Decacorns + Centricons: Just How Big Is This Cloud Thing Gonna Be? with BVP and SaaStr

Recently, at the SaaStr Really Big Holiday Party, Jason Lemkin, CEO & Founder of SaaStr, and Byron Deeter, Partner at Bessemer Venture Partners joined forces to talk about the rise of the cloud, the incredible growth rates and discuss just how big the cloud can really grow.

The whole session has some key insights for founders on the state of the cloud, and you can watch the whole thing below, but we thought we’d highlight a few of the lessons gleamed from this session.

Lesson #1 from the Cloud —  It’s growing faster than ever before and taking a lot less time these days to get to a billion. One of Bessemer’s early investments was in Eloqua, acquired by Oracle in 2013, and back then it had taken Eloqua about a dozen years to hit 150 million. On the flip side, today, one of Bessemer’s hottest investments, Twilio, will break the billion mark much before the dozen-year mark — which means we’re flying right by unicorns and into the decacorns and centricorns phase of the cloud faster than expected.

Takeaway #2 — Demand is growing almost concurrent with rapid valuations and growth. Twilio, which recently acquired SendGrid, (an email automation platform), is ramping 5X faster than the comprable Eloqua email marketing platform. Market pull for these kinds of products is a multiplier better than before and often more aggressive than a generation ago. Whereas doubling your revenue in a year used to be heoric in the early days, the hottest startups now are doing 4X or 5Xs in a year.

And VC funding probably happens less than often than you think. Byron, who’s one of the major players at Bessemer only does 2-3 deals per year, with about 20 or so that he becomes super interested in during the course of the year. He says during the session that one of his keys for investing and part of why Bessemer invested so much into Twilio was because he has to be an early believer in the product, the CEO and the team for it all to work out.

Get all the lessons from this session by watching the full recording below:

Video Transcript:

Jason Lemkin: All right. Everybody ready to learn about unicorns, decacorns, centicorns, trillion corns — what’s a trillion corn? When the first startup’s worth a trillion, what it will it be called? Do we know?

Byron Deeter: The Giga-corn?

Jason Lemkin: Yeah, I mean is Apple still worth a trillion? Did it fall out, or…? Is Amazon worth a trillion.

Byron Deeter: No. They’re back.

Jason Lemkin: Well then a startup will soon be worth a trillion. If Softbank invests, at two hundred billion -pre, it’s worth a billion. How does that help the IRR for the fund? Can we do the math? How much does Softbank vision?

Byron Deeter: Well they have one hundred and twenty, wasn’t that the target number? 120 billion?

Jason Lemkin: So if they put in

Byron Deeter: ‘One for you and one for you’

Jason Lemkin: So if they put in let’s say they do a big check they put up they put 80 billion in it two hundred pre.And they exited a trillion. That’s five X right. So that’s four hundred million that’s 2 x to the fund right. No no. Hold on. That’s three 3 point something X right.

Byron Deeter: You could live on that money. That starts to get to real dollars.

Jason Lemkin: That is that’s the goal. Yeah. All right. So I thought I’d have a little bit of fun with two ideas Mega and Deca. For folks that don’t know Byron, I’ll only give a short history but it’s a good history, Byron himself was an enterprise software founder in his youth. Looking at you now you were probably 16 when you started your own company sold. It was Bessemer backed, I think, right?

Byron Deeter: That’s how I first worked with them at age 26, as founding CEO of a cloud company.

Jason Lemkin: And they snookered you into joining as an investor, right? And not only was Byron a great investor but he was early to the cloud. Some early deals if you’d been around for a while he was super early at Cornerstone OnDemand which had its exit and now is worth two billion. He was super early in Eloqua which exited at a billion and was one of the first cloud exits and these are really first general almost first generation.

Byron Deeter: And visited the Echo Sign offices in Palo Alto early on and begged Jason to take my money, which he said no to.

Jason Lemkin: This is a long time ago. So… and a couple of things I wanna talk about not only were those great investments but as Byron became one of the preeminent investors they got better and bigger. Right? So Twilio you ended up owning 30 percent at IPO or something like that.

Byron Deeter: Right. High 20s yeah high 20s.

Jason Lemkin: So that’s that’s a lot.

Byron Deeter: Led multiple rounds along the way.

Jason Lemkin: Yes. Also on the board of SendGrid, Twilio buying SendGrid, so we can just see this sort of ecosystem coming together. So I want to chat about a few things so that’s a lot of change— Twilio’s worth 8 billion today plus or minus.

Byron Deeter: I think a little plus but yes.

Jason Lemkin: Yeah and when Eloqua was bought forget about let’s call it 800 million even though it was probably billion with cash. But Twilio’s an order of magnitude bigger than Eloqua right? Same amount of work to build Twilio as Eloqua, maybe more even more work in some ways to build Eloqua back in the day. More twists and turns?

Byron Deeter: There’s a tailwind for this crowd now. So yes the world. What was the headwind on Cloud is now an advantage. So you know I think next year Twilio should by analyst reports cross a billion dollars even without the SendGrid acquisition. They’ll be the third fastest in history in the software space to do that and others are ramping even faster than that. Like these innovation cycles are compressing.

Jason Lemkin: Wait so this is pretty interesting, let’s compare Eloqua and Twilio for a second. So Twilio will hit a billion in revenue next year. And when was it when was first revenue dollar roughly? You dont have to get it perfectly right. But let’s compare the two.

