"10 Laws of Building a Unicorn" at SaaStr Annual 2016

BYRON DEETER
Bessemer Venture Partners

BESSEMER’S 10 LAWS OF CLOUD COMPUTING
2016
BYRON DEETER
www.bvp.com/cloud
@bdeeter

Source: Flickr/Clemens Grün www.bvp.com/cloud 3

Source: Victor J. Blue/Getty Images 4 4 www.bvp.com/cloud 4

Source: Shutterstock.com/DeshaCAM
www.bvp.com/cloud 5

Source: HBO/iStock 6www.bvp.com/cloud

Source: Blue Apron Blog 7www.bvp.com/cloud

Source: iStock 8www.bvp.com/cloud

Source: Flickr/Marco www.bvp.com/cloud 9

Source: Microsoft 10www.bvp.com/cloud
LAW 10: ONDEMAND EVERYTHING

Source: Flickr/AJ LEON 11www.bvp.com/cloud

Source: Docusign 12www.bvp.com/cloud

Source: Shutterstock 13www.bvp.com/cloud

Source: PCWallart.com 14www.bvp.com/cloud
LAW 09: GROW (EFFICIENTLY)
…OR DIE

TOP TIER $10M ARR COMPANY SHOULD GROW 300% YOY
Source: SEC ﬁllings. BVP Cloud Index public companies. T = quarters 15
@ $10mm ARR
@ $100mm ARR
@ $300mm ARR
% YoY
Growth
300%
100%
30%
(Starting From Four Quarters Prior to IPO)
Public Cloud Company YoY Growth Best-In-Class Growth

FASTER GROWTH IS REWARDED – 10% GROWTH = +1.0X
IN REVENUE MULTIPLE
Appfolio, Inc.
Atlassian Corporation
Bazaarvoice
Benefitfocus
BroadSoft
Castlight Health
Constant Contact
Cornerstone OnDemand
Cvent
Demandware
HubSpot
Instructure
Intralinks
Jive Software Lifelock
LinkedIn
LivePerson
LogMein
Marin Software
Medidata Solutions
Mindbody, Inc
Mobileiron
NetSuite
New Relic
Proofpoint
Qualys
RealPage
Salesforce
ServiceNow
Shopify
Textura
The Ultimate Software Group
Veeva
Wix
Workday
Xactly
Xero
Zendesk
-1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
45 Public Cloud Companies
+10% growth results in +1.0x Rev Mult
10% 20% 30% 40% 50% 60%
y = 10.181x + 1.1297
R2 = 0.36068
’15-’16 Revenue Growth
2016RevenueMultiple
Source: 45 companies in BVP Cloud Index. CapIQ www.bvp.com/cloud 16

LAW 08: SALES EFFICIENCY IS
YOUR OXYGEN

www.bvp.com/cloud
CAC PAYBACK PERIOD
=
(Months)
TOTAL SALES & MARKETING COSTS
OF PRIOR QUARTER
NEW CMRR ADDED IN PRIOR QUARTER X
GROSS MARGIN % OF THE BUSINESS
CUSTOMER ACQUISITION COST - CAC PAYBACK
19

20
$10 $15 $23
$34
$51
($16)
($24)
($36)
($54)
($81)
($8)
($12) ($18)
($27)
($41)
Year 1 Year 2 Year 3 Year 4 Year 5
EFFICIENT CAC PAYBACK = MORE FOUNDER OWNERSHIP
ResulKng P&L for 3 companies growing at 50% new bookings with diﬀerent CAC paybacks
Total cash burn: $106M
New Bookings
S&M Costs
Cash Flows (Gross Profit – S&M)
1 Yr CAC Payback 1.5 Yr CAC Payback 2 Yr CAC Payback
$10 $15
$23
$34
$51
($8) ($12) ($18)
($27)
($41)
$10 $15
$23
$34
$51
($12)
($18)
($27)
($41)
($61)
($4) ($6) ($9) ($14)
($20)
Total cash burn: $0M Total cash burn: $53M
Note: Assumed 50% growth in new bookings every year, 80% gross margin, and other expenses equal 80% of prior year’s bookings. 20

