1: Leadership team must have experience.

Further through my research, I read in one report from, GP Bullhound, an investment banking group, that 58% of European unicorns were founded by entrepreneurs in their 30s with average age of around 35. Would you agree that this should be a law?

You’re hitting me right in the heart at the start given that I founded my first founded my SaaS business at 25, Alex. So I’ll take offense and try to back up my objection with some data.

But I do think experience in a broad sense is, of course, valuable and relevant. I don’t think that means age, though. It really is about unique insights and some unfair advantage.

And take my own experience off, we had a great outcome but a lot of other great things led to that. But we’re proud investors. And Aaron Levie at Box or Isaac at sendGrid or Michael at Vidyard, all great entrepreneurs that founded their businesses in their 20s in our current portfolio, nonetheless, many of our great billion-dollar plus outcomes through the years that were led by early young founders.

I think it comes down to really force of personality, some unique insight and a kick-start to get you going. Certainly in the B2B world, having some insider, some empathy for the customer problems has tended to be an advantage. That’s why I do think mathematically the ages skew there because everyone’s a consumer in some sense and it’s easier to come out of undergrad, have an idea for a consumer startup and get launched.

Whereas in the enterprise side, it certainly helps to have been in a corporate context or understand the corporate issues but it’s certainly not a prerequisite. We look at funding fresh entrepreneurs all the time even in the enterprise world.

It seems with that one we’re throwing this law out and saying rather it is dependent on force of personality, unique insight and a kick start to get you going?

Indeed.

Law #2. Be located in Silicon Valley 

A B2B SaaS company has a better chance of being a unicorn if they’re in Silicon Valley. Would you agree or disagree?

I love it when companies are based here. Silicon Valley, broadly defined, certainly including San Francisco now, which is the current epicenter of a lot of the innovation. And if you look across my own portfolio with Box, Docusign, Twilio, etc. and certainly many of our more visible unicorns who have been birthed here, including, as a firm, LinkedIn, Yelp, Pinterest, etc. and it’s easier.

However, I think we’re going to go 0 for two here and I’m going to refute the law more broadly because, if you step back and look at the data again, I’ve been fortunate to be on the Board of Directors of Cornerstone OnDemand in Santa Monica, which was a billion dollar plus IPO. Eloqua in Toronto, which was a very successful IPO and just under a billion dollar acquisition by Oracle. Criteo, which was a $3 billion IPO out of Paris. Instructure is on the road this week to go public sitting in Salt Lake City.

And then as a firm, more broadly, Shopify in Toronto, Wix in Israel, Parallels in Russia, Skype in Estonia.

The reality is that the world is flat and our job is to go wherever in the world great entrepreneurs and great ideas happen to be. It’s great if it’s a short drive or a walk from our office here, but more and more that’s not the case. We have offices all over the world including India. We do a lot in Israel. We do a lot in Europe and even a bit in China. Because increasingly, great innovations come in from everywhere.

I do think there’s a lot of special things and they need to have a value mentality and even some access here. Having some sales and biz dev resources, maybe some front-end architectural work certainly as a firm.

One of the things we do for these remote companies is help them be value-aware and value-connected but, in many ways, these teams persuasively argue that having their core office or a large center outside of the Valley is an advantage for hiring and recruiting and retention in ways that are a competitive weapon for them.

Law #3: Must take VC Money

I believe that a B2B SaaS company needs to take VC money to fuel growth to become a billion-dollar company. Would you agree or disagree?

This is a softball down the middle that is self-serving. But I’m going to largely agree with you here just because it’s helpful but not needed in the sense that when you look across the 43 pure play public Cloud companies today, the vast majority of them have chosen to take venture capital. As a firm, Bessemer Venture Partners has actually backed 1 in 4 of them, so by far, the most of any venture firm. But a number of other great firms are out there working with many of these great companies and all of them have taken some form of organised capital.

It’s not to say that it’s needed or that it’s the only way. Certainly customer financing is the best core capital that you should take and it should always be the focus but venture capital is an accelerant. In these winner-take-most markets, time to market and time to scale has massive economic value to a shareholder and a business operator. And if you can hit hyper-scale faster, that tends to be worth the dilution.

And so that’s what we see from the best entrepreneurs time and time again. They crack the code on a repeatable model, they have conviction on their true north in terms of building a business, and then they add the rocket fuel and help. Certainly capital is a part of it but expertise can be additive here.

And as a firm, we’ve backed almost a hundred Cloud companies, just using ourselves as an example, and there are real benefits from that portfolio from the network, from the synergy across the group that can de-risk the business for founders and can help achieve scale faster. That’s why, time and time again, you see even very wealthy repeat-entrepreneurs going back and working with venture capital partners because of that support and the role that they can play in helping to build the business faster.