Byron Deeter: Yeah. Let let’s put that around. ’08.

Jason Lemkin: Okay, ’08’s first check, and so that’ll be eleven years to a billion? 10 years? 10-ish years to a billion.

Byron Deeter: 10 and change exactly.

Jason Lemkin: And that’s 2018, and when was it Eloqua was acquired? This was in the dark days of the cloud, 2011? Or something like 2010? When was it? 2012?

Byron Deeter: Yeah.

Jason Lemkin: So that’s too many too many billion dollar exits that you can’t even remember when they were.

Byron Deeter: So the the IPO I think was 13. And they were acquired six months after. No, it was ’12, it was an Olympic year as I remember I was in London right around the IPO August of 12. I guess it would’ve been.

Jason Lemkin: Got it. Yep. So six years and Eloqua was doing roughly how much? How long did take Eloqua to get to whatever rough revenues it had at exit.

Byron Deeter: So that was a decade to get to call it one hundred and fifty million in revenue.

Jason Lemkin: Ok. So Eloqua,

Byron Deeter: Sorry. Dozen years. Let’s call it a dozen years to 150 and Twilio will break a billion before then.

Jason Lemkin: Got it. So I’m going to call them equal. They were both market leaders in competitive categories. So an exit in 2013, so let’s time shift roughly six to seven years. The companies are growing. Six times faster and worth ten times more. This isn’t that crazy for multiples, is it? The best of the best micro six times faster but be worth ten times more which maybe justifies all these decacorns, right?

Byron Deeter: Yeah, I mean that’s the point. Twilio is you know eight times larger like it is fundamentally a much better business. It’s a it’s a much larger market and the fundamental financials are that much more compelling. And I think if you look across this room the innovators now are that much more compelling than the first generation that were fighting the basics of standing up Oracle databases and Sun servers and just trying to make this cloud stuff work.

Jason Lemkin: Twilio’s a better business. Let’s just deconstruct that for fun for a second. Jeff’s an amazing CEO. I love him. He is an inspiration to all of us right. And it’s a great company. But if Twilio were founded the same year as Eloqua, would it really be that much of a better business?

Byron Deeter: Absolutely still. I mean I buy the analogy in the sense that things are compressing and so if you look at SendGrid’s marketing email marketing product, which in essence was a lightweight version of ExactTarget or Marketo or Eloqua, their ramp is you know 5 x faster than what it was for the first generation.

Jason Lemkin: Well, that’s an important comparable to, SendGrid to Eloqua, right?

Byron Deeter: That’s right exactly.

Jason Lemkin: Low, very low end version, but conceptually related?

Byron Deeter: Adjacent products. Their application is the equivalent to what the email marketing platform was would’ve been and their ramp is 5 x faster. It’s just that the market pull for these products now is a multiple better and more aggressive.

Jason Lemkin: So does that mean that everyone in the room should grow five times faster. Is that what we talk about the CloudFlare team meetings, Michelle? Going five times faster than a generation ago.

Michelle Zatlyn: We do.

Byron Deeter: Luckily CloudFlare, and Allison with GainSight and others, they they are. The bar is raised. You wake up every day you read TechCrunch or flip through you know, that paper magazine if anyone still does that and you’re gonna see all these unicorns being funded and the reality is their metrics are that much more impressive than when I was an entrepreneur and when you were an entrepreneur when you know doubling over a year was heroic.

Jason Lemkin: Heroic right? There was no pull so doubling was heroic.

Byron Deeter: Absolutely. And we see companies that are doing you know 4 and 5xs in a year. It’s unbelievable the numbers some these companies are posting.

Jason Lemkin: So let’s tie this to the latest fund because I want to talk about how the market’s changed. But today if you’ve got to grow 5 x faster. When do you have to grow 5 x faster? When do you have to grow 5 x faster? At 1 million at 5 million, at half a million? Bessemer is multi-stage right? So you’re thinking about these issues. When do I have to be a crazy rocket ship today? Is it the first week? Is it before I get out YC? Is it afterwards? I mean that’s actually not a facetious question, is it?

Byron Deeter: Well and the news that people don’t want to hear here is that it’s easier the smaller the numbers and the earlier you are. I mean growing 5 x at 50 million is really hard growing 5 X at a million is relatively easier but still extremely hard.

Byron Deeter: And so at the end of the day I do think that the old triple triple double double approach still holds for a bar of excellence. And then we’ve got online all these marks for kind of what the top decile and quartile do for scale when you ramp up, but when you’re at the million dollar ARR range, trying to post that triple in a healthy way is absolutely a mark of you know top quartile but not top decile.

So let’s spend a second on that. So in the age of Twilio, rather than Eloqua if I’m at a million ARR and I’m gonna triple this year — if you love the CEO and you love the market, do you do it? But if you’re lukewarm, you don’t do it? Or where’s the brake line if you’re going to triple at a million?

