Welcome to Episode 176! Kristina Shen is a Partner @ Bessemer Venture Partners, one of the world’s leading venture funds with a portfolio including the likes of Pinterest, Skype, Box, LinkedIn, Yelp, and many more incredible companies. As for Kristina, she serves on the boards of DoubleDutch, Glint, Retail Solutions, and Zoosk, and is also a board observer with RainforestQA, Vidyard, Gainsight, and ServiceTitan. Kristina is also one of the best data gurus as the co-author of Bessemer’s State of the Cloud 2016 and 2017 and Bessemer 10 Laws of Cloud, which captures the top trends among leading public and private cloud computing and enterprise mobile companies. Due to Kristina’s success she has been named to both Forbes and Business Insider’s 30 Under 30 in 2014 and 2016, respectively.

In Today’s Episode You Will Learn:

* How Kristina made her way into the world of cloud investing and came to be the data guru for much of the cloud landscape.

* What does Kristina fundamentally mean when she states the key question is, is there velocity in this SaaS business? Is velocity just about revenue or ARR growth? How can startups present real velocity with their sales funnel? How can startups present further velocity through their SQL process?

* Why does Kristina believe that “private SaaS multiples are not expensive and we need a new framework?” What makes the existing framework inaccurate? What does this mean for the way Kristina assess ARR multiple and growth rates? How does this framework alter Kristina’s perception of the often hailed “Rule of 40?” How does it change with scaling?

* What are the core elements Series A SaaS investors focus on today? With regards to revenue benchmarks for the A round, where do they need you to be both on the low and high end? Where do Series A investors expect startups to be for y/y ARR growth?

* What core metrics are required to successfully raise your Series B in SaaS today? What does Kristina think is the fundamental difference between Series A and B today in SaaS? What can founders do to show repeatability and reliability of revenue streams as they move into the B round?

60 Second SaaStr:

* What does Kristina know now that she wishes he had known at the beginning?

* Questions from Jeremy Levine: What would Kristina like her legacy to be as an investor in 20 years time?

* What keeps Kristina up at night?

* Is it worse to see an amazing deal and pass on it or to have never seen it at all?

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Jason Lemkin
Harry Stebbings
Kristina Shen


Harry Stebbings:  Hello, and welcome back to another week in the world of SaaStr with me, Harry Stebbings. You can find me on Instagram @hstebbings1996, with two Bs. I’d love to see you there. You can also recommend future guests for future shows, and there’s more, from the amazing team at SaaStr.

If you cannot get enough of all things SaaStr, have read every piece of content on www.saastr.com, and wondered how you can train your team on SaaStr’s best practices, SaaStr PRO solves that problem.

Sign up today on saastrpro.com/podcast, and let SaaStr train your team for you automatically, each week sending your team a highly actionable lesson meant to help you grow faster and drive discussions on how to improve. It really is such an amazing platform being built there.

On the theme of pros, I’m thrilled to welcome a pro in the world of cloud computing as one of the data gurus of the industry. I’m thrilled to welcome Kristina Shen, partner at Bessemer Venture Partners, to the show today.

Bessemer is one of the world’s leading venture funds with a portfolio including the likes of Pinterest, Skype, Box, LinkedIn, Yelp, and many more incredible companies.

As for Kristina, she serves on the boards of DoubleDutch, Glint, Retail Solutions, and Zoosk, and is also a board observer with RainforestQA, Vidyard, Gainsight, and ServiceTitan.

Kristina is also one of the best data gurus as the co‑author of Bessemer’s “State of the Cloud,” 2016 and 2017, and Bessemer “10 Laws of Cloud.” They really are personal favorites of mine, phenomenal reads, and I have attached links to the show notes.

Due to Kristina’s incredible success, she’s been named to both “Forbes'” and “Business Insider”‘s “30 Under 30” in 2014 and 2016, respectively.

I do also have to say a huge thank you to both Jeremy Levine and Byron Deeter for some fantastic questions provided today for Kristina. I really do so appreciate that.

You’ve heard quite enough of this dulcet English accent, so now I’m thrilled to hand over to Kristina Shen, a partner at Bessemer Venture Partners.

Harry:  Kristina, it’s absolutely fantastic to have you on the show. I’ve heard so many wonderful things from Byron and Jeremy, so thank you so much for joining me today.

Kristina Shen:  Thank you so much for having me. I’m excited to be here.