I’m pleased we’ve got one kept in there. As part of the research, I looked at companies like Qualtrics and Atlassian. Qualtrics was bootstrapped up to $50 million ARR, and around that mark had a half-billion dollar exit offer. But Ryan Smith, CEO, was then asked do you want to become a billion-dollar business, took VC money and joined the Unicorn club.  Similarly Atlassian was bootstrapped and took VC money quite far down the line. Now Atlassian is filing it’s S-1 and likely to have a $3.5 billion valuation.

It’s very much the case. SurveyMonkey, same bucket. Our portfolio, Cornerstone OnDemand was very capital-efficient but chose to because they wanted the support and the extended leverage to get there faster. And that’s the best of both where you don’t need to, you have ball control, but you can bring in a strategic partner very thoughtfully to help you reach the full potential of the business. Time and time again, we see the very best founders still making that choice.

Law #4: Be Disruptive/Innovative

To build a billion-dollar business, the product has to be disruptive/innovative. Would you agree?

Yes in a broad sense. And I’ll say it’s certainly more fun if it’s disruptive, and those are the businesses we love backing the most.

But there is still a role for faster, better, cheaper or the SaaS version of X. We’ll readily admit that. You look at a great company like Workday and fundamentally they admit that they are the Cloud version of PeopleSoft and increasingly going down the ERP playbook but with a Cloud mindset. And we have many of our Cloud businesses have done exactly that.

I will say, though, that there is an opportunity now to take what is uniquely possible through interconnectivity of web, location awareness and intelligence with the mobile supercomputer in your pocket, etc. and do things that are fundamentally disruptive. And those are the types of businesses that get us most excited.

Look at a business liked a LinkedIn or Eloqua or Shopify that weren’t possible without Cloud. Or even new business models like a Twilio where Platform-as-a-Service capability API developer-centric business just fundamentally changing business model and delivery model. And those are the types of businesses that we think have to blaze a trail. It’s harder but ultimately they can have very disruptive economics as well if successful. And we do tend to gravitate towards those types of businesses at Bessemer just given our personal mentalities.

Law #5:  Be friction-free.

Yes, but it’s an important distinction there, important asterisk. People have fallen in love with the freemium model and we don’t believe that the onboarding itself necessarily needs to be friction-free to that degree. It needs to be a fantastic user experience. It needs to be tutorial-free and self-serve in a sense that these days of long corporate training sessions where you put people in a room for a week to teach them how to use SAP is just not going to happen anymore. If the users can’t figure it out on their own, they’ll move on.

And that’s the beauty of SaaS and of mobile enterprise now increasingly as well is that people have the luxury of moving products and going to something that they like and that works. And so we do think that you need to take friction out of the onboarding process and make it intuitive or someone else will and you will lose the business.

Fundamentally, you’ve got to win that business every week and every month in SaaS because of the subscription nature and you need to bring much more of that consumer mindset to product design which is why many of the legacy players are struggling so magnificently in this transition because not only do they fight the business model instinct of selling subscription business models and licenses but they also just don’t have the product DNA to take out the heavyweight, feature-rich, integration-heavy elements and make this enjoyable.

Law #6: That founders should be tenacious.

That the company should have tenacity. And I think I got this one from watching a video of yours on YouTube where you referenced Charlie Sheen having tiger blood, being able to run through walls. So Law #6 the B2B SaaS company, the founders, they need to have tenacity.

Yeah, absolutely. And admittedly, Charlie Sheen’s probably not a great analogy but a little bit of Charlie Sheen crazy is probably good. To have the drive to take on the world and to believe that you can fundamentally change things and rally a team to do that is core to being a great founder.

And it’s important that doesn’t mean you have to be an extrovert. Many of our best founders are product visionaries and are just so compelling by their force of vision and highly introverted people. So personality types can take a number of forms, but the drive, the vision and a little bit of that nutty Steve Jobs like, “I’m going to take on the world,” tends to correlate very well with long-term success.

Have you ever been pitched by somebody that’s Charlie Sheen-esque? Or even have you invested in any?

I will know some people can take it too far, so the Charlie Sheen analogy does have its negatives as well. And certainly we’ve been pitched by many a folk who you sit back and say now they are just certifiably crazy.

So we do draw a line. But we love it when they walk right up to that line. Let’s put it that way.

So tenacious but not certifiably crazy?

Exactly. The very fine line.

Law #7: You need to have the right market.

Yes. You need to be pointed in the right direction. The rising tide or the tailwind or whatever analogy you want to use just helps a lot. You don’t need to get everything exactly right to still have a success.

In general, we will still take in the A-Team in a B-market any day because we think great people figure it out, but you want both. We certainly try to find both and great teams out there try to find both, which is look for spaces that are going through massive disruption that has some tailwind effects. And if you can be the best company and team in the best market, that’s where you get the double whammy multiplier and you can have these hundred X outcomes.

We’ll keep that in, an A+ team in a B-market is Law 7.1.

It’s going to win every day against the reverse.