Byron Deeter: I mean that’s the shocking thing is that there’s so much activity and we’re all time constrained as investors more than than dollar constrained and so you can only make a couple of bets a year maybe two investments a year per partner. And so the end of the day comes down to you have to love the team you have to love the market and you’ve got to have in this day and age you’ve got to have real momentum. And on occasion we’ll bet against momentum we will almost never bet against Team or TAM. In other words, the numbers won’t compel you to invest. The numbers often are a necessary but not sufficient. The team and the market is what compels you to invest and the counter I would tell you is when we invested with Twilio they had down months, they were tiny numbers. You could argue that the dollars were irrelevant but they actually were down sequentially month over month. Our investment had nothing to do with the financials. It was all about the market. And Jeff and the team.

Jason Lemkin: Yeah. So let’s have a little fun. So here’s the team, is this the Redwood City office?

Byron Deeter: Right. Right across the street from Box which was a portfolio company, on the same building with SendGrid, a portfolio company. It’s in a neat area. So come on down.

Jason Lemkin: So let’s just for founders here because there’s so much more transparency in venture but some of it’s confusing, let’s just have a little fun at 1.85 billion, how big was the last fund and when you raise it?

Byron Deeter: 1.65, 3 and a half years ago.

Jason Lemkin: Ok. So that doesn’t actually sound like a much faster pace. You didn’t go back to market in a year or something like that. OK. So what’s different. And 1.85 with inflation is the same as 1.6 right.

Byron Deeter: I think so in the sense of we’re not we’re not changing our model. We’re not doing the mega fund it sounds like a big cover number but we’re a global firm with seven offices 14 partners. Christine and Mary are here, were three of 50 investment professionals in our firm. We still want to be able to write a 50 k check. We still want to be able to do seed stuff. But at the same time we don’t want our companies to be muscled by the hundred million dollar checks. And so we can write one hundred and fifty a 200 million dollar check if we wanted to. We haven’t yet. And you know, who knows when we will but fundamentally we want to be able to fund all the way through private existence. In the case of Twilio the reason why we owned so much is because there were several rounds there where outsiders wouldn’t fund them. And so we went out and we gave them a market price and said look they don’t get it. We’ll lead. He went out did another process came back like ‘this is frustrating as hell’, like they don’t get it, we’ll lead. a\And we did that we led three rounds at Twilio all at big step ups.

Jason Lemkin: All three internally?

Byron Deeter: All internally. So we had of the five rounds they did. We led three of them. And it was just because from our standpoint like we’re believers we’ve got plenty of capital we’re very supportive of you doing a process if you want other things or if they’re going to do other things. But if not don’t worry about it. Keep going. And I’ll tell you when the market turns is when that’s an advantage when our portfolio companies can say we’ve got billions of dollars. Don’t worry about it let’s just build a great business and we’re not going to jammy because we’ve been in this industry one hundred and seventy years as a firm and we want to be in it for another hundred years and if we start jammin our founders our reputation’s done. So like let’s just figure this out.

Jason Lemkin: And to help people understand what one point eighty five billion is what was the pre at Twilio? These are all public. It’s close enough right?

Byron Deeter: Yeah. We invested one hundred twenty five thousand at I think what was a 12 million dollar seed round.

Jason Lemkin: So that was a look, you played a card.

Byron Deeter: That was it. Exactly, it was get to know you. It was coming together quickly. He didn’t want to fool around. He didn’t want to leave. So it was like in one meeting we’re in.

Jason Lemkin: Ok so let’s take take a break for a second you put one hundred twenty five thousand in a 12 pre?

Byron Deeter: Yes.

Jason Lemkin: So that alone probably won’t return a one point eighty five billion dollar fund. So to help folks here if I get Christina or Byron or someone to write a one, what does that mean? How much of your time do I get at the Redwood City office for that check?

Byron Deeter: For the seed check we try to be very front which is that you don’t want us as a board member we’re not going to sign up to be fully active we are acting like an angel there which is we’ll be an advisor, we’ll grab a meal or a drink. We will review anything you send over in the sense of word packs. Yeah. But we we don’t want you to have signal risk and we don’t want you to expect that you’re getting our whole 50 person BBB funded team board member stuff. It’s not yet that level of mutual commitment.

Jason Lemkin: Okay. So the first check is an explorer, get to know you check. What was the next check roughly? It doesn’t have to be accurate.

Byron Deeter: Yeah I think it was 10 at 50.

Jason Lemkin: Ten at 50.

Jason Lemkin: Okay. So. When I’m trying to understand VCs out there is that a sweet spot for a one point and then someone else raises two billion, Ajay raises a billion from Bain. How can I figure out if you’re too big for me, or any fund? How do I know how to turn this number into whether you’re a good candidate for me or not.

Byron Deeter: Our specific purpose is for that to never be the issue. Meaning we still absolutely want to series A deals and we do. And so it ends up being a bi modal curve our mathematical averages will. We’ll do an eight million dollar you know set of checks and then we’ll do 30 million dollar bundles of checks. And you’ll see that it’s a lot of series A’s and it’s a lot of growth rounds and then with the series A’s we tend to follow it. But our point is realistically what it means is a lot of times seeds. If we haven’t worked with you before or if you’re not in a sector we already know and love. We’re not yet ready to make the full commitment both ways. But we want to start the relationship and then for the A’s absolutely will we want to be all in if we’ve been able to like start a relationship get to know you and be in a position to be aggressive. And so you know, my deals last year Zylo was a series A in Indianapolis and Guild was a series B. Both of them were you know sub were double digit million pre moneys.

Jason Lemkin: So those are good ones. Let’s just just for the crowd that’s fun. So last year with your all of your history you did two deals. Two deal and you’ve average that roughly over the last eight to 10 years or something like that.