Harry:  Not at all. I want to kick off today with a little on you and your foray into the world of SaaS ‑‑ and more specifically ‑‑ cloud investing. What was your start, Kristina?

Kristina:  I’ve been in the cloud SaaS investing area probably for over a decade. I started my career in the investment banking world. I was at Goldman and Credit Suisse doing cloud investing at the balance sheet as well as looking at cloud IPOs and M&A, and I fell in love with the category.

I think a lot of it comes from joining the workforce and thinking, “Wow, these products are horrible. There’s got to be a better solution.”

I watched this cloud wave, companies transitioning from on‑premise to cloud, and felt that this is something that I wanted to dedicate my early career on.

A decade later, I’m still investing in cloud Saas, and we’re only 3 percent penetrated in total IT spend today, and 30 percent penetrated on the SaaS spend, so I think we’ve got still quite a long way to go.

Harry:  Speaking of your foray there, I did speak to, and I want to start with this, actually ‑‑ with your partner, Byron Deeter, and he mentioned that you’ve built up this incredible reputation as a cloud benchmark guru. He asks first, how does that help you evaluate deals? Let’s start with that.

Kristina:  I think I’m such a data nerd that I get obsessed with getting to know all the data out there that I can collect at any given time. I think that’s helped me over time, because a lot of venture capital is pattern recognition.

Particularly on the SaaS side, understanding all the different types of go‑to‑markets, business models, what are the right conversion metrics in the sales funnel. I think that’s really helped me pattern recognize what businesses have real velocity, especially on the later stage.

I try to use that to my advantage, and I use that not only to help our portfolio companies think through benchmarks and what other companies are doing.

But also when assessing and finding new companies, I think one of the key things is to look at, is there real velocity in the business? Sometimes that’s hidden deeper in the numbers as opposed to just the top‑line revenue.

Harry:  Can I [inaudible 5:14] , when you say velocity, what do you mean by that, if we drill one layer deeper?

Kristina:  If you drill one layer deeper, I think a lot of people will look at revenue or ARR growth, and it’s definitely one great way to look at a velocity of a business, of how quickly they’re growing, and if they’re hitting that inflection point.

But sometimes, they’re hitting that inflection point before it hits revenue or ARR. Sometimes it’s in how quickly their leads are growing, how well their SQLs, or sales qualified leads, are closing. Sometimes it’s hidden in how well they’re upselling their products to their existing customers.

I think it’s actually really important to go one layer deeper to the additional metrics and capabilities to understand the true health of the business and velocity of a business in the future, other than just top‑line revenue.

Harry:  Absolutely. Speaking of the metrics of that, that we use to assess businesses, often in SaaS and investing in SaaS, especially on the evaluation side, it comes down to multiples.

I’m intrigued, because you’ve said to me before that private SaaS multiples are not expensive if you use a new framework. Before we touch on the new framework, what’s fundamentally wrong, maybe ‑‑ or not accurate, so to speak ‑‑ with the existing way we value SaaS companies through multiples?

Kristina:  In order to address that, let me take you back a little bit, because if you looked at the way that SaaS companies were valued 10 years ago, a public company that was growing 30 percent, probably got a five times revenue multiple.

A private company that was growing, say, 100 percent also got a five times revenue multiple because there was this illiquidity discount for private companies. You didn’t get paid for your growth, and in fact, you tended to get paid at a lower multiple because you were private.

If you look at it today, private companies are growing faster than that. Most private companies at their early stages are growing anywhere from 100 percent to 300 percent, and I’ve recently even heard some cases of companies growing 1,000 percent, which is incredible.

Private companies are fundamentally growing faster now, and it’s for many reasons. One is SaaS adoption. 10 years ago, SaaS adoption was less than 10 percent.

Today it’s over 30 percent, so there’s this general acceptance that cloud software’s here to stay, and particularly in the enterprise. They’re now comfortable and willing to adopt cloud software.

The second is people like myself. VC interest in cloud companies is really high because we’ve discovered it’s just fundamentally a great business model, and so the amount of capital that’s pouring into the cloud ecosystem has also enabled valuations to change and stabilize to where they probably should be.

Now if we look at private company multiples ‑‑ a lot of people talk about an arbitrary 10 times ARR multiple ‑‑ but I would argue that that’s not the right benchmark to look at multiples, because growth is such a big factor in determining the future value of a business. If you’re growing 100 percent versus 300 percent, you should get paid for that growth.