Law #8: Be revenue growth based

A SaaS business in order to become a billion-dollar business should be focused on revenue, or should be revenue-growth based and not user-growth based. So start moving money from the day that you ship and don’t figure it out later.

I’m going to push back on this in the short-term because ultimately of course all businesses need to show revenue, all businesses ultimately need to show free cash flow to be valued. That should be the ultimate arbiter of value and generally is in the public markets long-term. But there’s a number of ways to get there.

Certainly in the consumer world, if we think of examples and we took a lot of grief for LinkedIn on the enterprise Cloud to consumer side, or Pinterest for no monetisation early on, but they had very purposeful strategies to build user engagement, user love, network effects, etc. and then monetised later. I do think that that holds true in enterprise mobile and in Cloud in many cases. However, the pressure and the value of moving there earlier is generally true.

And so what we often find is have a clear thesis for a business model, building world class product that people love and the dollars will come. And where you get the scale and really the valuation acretion is where you get the user engagement and you have proven out the human economics that work. You don’t need to lean in the human economics fully upfront but you need to show that there is a profitable business at its core that you can scale and you know how to scale.

And that combination is powerful in SaaS. It tends to happen earlier than it does in the consumer world but it’s not a deal breaker at Day 1.

 Law #9: Have Customer Success at the heart

Customer Success should be at the heart of every SaaS business in order for them to become a unicorn. Would you agree?

Absolutely. And this is a new concept for many people in the industry particularly those that may have sold into the Oracle or SAP customer bases before where really it was an afterthought.

Yet, in a Software-as-a-Service business, service is the important term and fundamentally, subscription economics mean that customers can walk. Even if they have a 1-year or 3-year deals, oftentimes those are up for negotiation if things aren’t working out or if they find something else.

And so we do believe that customer success management is becoming a term of art where investors in Gainsight, as an example, because of our strong conviction here but just more broadly that you will see VPs of customer success titled in companies in senior positions and that what used to be an account management function is being elevated to a customer success function with real empowerment and real responsibility.

And any company by definition that’s a subscription business growing by less than 100% depends on a majority of their next year’s revenue coming out of their installed base from before. So customer success is actually controlling the largest P&L in the business, the largest P in the business and so they should be empowered appropriately. And we do think that on a relative basis that they’re gaining organisational credibility to reflect this.

We’ve got a winner there. Customer success is at the heart of becoming a unicorn business. I was at Gainsight’s Pulse Conference the other week in Europe, you can see the growth of customer success movement and the importance of it within any subscription business.

You see it firsthand. They’re pulling together thousands of people now worldwide if you combine their events that are seeing the cause. It’s very clear, front and center, the movement is real.

Law #10: Be Obsessive over metrics

Every B2B SaaS business needs to be obsessed about it’s metrics, needs to have a CEO dashboard. Would you agree that this is a law that we’re going to keep in?

Yes. We do believe that metrics can be an offensive weapon and should be used to its fullest extent. We look at the consumer world first, just an example here, and you look at not just Google but Facebook, how they ruthlessly test new features and tune a user engagement. Twitter in many ways is a core data and metrics business despite the outward perception.

And this has been underused historically in B2B to a sort of shameful degree. People used to not even get logs of who installed their software, nonetheless any idea of where it was running, who was using it or, god forbid, what features people were using. So there was just no feedback loop there.

But if you take subscription businesses and on-demand delivery businesses, you’ve got more data than ever and you’d be crazy not to use it.

So we think that a culture of metrics awareness is critical at scale. It doesn’t need to be the CEO that’s the metric czar. Jeff Weiner at LinkedIn is that person and is just a quantitative genius by all accounts, and able to absorb that. But if you look at what Zuckerberg and Sheryl do at Facebook, that combo can work just as well. You could probably even flip their roles. I think everyone would bet Sheryl would be a fantastic CEO and that having a strong Product #2 can work well.

The roles are less important than having that persona in the company and having a dashboard that’s shared and that a culture where metrics permeate all levels of the organisation, not just quantitative demand gen, which is certainly the new marketing, but quantitative product design where customers are telling you what features work and which features don’t and what they love and what they don’t. And follow data and follow your customers rather than your conceptual white-boarding that serves companies very well early on but seems can take you down some very incorrect paths later in life.

On that note we’ve gone through the 10 Laws. I think we’ve kept 7 of those in. A pretty good job at writing the seminal 10 Laws of Building a B2B SaaS Unicorn, and perhaps people will be talking about them in the future like they talk about the 10 Laws of Cloud Computing. Perhaps.

All joking aside, there’s going to be a lot of good insights for founders of early Stage SaaS startups that are listening to this podcast. 

I can’t wait to see what the teams out there have to build and certainly encourage people to reach out when they’ve got ideas or want advice or use a sounding board to my colleagues here at Bessemer Venture Partners as we’re always looking to work with the next great set of founders.

Never miss an episode. Subscribe to The SaaS revolution show podcast for more insights, inspiration and actionable learnings for SaaS Startups.

In this article