Byron Deeter: Yeah. Two to three.

Jason Lemkin: Two to three.

Byron Deeter: And and sometimes you know I’ll partner with with you know another colleague and they’ll take the board seat and I’ll be the second or reverse.

Jason Lemkin: But even if they do it’s only two to three for you. Whether you’re the partner or the board member.

Byron Deeter: Yeah it’s just it’s hard. The end of the day that’s our scarce commodity. I’m not not. To make an obvious statement for any talk to your fund. We could have raised four times that amount of money if we chose to. It’s not the capital. It is very much just the human bandwidth and I respect a lot what the benchmark team has done where they say you know we’re gonna have a 400 million dollar fund because again the people are the resource. They have a smaller group of partners than us but the dollars per partner is very similar. It’s just we also have a team in Israel doing this we also have a team in India doing this. We also have a team in New York doing this. But it’s hard for me or Christina to put out more than one hundred million dollars responsibly or in this case a hundred and fifty million dollars over the four years. Even if 75 million goes into a Twilio you know because because we keep you know backing up the truck to lead rounds.

Jason Lemkin: So just three more insider questions then I want to hit some of what the heck is going on in the markets today.

Jason Lemkin: But so you put 75 into Twilio?

Byron Deeter: Yeah, there abouts.

Jason Lemkin: So obviously it is a winner investment right. Maybe your best investment at the moment. Right that’s liquid but you put half your out. Your personal allocation into your winner just to think about how the industry works. You started off one hundred twenty five thousand dollars. And by the end of the poker game you put half the chips in that and you probably could’ve been put more in right.

Byron Deeter: If it were, yeah we actually could. We had T Rowe and Salesforce and Amazon and strategics coming in.

Jason Lemkin: Half is how this ends up working. This is an extreme example of going from 125 K check out of a billion six to seventy five million just in.

Byron Deeter: The way I think of it, I mean obviously founders and entrepreneurs you’re making a bet you’re a highly concentrated single position bet. But for some seed investing or something you’re doing on the side or a spouse who’s making a parallel bet. But essentially you get one shot for you know three to 12 years. From my standpoint I get a few shots. But if you’ve got conviction you should be willing to take the risk. And so it’s not an exposure thing. It’s generally if we want to be an investor and if it’s worth you know our time to be onboard et cetera we want to be a bigger partner not a smaller partner. And so we would love to you know to do the whole round and own 30 percent and do those thing. At the same time, we totally buy into working with others and so where you see a skinny down it’s because there is another firm that made tends to work with or they’re strategic or angels that it made sense to work with to bring up.

Jason Lemkin: All right. Just two other questions on this that are fun for me. So the two to three deals we got to do a year for real, for real. How many almost do you have? Whether they’re deals that were competitive you were close you got tired but how many really almost got to that next level down the pipeline for real. For whatever reason: anti portfolio, Wrong day, you were skiing, Softbank paid five times the price— forget why. How many yeses did you get to in your head versus the yeses that happened.

Byron Deeter: So I’ll give two answers. There’s probably 20 deals that we get very interested in. There’s probably. Five that we get super serious and actually get in the numbers with and there may be one that we give a term sheet to that we don’t close on in that sense and in that if you get to the point where you’re there’s mutual commitment and excitement and you’re talking numbers like we pay fair prices it’s not like we’re gonna you know lowball someone and so we don’t generally lose when we get to a term sheet stage. In this market I’ll say the prices have gotten huge. And so there have been you know, more deals than usual where you’ll say like here’s how we’re thinking about it. Price being a component and they’ll say like I get it I’d love to work with you but like firm X just came in at 50 percent above and we try not to be influenced either way by what other firms think. So we’re going to give you our number even if we are the high one. But if someone else was 50 percent above and we haven’t been able to show you that we’re worth that much of a discount then shame on us and I totally understand it.

Jason Lemkin: If you think about it from a founder perspective there’s about 20 deals a year that hit you guys that are stage whatever, stage five. These are deals that if a few things check out you’ll do them. Like if the diligence works if the growth like, you’re very close. So if you’re one of the 20 your job if you want if you want Byron is then to turn that 20 into three right. That’s that. So if it’s feeling really good you still have to turn the 20 into the three. You might not know it. On the other side of the table. But but it’s not two hundred into three.

Byron Deeter: No it’s not and the number of second meetings we take is tiny. It’s just like we’re not wasting your time or ours like we try to be upfront and as a former entrepreneur I hated the slow No. I hated the firms that would do the follow ups due diligence and then turn you down for the thing that they knew in the first meeting and that’s just crap. And so from our standpoint it’s like we try not to play those games. We’ll give you the reason why and we’ll say sincerely if we’re interested in staying in touch and why and what we would want to see to then still lead the B or the C and by the way we blew it on LinkedIn. We led I think as their Series B instead of Series C actually at 150 million valuation by the way because we didn’t get it enough on the A and the B to be aggressive and we said look we’ve got these questions here’s the thing and then we we begged our way back in and led the C saying you know we get it now and here’s why. And the nice thing of having a big enough fund and a big enough market is that we can pay for our mistakes and give you the valuation markup in the series B or Series C still and hopefully still work together. When we finally get to the point where we have conviction and it’s like this is my bet for the year. I want to work with you.