What I personally look at is I look at an ARR multiple divided by the growth rate, and the reason I do that is because you should get paid for growing faster. A simple example would be if you’re looking at a 10x error multiple, but the company is growing 150 percent, that’s a 6.7x error multiple.

If you look at where private multiples have been historically, if you look at the last five years, a 7x ARRG, or ARR‑to‑growth multiple, is actually where the market pays. Basically, if you’re growing faster, you should be paid higher than a 10x ARR multiple.

Harry:  Can I ask? You mentioned the explosion of capital going into this space. I’m intrigued.

How do you think about capital efficiency and the potential, maybe, distortion in that model where companies can, with huge amounts of funding, buy that growth, so to speak, even in the earliest stages today, and how important does capital efficiency play for you in evaluating companies?

Kristina:  For us, capital efficiency is incredibly important. We look at a particular metric, what we call BVP efficiency. For a company that’s less than $20 million revenue, we look at whether their net new ARR is greater or less than how much they burned that same time period.

A simple example would be if a company grew from $10 million to $20 million, that means they added $10 million of net new ARR, but if they burned $20 million to do that in the same time period, they’re only a 0.5 on an efficiency score.

We tend to try to aim for closer to a 1, because the idea is that you should be spending less each month on what you’re burning to acquire that additional new revenue. It’s one of the key metrics that we look at, particularly for series B and onwards companies.

Harry:  Would you agree with Jason Lemkin in the early days? He says that when you are starting to spend on acquiring customers, just get your marketing people to earn a dollar back for every dollar they spend, because blended, you’ll actually get double or more, so to speak?

Kristina:  I very much agree with Jason. I highly respect him, but we tend to look at the full sales and marketing costs as opposed to just the marketing costs.

We think if you should look at it from a fully‑loaded basis, because it’s what your marketing team does to generate new leads and generate demand gen, what your sales team does in order to do outbound sales or close deals, and ultimately, what your customer success team does in order to keep your customers happy as well as potentially drive upsell or sell more book of business to your existing customers.

When we talk about it, we tend to say for every dollar you spend, you should get a dollar back in terms of net new ARR. We call that a CAC payback.

We try to say, for the average SaaS company, your CAC payback should be around 12 months or around one year, but that actually varies pretty dramatically if you sell to large enterprise customers, which have higher retention, or you sell to SMB customers, who have lower retention.

Harry:  With these frameworks in mind, one that I always hear cited is the rule of 40. How do you analyze and think about the rule of 40 today, and in this environment that we’re in?

Kristina:  We think a lot about the rule of 40. I think it is probably more addressable for later‑stage companies, but the rule of 40, for those who don’t know, is basically saying that your percent year‑over‑year growth plus your percent burn should be 40 or higher.

If you’re growing 100 percent, you can burn 60 percent. If you’re growing 40 percent, then you can be a break‑even business.

We have a slight twist on that, actually, because that rule of 40 is very true for public companies. If you look at the top 50 public cloud companies, the rule of 40 is how the companies tend to be valued. People who are more efficient are valued more highly.

If you look at the private companies, and we benchmark this, actually right before you go public, two years before you go public, it’s more like a rule of 70.

If it’s one year before you go public, it’s more like a rule of 50, and it’s because private companies are growing so much faster that it actually helps them in their efficiency score.

Harry:  I spoke to Tom Tunguz the other day, and he said that even for public companies, growth is the number‑one determinant of value driving at that public stage.

Would you agree with him, kind of thinking about that? We spoke about growth and the importance of it at the early stage, but would you agree with it as the primary importance at that IPO stage?

Kristina:  It definitely is. Growth is always the number one driver of value, because fundamentally, if you’re growing more quickly in the next year or two, you will be a larger business. It always is the number one driver.

We see at different time points in public markets, efficiency is the number two driver, and then the number three tends to be retention. Businesses that have over 100 percent net retention tend to be significantly be valued higher than a company that had a lower retention rate.

Harry:  We’ve spoken about early state, about A and B, and the pre‑IPO there. I do want to focus today on two stages, being the A and the B round.

Starting on the A round, we often hear that seed round’s where the founders must sell the vision, A round’s where you show traction and fundamentally product market fit.

I’m intrigued. For you, working kind of exclusively A, B, and seed, what are the core elements that you’ve found series A investors focus on?