LAW 07: CUSTOMER SUCCESS =
COMPANY SUCCESS

1% IMPROVEMENT IN CHURN = $100M+ IN VALUATION
Note: Assumes monthly new bookings increases by $5k per month.
0% Churn
(100% renewal + upsell)
1%Monthly Churn
(-1% growth)
1% Monthly Upsell
(+1% growth; Net NegaZve
Churn)
~$95M
~$75M
~$115M
ARR in Y6
5x
5x
5x
Mult
$475M
$375M
$575M
Equity Value
$95
$75
$115
$0
$20
$40
$60
$80
$100
$120
$140
Y1 Y2 Y3 Y4 Y5 Y6
$ ARR
ARR of 3 Diﬀerent Businesses
ARR (0% monthly churn) ARR (1% monthly churn)
ARR (1% net negaZve monthly churn)
1% Churn = $20M ARR = $100M in ValuaKon
www.bvp.com/cloud 22

CUSTOMER SUCCESS MANAGEMENT
23www.bvp.com/cloud

LAW 06: CONTROL YOUR OWN
DESTINY… CASH IS KING

12/31/2015
BVP Cloud Index
45 Publically Traded Companies
Indexed as of Jan. 2011 | @ 12/31/2015
25

v
www.bvp.com/cloud
BVP Cloud Index
45 Publically Traded Companies
Indexed as of Jan. 2011 | @ 2/5/2016
26

$63BN MARKET CAP LOST IN 5 WEEKS

PRIVATE CLOUD MULTIPLES ARE TRADING AT A PREMIUM
TO PUBLIC CLOUD MULTIPLES… BUT IT CANT LAST
Source: 45 companies in BVP Cloud Index as of 2/4/2016. CapIQ.
Note: Private cloud transactions based on 69 private transactions. In the last 6 months, the average ARR multiple paid
was 14.0x. BVP Cloud Index multiple and Legacy software multiples are both NTM GAAP revenue.
The public /
private gap
will converge
Public cloud
multiples
are cheap
28

LAW 05: 5 C'S OF CLOUD FINANCE

Gross Burn Rate
Net Burn Rate
Free Cash Flow
Committed
Annual
Recurring
Revenue
(CARR)
Annual
Recurring
Revenue (ARR)
Customer
Acquisition Cost
Payback Period
Logo Churn
MRR Gross
Churn
MRR Net Churn
Customer
Lifetime Value
(Gross Margin
Affected)
CARR & ARR CAC PAYBACK CHURN CLTV CASH FLOW
1 2 3 4 5
5 C’s OF CLOUD FINANCE
www.bvp.com/cloud
30

BUILD YOUR DASHBOARD TO FLY YOUR ROCKETSHIP…or RIDE YOUR UNICORN

$10 $10 $10 $10
$0
$8
$16
$24
($8)
Year 1 Year 2 Year 3 Year 4
MULTIPLE WAYS TO BE SUCCESSFUL:
KNOW YOUR MODEL AND NAIL IT
Revenue
S&M Costs
Cash Flows (Gross Profit – S&M)
1 Yr CAC Payback, 100% Retention 2 Yr CAC Payback, 115% Retention
Note: Assumed 80% gross margin, and no other expenses.
$10 $12 $13
$15
($8)
$1
$12
$24
($16)
Year 1 Year 2 Year 3 Year 4
Results in same cash ﬂow
aber 4 years

TAKEAWAY: GUARDRAILS FOR VALUATION
Representative SaaS Business ($15mm ARR)
CARR
% Fwd Growth
1
Good
Better
Best
50-100%
50%
100%+
CAC PAYBACK
(Mos)
2
12 - 24
24
<12
CHURN
(Monthly)
3
<1%
1-3%
Net negative
CLTV / CAC
4
3-5x
3x
5x+
CASH FLOW
(New ARR/Mo Burn)
5
1x
<1x
>1x
www.bvp.com/cloud
33

1x 1% 1yr
<-1% MONTHLY
GROSS CHURN
>+1% NET CHURN
CAC PAYBACKNET NEW ARR
NET BURN
POST SERIES A: THE 1-1-1 RULE!