Jason Lemkin: All right one last crazy one on this. And we got to talk about the market for another time but you’re on the board about Twilio and send grid. send grid was bought for two billion fast rocket ship from the IPO price. How much did you own. How much of the promoters of Sendgrid. It’s all public so we’re not hiding anything.

Byron Deeter: Yeah. Low 20s.

Jason Lemkin: So let’s call it 20. So how big was the fund that Sendgrid’s in?

Byron Deeter: 1.65.

Jason Lemkin: So this is a 2 billion dollar exit, not a billion. A double-corn, a 6 hooved unicorn and you own 20 percent which is hard to get. It’s not easy to get 20 percent that’s a quarter of the fund that it returns. What does that mean to founders that a two billion dollar exit where they give up 20 percent— do founders understand what this means? What does it mean? I mean this is an outcome, It’s not a once a century outcome. But back back when we were founders this was mind boggling. Right. What does this mean that it’s only a quarter of the fund?

Byron Deeter: Well I mean I’d say the question what it means for Founders is that wealth creation happening right now is awesome. We used to sit back I’d go through my investment memos when I started and when you were still an entrepreneur moving over to venture and when I made that move and you would aspire to have this billion dollar IPO and you’d look at it it’s like there’s a 10 percent chance if everything goes right it might be a billion. ‘I believe this one can do it.’ And now you look at the list and it’s like you know work we’re in our in our BVP Nasdaq cloud index we go 40 some odd companies deep. you go 30 companies deep at 3 billion you go you know.

Jason Lemkin: That’s what I want to talk about. That’s your Bessemer cloud index. Yeah I wrote about it in 2017, I was trying to figure out what was goin on. 2017 was a long time ago wasn’t it? November.

Byron Deeter: Yeah we’re like seven companies out of date, five companies out of date.

Jason Lemkin: yeah, I wrote is three billion the new billion on your Bessemer Cloud index which everyone should read, I quote it a thousand times a year but there were 24 above three billion.

Byron Deeter: I think we’re at twenty nine today even with the pullback. To put that in perspective twenty nine public pure play cloud companies not even including Amazon and AWS or kind of allocations of some of the old older. twenty nine three billion dollar plus pure play public cloud companies and there are 53 private cloud companies worth over a billion right now.

Jason Lemkin: So let’s call it one hundred ish.

Byron Deeter: Yeah there’s there’s yes 100 hundred cloud unicorns right now slightly more private than public.

Jason Lemkin: Okay. So and then These these investment memos you wrote 10 years ago that you said you hope one of them could be worth a billion. What does it say at the end of the Bessemer investment memos today. We hope it’s worth 10 billion?

Byron Deeter: Well I mean we’re for the first time ever we are buying into companies above a billion we announced Hashi Corp. was one that announced it’s our valuation. And so you better believe it’s worth more than 2 billion or your money is going sideways for a long time. We do believe that we’re still in the early days of this transformation that these companies will be foundational pillars of next gen tech not just software and not just cloud and that you will absolutely see more hundred billion dollar cloud companies in the years ahead. And you know the growth rates of these businesses even at scale is astronomical.

Jason Lemkin: So related to this, if a founder came to you that you invested in or didn’t. And they want to know whether to sell or not. What’s the answer in today’s world assume and make let’s make up a number their at 5 million or 10 million. When would you tell them in today’s world going to what you said, just don’t whatever you do don’t sell no matter what it is.

Byron Deeter: We have this conversation a lot including a couple that were publicly disclosed last year through industry chatter. I take an extreme take Ryan at Qualtrics, who I coincidently saw the night before the deal was announced and I absolutely would have said hell yes if he had come to me which he didn’t. We were not investors, I wish we were.

Jason Lemkin: What would they be worth today as a public company?

Byron Deeter: Yes. So he would have been less than the clearing price that i assume he paid. And my fear is that for a business a world class business a multibillion dollar business will get me wrong and so this is nothing but praise for what they’ve built but to pay it 20X revenue multiple for a business growing in the low 30s is given a lot of forward value. to pay 10X multiple for business at scale growing 300 percent is still betting on the future but you don’t need to look 20 years into the future you need to look two or three years into the future. And I think that’s a difference where you see us as investors leaning in and maybe disagreeing with the market a little bit is that we absolutely believe there will be multiple compression like these these multiples enjoy them as we all are. The multiples cannot last. The valuations can and the difference is how long it takes to earn back into that valuation and beyond. And that’s a function of the growth rate and efficient growth.

Jason Lemkin: Michelle, since you’re not public yet would you sell for any price?

Jason Lemkin: The last round was reported at one point six billion. I know the IPO is going to end up around… I mean has it been easy every day? Is it always daisies and unicorns and smiles and is it always terrific right. Would you sell?

I did speak with Ryan. I want you to answer. But I spoke with Ryan at the SaaStr Annual last year and I just did one with Eric from Zoom and Mark from smartsheet and I always ask them the same question. Has it gotten any easier this year? And the answer is always no. And I met with Ryan Smith from Qualtrics about three months ago at breakfast you know what he said to me and he’s amazing founder, like this scale at Qualtrics. Every year I have to add a unicorn. Every year he has to add one hundred million. That’s birthing a unicorn Each year at Qualtrics. it’s not a little bit of pressure. So would you sell is there any price? would you do it for 8 billion if SAP and you had to work at SAP and it was a six year earn out as V.P. of special projects would you work? Would you work for the sunglasses guy?