Kristina:  I think that’s right. I think at the series A level, we’re focused on, how big is this market opportunity. We’re focused on, does this company have an unfair advantage to win? When I say, “unfair advantage to win,” that could be anything from, are they first to market, and can they be the thought leader to create this category?

Or, is there something that is differentiated or defensible in their products, say it’s a network effect or a data play, that enables them to succeed over their competitors? That’s what we tend to look for at the series A.

Sometimes we also make a velocity bet. If a company really is growing from one to five, or one to six or seven million in a year, something is just working, and great founders can figure that out. That’s what we tend to do at the series A.

At the series B, we do start to look. In addition to the market, competition, and the unfair advantage that they have, we also start to look at these additional metrics that we’re talking about as well, because we want to understand that this business can scale from a go‑to‑market standpoint.

Can it have a reasonable CAC payback, say 12 months for the average SaaS company. They should have enough data to see how retention and churn is performing, and so we want to make sure that their customer base is very healthy.

There is a pretty big delineation between series A and series B, but the one thing we will say is because we’re such a large fund, we’re always focused on believing that when we make the investment, we believe the company could be an IPO or public company.

Obviously that’s not always the case, but we want to believe that that market opportunity’s large enough for them to be.

Harry:  You said that about the velocity. I’m intrigued with you being, as you said, such a data geek at the beginning. Have you found commonalities between companies both in time and duration in getting to that $1‑$10 million in ARR when you look across the data set?

Kristina:  Yeah. I think that the best cloud companies can get from $1‑$10 million ARR in two or three years, and we’re seeing that to be pretty consistent.

If you look at the public companies and when they were early stage, we were early investors in Twilio, in Shopify, in LinkedIn. We looked at a lot of the data of these companies when they were early stage.

The best‑in‑class companies go from 1‑10 in about two years. I would say the average public cloud company gets there in about three years, and it’s like very good cloud companies can get there in about four years, which means you’re doubling, basically, every single year.

Harry:  I always find that founders tend to spend a lot of time on ARR, especially when they’re approaching rounds. Wondering what VCs expect at different stages.

If we focus exclusively on the ARR metric, how do you think about what’s required at the A round versus the B round, in your expectations, generally speaking?

Kristina:  I think some investors will throw out some number ranges. We try really hard not to throw out an ARR number range, because it depends so much on what’s going on in the competitive market dynamic, how big that market opportunity is.

I know a lot of investors will say, “You should get to at least a million in ARR for your series A,” but I’ve seen actually a very wide range. We’ve funded many series A companies pre‑revenue because we’ve found the team and CEO to be very compelling, and the market opportunity to be a unique opportunity.

There’s many times that we’ve funded a series A when they were over three or four million ARR because we wanted to see the velocity in the business, and it might have been a slightly more competitive market. It’s quite a wide range, but I would say it’s anywhere between that pre‑revenue and a couple million ARR, tend to be that traditional series A level.

Harry:  Is there a level for series B where really there is a minimum bar given the data and the time that they’ve had to operate and build out the product and team?

Kristina:  I wouldn’t say there’s a minimum bar, but we are looking to make sure that the core unit economics work, so going back to those numbers like, can they drive reasonable sales efficiency with a 12month CAC payback? Is retention healthy and within their customer base?

At a series B, you have enough data over a certain time period in order to assess these metrics. We’re really looking at the health and scalability of the business more so than a specific ARR number.

Sometimes, in series B deals where it’s been as low as $1 or $2 million in revenue ‑‑ I’ve done some that have been pre‑revenue, but that’s a little bit more rare ‑‑ and as high as $5‑$10 million in revenue, so the range can be quite broad.

Harry:  You spoke rather core unit ec. on that. I’m intrigued. Where do you find the most struggle in really fine‑tuning that core unit economics?

Kristina:  A couple of areas. I think one of the biggest struggles I find is particularly on the sales efficiency side.

If you’re selling to really small SMB companies, or you’re selling to really large enterprises, your unit economics may not always be consistent from every month or every quarter, because you’re just an early business, and you have to normalize across multiple months or quarters.

I find with SMB‑based businesses, sometimes the struggle is to scale up the sales orgs at a cost‑efficient rate because you’re charging much less for your product, let’s say a couple hundred dollars or a couple thousand dollars every single year, and sometimes it can be hard to make the unit economics work in the first couple of months as you’re ramping up your sales reps.