LAW 04: THE BEST PRODUCT IS
FINALLY STARTING TO WIN

LAW 03: THE ASCENDANCY OF DEVELOPERS
40

$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
2013 2014 2015 2016
Source: Reuters.
Uber Growth
Global bookings, in billions
Mapping
Payments
Communication
(Messaging/Voice)
Email
SSO
Customer Engagement
Storage$0.6
$2.9
$10.8
$26.1
www.bvp.com/cloud
APIS TO ACCELERATE YOUR BUSINESS
41

LAW 02: INSPIRE (AND HIRE) WITH
VISION
Source: iStock 42

Vision - The dream; a team's true north. Primary
objective is to inspire and create a shared sense of
purpose throughout the company.
LinkedIn’s Vision:
Create economic opportunity for every member of the global workforce
“
”
www.bvp.com/cloud
INSPIRE (AND HIRE) WITH VISION
43

LAW 01: MOBILE IS EATING THE WORLD
....WIDE WEB!

MOBILE IS A GAME CHANGER FOR THE ENTERPRISE
85%
Americans between 18-29
>50%
Internet usage on mobile vs desktop
80%
Workforce are non-desk workers
~EVERYONE IN ENTERPRISE B2B
NOW HAS A SMARTPHONE
INTERNET USAGE TIPPED TO
MOBILE
REACHES AN UNTOUCHED
WORKFORCE
Source: Pew Research Center, April, 2015, “The Smartphone Diﬀerence”. Source: eMarketer 9/14 (2008-2010), eMarketer 4/15 (2011-2015). Note: Other
connected devices include OTT and game consoles. Mobile includes smartphone and tablet. Usage includes both
home and work. Ages 18+; Zme spent with each medium includes all Zme spent with that medium, regardless of mulZtasking. KPCB Internet trends, 2015
Global Mobile PenetraAon 1995 - 2014
GLOBAL PENETRATION
1 –> 73%
45

kk
USE CASES THAT SPEND >50% AWAY FROM A DESKTOP
Healthcare EducaKon Retail
ConstrucKon Field Services Field Sales
Events Agriculture SMBs
VERTICAL
Paper Replacement (Forms/Invoicing)
CollaboraKon
HORIZONTAL

2010 2015 2020
CONTENT
CONSUMPTION
CONTENT
CREATION
The mobile version of the cloud app
Paper replacement
Collaboration/Communication
In the field working
???
WAVE 1 = CONTENT CONSUMPTION
WAVE 2 = CONTENT CREATION
www.bvp.com/cloud
47

LIMITED REAL ESTATE = CONTEXTUAL AWARENESS IS THE FUTURE
DOWNLOAD NOW @ www.speakeasy.co
48

MESSAGING IS THE KILLER MOBILE EXPERIENCE
•  The average Millennial (18-24)
exchanges an average of 67 text
messages per day1
•  Text messages have a 98% open rate,
while email has only a 20% open rate2
•  Over 80% of people use text messaging
for business, and 15% said that more
than half their messages are for business
purposes3
•  First example of success – Slack4
•  2M DAU
•  570M paid users
•  800M+ messages sent a month
•  4k platform apps
Source: (1) Business Insider. (2) Velocify., (3) eWeek. (4) Slack.
49www.bvp.com/cloud

BESSEMER’S 10 LAWS OF CLOUD COMPUTING
10
OnDemand
EVERYTHING:
09
GROW
(efficiently) or
die.
08
Sales
efficiency is
your oxygen.
07
Customer
SUCCESS =
company
success.
06
Control your
own destiny…
CASH is king.
05
5 C's of cloud
finance.
04
Best
PRODUCT is
finally starting
to win. .
03
The
ascendancy of
Developers
02
Inspire (and hire)
with vision
01
MOBILE is
eating the
world...wide
web
www.bvp.com/cloud

“
Don’t live up to your
expectations, live up to
your potential”
www.bvp.com/cloud

"10 Laws of Building a Unicorn" at SaaStr Annual 2016

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"10 Laws of Building a Unicorn" at SaaStr Annual 2016