Michelle Zatlyn: The problem is as a founder you search your whole life for an opportunity where you think you can really make an impact in the world and I think we have that at CloudFlare. And so you want to see how far you can take it. And we think we give a lot. We see ourselves being independent so like that’s the thing. It’s like this is people’s lives their whole life for something big. And we have it. Why. Why get out early. Well what I do instead.

Jason Lemkin: So you can set up a foundation you can solve global warming, I mean software is great but like the world’s burning out here. I mean shouldn’t we all be doing more than this than just like you know. I don’t know it’s a funny question. You know I mean related to this, let’s go on. But when Jody sold App Dynamics he was at the SaaStr Annual, you know this feels like 10 years ago it was like 18 months ago. He’s like we got around the board and he’s like at 3.7 billion it would take us two years to get there and it turned out it took two seconds. Right. New relic’s worth almost five, six billion and if app dynamics had gone public they just hit their numbers they’d probably be worth crazy.What’s your guess?

Byron Deeter: Well more than Qualtrics I’d bet.

Jason Lemkin: Yeah. Maybe more than New Relic, I love Lew but he might be worth more than New Relic.

Byron Deeter: Yeah, I think they were viewed as a premium asset.

Jason Lemkin: So that’s five. So it’s a crazy world right. All right, you answered this one.

Byron Deeter: A lot of them.

Jason Lemkin: I wrote this thing in 2016 that I thought was facetious but I’m trying to figure out what’s going on after the 2016 crash and I said if we’re going to have this many unicorns we have to have a pyramid structure there have to be top 20 to 30 deca-corns and everyone can make money. And now you just did Hashi, you want that one to be a decacorn. It’s OK if it isn’t.

Byron Deeter: We’re betting that bet. Yeah we’re at nine today pure play decacorns in 2018. Three years. Absolutely. There’s 20 in that bucket from you know 10 billion to 3 billion. Yeah. So that group has to on average double in three years.

Jason Lemkin: So Michelle shouldn’t sell for 8 billion.

Byron Deeter: Never. I do think there’s a number for everything though his first question was Is there a price? And i do think we could get a price out of her.

Jason Lemkin: Because this said servicenow is 14 and workday 16. Those are up at least 50 or 70 percent today, even with the correction? All right hold on. Next slide seem crazy still seems crazy. Here you already hit it,.

Byron Deeter: Yeah you got Adobe up there and PayPal. There you go. So they’ve flipped orders a little bit PayPal and Salesforce are both sitting around one hundred billion they slightly flip position but yeah.

Jason Lemkin: Oh let’s talk about, there’s some moldy these on this list. Let’s talk for a second. This is the other thing I really got wrong as a founder. This is the whole genesis of 3100 pieces of content. When do you get unkillable? I mean look at this. We’ve got Adobe, PayPal. I mean we can make fun of PayPal but this is a hundred billion dollar business.

Byron Deeter: So Adobe and PayPal are the two to highlight here for the ones that have successfully made the pivot. And when we professionalized the cloud index we did a lot of work with Nasdaq. They forced us to have a you know pages and pages of documentation clarifying exactly what cloud was and you needed to be majority business model and delivery model. And we had the validation through it. Adobe made that switch this year they had crossed over you know they were 80 percent subscription but they hadn’t flipped over to business model or to delivery model. They’re over 50 percent cloud hosted. Now it is awesome to see that transition. They have a higher multiple than Salesforce does. And I bet if you asked people in the valley or in the city certainly no one would actually think that. worth more at a higher multiple.

Jason Lemkin: I’ll tell you one little story. I want to I want to hear what you have to say, but I was briefly a junior senior vice president at Adobe during the transition 2011- 2012 and we had a VP retreat, the top 50 VPS. I was number 50 literally number 50 but I was in the top 50 and it was right when Creative Cloud was about to launch And we got around the table and they said what do you think is going to happen. And no one almost no one thought it was going to work and I said look I’m the new kid but I got four designers working for me they’re right now paying $2200 for Master Edition. And two of them have a pirated version that they’re trying to work on the copyright and three others are using a five year old version of the software and I just asked them Would you pay 50 bucks a month? And I bet every single designer on planet Earth will buy a recurring and that’s actually part of what happened right. Plus buying into marketing automation but they didn’t know. So.

Byron Deeter: I think very very few are gonna make that organic transition and that’s why they’re so notable. You look at why SAP has to pay 8 billion for assets because their organic internal efforts have been a total disaster in the cloud space.

Jason Lemkin: I know you have some SaaS investments that have done well and then petered out but have you seen anyone north of 10 or even close to 10 with high revenue retention and high NPS not make it? Have you seen anyone at 10 million growing quickly with 40 50 NPS, 120 percent have you ever seen any of those crash and burn.

Byron Deeter: The revenue retention point was the key one because my first answer is gonna be yes and it’s public now and the founders that share this, clearslide was one that got to 40 million in ARR and plateaued.

Jason Lemkin: But it wasn’t beloved was it?

Byron Deeter: The NPS numbers were great early on and then the issue is that the product cycles didn’t innovate as fast as the market did. And so those scores dropped and then the churn came up and the when you get to the point at scale where you’re working your butts off in sales and marketing to refill the pipeline that you’re losing out the back door it’s why you know the prior discussion was so important is why Alison and gainsight are so important because that CSM function and what Michelle was talking about with them is critical because as soon as your churn spikes and your sales slows— you’re dead. And that business was acquired but not for a happy outcome at 40 million in scale because that churn was just it was killing it underneath.

Jason Lemkin: And is it recoverable? Are there counterexamples of folks were that plummeted and they pulled it out at scale.

Byron Deeter: So yes but tech is super hard. Momentum is powerful both ways. When it’s working it’s hard to screw up and that’s the beauty of these models like when you get these things going the momentum is so powerful and the reverse when you start to decelerate and when things start going wrong and your team feels it and they go to the next hot thing down the street and your customers feel it and they take that call from the shiny competitor. Those are brutally hard to turn around and frankly in this market where these multiples are 10 to 20 x just objectively you are probably better off selling than thinking that you can muscle through the four year turnaround rebuild it and get back to the point where you wanted to be. Yeah

Jason Lemkin: Yeah. All right, slack 10 billion north or south when it IPO? what’s your guess?

Byron Deeter: Long term North. Stripe, slack, zoom procore. I mean there are fantastic decacorns that people don’t fully appreciate at all right now.

Jason Lemkin: Yeah. All right. Next one, I think we’re almost through. Okay. Just for a minute. So what the hell is going on with M&A why are all these companies getting bought? I know we’re not letting Michelle sell but why what’s going on here. I know a little bit but what’s really going on and what what does this mean for founders.

Byron Deeter: I mean it’s awesome desperation for the incumbents realizing that they’ve been absolutely blindsided by this and the organic is the SAP comment but across the board and you look at these numbers and you know Github was a case and point of the founders just not wanting to sell and saying no no no until Microsoft hit the bid in the sense it wasn’t a rational you know short term financial multiple. It was a strategic price that made sense and that was the number that they were going to sell.

Jason Lemkin: But Didn’t they agree within three years they had to hire a CEO wasnt that part of the deal too?

Byron Deeter: No no they’ve got one identified that that I was part of why it made strategic sense for them. But you know again a fantastic business but on a a future free cash flow basis which in theory all businesses whether it’s a SaaS company or a grocery store should be valued as a sum of your future free cash flows. It would take a long time for github organically on their own to generate seven point five billion dollars of you know dollar weight adjusted free cash flow and yet it was a awesome strategic asset.

Jason Lemkin: And let’s come back a second just a second. Some folks here are going to forget these names but this happened just like in Battlestar Galactica it’s all happened before. So a years ago successfactors got bought Concur got bought all the moldy oldies that were my peers back in the day they all got bought.

Byron Deeter: With huge multiples 8 x 10 x.

Jason Lemkin: Forget about the multiple because you can’t control Wall Street. I mean there’s no way that SAP could buy Qualtrics for less than the cover price. It’s not it’s not going to happen right. But what my real question is we went there was this way when everyone panicked and they bought up all the moldy oldies and now they’re panicking again right. But they didn’t. Why is there this U-shaped panic. And is it gonna be, Is there going to be another trough. Will people panic again in 20 you know 21 or what’s happening.

Byron Deeter: So. So I see we’ve got at least one banker in the audience or maybe a David or others could weigh in but. But I think of it’s like the short squeeze for for many buyers where they’ve tried to wait it out and they thought that these 10x prices were going to go away and they were going to have that February 2016 moment again hoping for a crash hoping for the crash and hoping for the normalization and they keep walking up and every year and every quarter and every day that they wait they’re losing market share and they’re getting beaten. And so you go down this list and it’s like are you going to make the transition to cloud and survive or are you going to cease to exist. And if you are going to make the transition you need to pay the clearing price and you need this room. You need the cloud innovators because you sure as hell don’t have an in-house and you’ve proven that over the last decade as you’ve gotten beaten.

Jason Lemkin: Okay. For founders here because you’ve been on the other side of these so many. obviously from the press, You know Ryan and Bill at Qualtrics didn’t talk for the first time the night before the deal price. That’s clear. I mean we know that but it was obviously clear in the press when forget about when you’re about to go public. But when as a founder do you know this is happening when do you know that it’s real when someone’s panicking when there is a phase transition. How do you know when you get approached or something or whether it’s not real. How do you. What happens on the other side.

Byron Deeter: Well let me back up a half step before that which is to say that I absolutely believe part of the founder’s job is to build relationships with critical partners potential acquirers and ecosystem vendors like understanding how their thinking is super valuable to your company even if you have no intention of selling anytime soon. Yeah it’s just it’s good relationship development. It’s good ecosystem development. It was you know Jeff Lawson with with Salesforce and with Amazon with these companies and as you would suspect they’ve been approached a gazillion times along the way to be acquired in their answer is always no. But understanding how that ecosystem works and partnering with these companies will make you bigger and better as a company. And so when you know that crazy strategic prices will get paid is when you can credibly say no interest no interest and you start hearing them play back that combined vision you start hearing them playing back why they need you in a credible way and then saying what will it take. And we time and time again get very big companies with very big checkbooks coming to our founders saying what would it take. And then saying I really don’t want to sell should I give him a number. That’s just crazy or can I just punt and then you know deal with this later in the beauty of being a private company is that you can punt as long as you want when you’re a public company you need to be responsible but there’s a wide range of discretion for what responsible is right now. And a lot of our public companies are saying no interest to big strategic premiums because they have the luxury of saying no.

Jason Lemkin: All right let me just see what else we have I forget. And then we can wrap up it’s probably over. Ok just quickly where are we on M&A cycle. I know there’s only so much you can talk about Twilio and sendgrid. But where are we. There gonna be another 10 of these?

Byron Deeter: I think there might be we are 70 percent up from last year. And there’s still a backlog like the backlog.

Jason Lemkin: are people trying to buy everything that’s good. That’s that’s public or a unicorn.

Byron Deeter: I think what you’re actually seeing is the is the good but maybe not even the exceptional aren’t selling it’s the really good that are going to be selling. Yeah. And to take a company that again you can get a 20 x revenue multiple not an earnings multiple a revenue multiple for really good business to a home that you’re you’re comfortable going to these people they’re not going to sell to the company they really dislike. And in that case I think Ryan and Bill really did like each other even though SAP gets a lot of knocks. And so I think there’s a crop of really good companies that are only growing 40 percent that are gonna say we’ll take it.

Jason Lemkin: Yeah. All right just one more slide and then if we have energy we’ll take one or two more questions.

Jason Lemkin: Service Titan another one of yours, you got some good ones. Congratulations. 165 million Series D. And then this one I just made you UI path. Which no one heard of a year ago maybe you did they just raised at 3 billion. Right. And automation anywhere raised at 2.8 billion today. We didn’t even know how to spell RPA nine months ago. Service Titan selling to S.M. plumbers and janitors ten years ago no one believed. I mean the underlying metrics are very impressive but are these rounds going to get even bigger? And everyone in the press writes that the top startups are sucking up all the capital. I’m not sure I believe that because there’s a thousand seed funds today. I mean now there’s a Motley Fool fund today right. I think there is a Goodyear tire fund. I mean there’s so many. what’s going on at the low end and the high end In brief?

Byron Deeter: It is a fantastic time to be an entrepreneur. There is capital everywhere. Yeah. There are wonderful businesses that you’d Survey the average cloud operator will will have never heard of. And these are companies that are you know unicorns that people wouldn’t name in a list you know couldn’t name on a list of hundred companies or couldn’t identify a list of our companies. And that’s that’s what’s happening as these businesses are breaking out. It is rolling to every part of the economy. Yeah and you know these vertical SaaS businesses are rolling into markets that are massive but not obvious from the outside service Titan was absolutely not obvious until we did a deep dive into home services and then specifically went into plumbing and hvac and electrical.

Jason Lemkin: How many plumbers do you talk to.

Byron Deeter: Actually a lot. And there are probably five companies that we talk to as part of the diligence process that we’re trying to serve them and you get in the situation and those are markets where the winner can get a majority like you can actually you know in CRM a home run is 20 percent market share in vertical SaaS you can get 60 percent market share and and run the table essentially of anyone who’s buying a real solution. And that’s that’s why it’s such a beautifully protected series of markets.

Jason Lemkin: Yeah let’s wrap up on this because that’s that’s something it’s not in this deck but it’s something that I wish I’d understood as a founder but going to that is brand and I think a ways back, We used to almost mock brand at some level in SaaS because first of all all of us thought the world was premium that’s all you needed was to put an app up and everyone would buy it and then we thought brand was what old school companies did. And like weird marketers that don’t know how to get leads did. And I think we learned that. Like it’s it’s exhausting to buy products and brands are so enduring in saas because not everyone can do a bake off with 10 vendors. And that’s part of the service Titan 60 percent, if brands don’t matter to janitors and plumbers it’s hard to get. So any Zen learnings to founders on when should I go deep on the brand. What does it mean for me as a founder? I don’t even like corporate marketing or marketing at all. What any any learnings on when to go deep here?

Byron Deeter: Yeah. So I think this is the art of being a great entrepreneur because there are multiple good answers depending on how you’re approaching the market. You just need to know what your business is and run that playbook. And so you know Alison and gainsight would tell you that they went all in on brand early.

Jason Lemkin: From like month three

Byron Deeter: A staggering amount of spend and we’ll sit and say this this is totally out of whack with all all the comps and here’s why we’re doing it. Yeah. And it made a ton of sense but it was a very conscious very strategic bet to create a category anoint themselves the leader of the category and then suck the oxygen out of the room for their competitors. And it was a big bet but that was the playbook that they very consciously set out to run from almost day one in reposition the contra is a lot of our API businesses including Twilio and you know off zero and send grid and a lot of these where they go in and say we’re going to put the best product out there we’re gonna do Dev evangelism and let them come and find us and self discover and work up and that the brand stuff actually came later. Both of them in terms of they did a great job of hackathons and events and that evangelism art was super critical. Yeah but the actual marketing came way later and again that strategy for their go to market made a lot of sense but conflicting you know getting caught in the middle or trying to do both. Will be you can’t afford to do it and it’ll be a disaster because you’re going to end up getting caught in the middle and you’re going to have the wrong personnel trying to you know operate the wrong go to market.

Jason Lemkin: All right. We’re way over. All right everybody let’s thank Byron. This was pretty amazing for me.

Byron Deeter: Thank you. Great to be part of the SaaStr community.

Published on December 9, 2018

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