The same becomes true on the enterprise side, because you’re selling really large deals, let’s say hundreds of thousand dollar deals in a year. Realistically as an early‑stage business, you might have a month or a quarter where you don’t sell a customer yet, and that can screw up your economics in a given time period, as well. That’s one thing I see companies struggle with, is they’re not quite sure of the predictability of their business yet, because they may not have a very average customer base.

That’s where we like to sit down with companies and help them think through and normalize that data to help them think through benchmarks so they can understand what’s working and what’s not working.

Harry You mentioned the enterprise play there of selling very large contracts. When evaluating really early‑stage businesses that you’d maybe really like to keep tracking, are there elements that excite you, be it number of pilots signed, be it engagement within pilot, be it brand of companies signed as a pilot?

Are there elements that would really excite you, given the fact that at, say, seed, when you’re evaluating, the sales cycles are so long?

Kristina:  I definitely love to see when there’s a velocity of increasing pilot, and so you signed two pilots this month, three pilots the next month, etc. That’s really helpful to see, because that’s basically your top‑of‑the‑funnel pipeline.

The second thing that’s really exciting to see is when they’re in these pilots, how engaged the customer is and how quickly the product spreads across the organization.

The third is at the really early stages, we love to talk to the pilot customers. I think there’s a big difference when you hear from a pilot customer, “This is a great product, but I’m still figuring things out,” or say, “I can’t live without this product.

“I need to buy and sign this contract immediately, because this has transformed my business.” We love hearing those types of conversations.

Harry:  I couldn’t agree with you more. I do want to delve into my favorite element of any interview, Kristina, being the 60‑second SaaStr. Essentially a quick‑fire round where I say a short statement, and you give me your immediate thoughts, about 60 seconds per one. How does that sound?

Kristina:  That sounds good.

Harry:  A question from Jeremy Levine, your partner. What would you like your reputation or legacy, so to speak, to be as an investor in 20 years’ time or so?

Kristina:  Ooh, that is a good question. I would say I would want to be a lasting investor. I think a lot of people who’ve had great successes and had a great one or two hit big deals, but I want to be known as a lasting investor.

I want to not only succeed in the SaaS ecosystem, in which I spend a lot of time today, but be multi‑sector, multi‑stage, and be someone who’s known to have left their mark on the industry, and someone who can accomplish many different types of deals. That’s what I would say if Jeremy was asking me directly.

Harry:  What keeps you up at night, Kristina?

Kristina:  Gosh, we have this thing called the anti‑portfolio, which is all the deals that we’ve missed. That’s what keeps me up at night, because we’re making rapid decisions all the time.

Funnily enough, we say no to companies 99 percent of the time, so it really keeps me up at night that I might be passing or saying no to companies that could be the next LinkedIn, Shopify, or Twilio. [laughs] I wish it didn’t keep me up at night as much as it does currently.

Harry:  Tell me, what’s worse, seeing it and passing, or not seeing it at all?

Kristina:  I think not seeing it at all is worse, because you always want that at bat or opportunity, but I think it’s more painful when you pass on an incredible company.

Harry:  I agree with you, for sure. Tell me, the biggest mentor to you, and the most memorable takeaway from that relationship.

Kristina:  The biggest mentor to me has been Byron Deeter at my own firm. He took me in when I was quite junior in this industry, five years ago, really took me under his wing, and treated me like it was an apprenticeship‑like model.

I’ve always looked up to him, really appreciate his help, but I would say what I appreciate more and what’s memorable about him is we cross over from the business and personal side.

Byron helped my husband and myself get engaged, and he was part of that tricking me into story, when I was getting my surprise. We’ve got this great, both professional and personal relationship.

Harry:  That really is going above and beyond from Byron. I love that story, but I do want to finish today. What do you know now, Kristina, that you wish you had known that decade ago when you entered the world of SaaS and cloud investing?

Kristina:  I wish I had known how hard it would be. I think outside in, where I had always looked at investing world, I had always thought it was thrilling and exciting. You always get to be at the front edge of technology, which it very much is.

Even five years into this industry and being a partner at the firm, you still do a lot of grunt work, and you still have to chase and find all your deals and constantly improve yourself.

I wish I had known those challenges up front, but I wouldn’t have it any other way. I really love this job, and love this industry. It’s been an exciting five years, and I look forward to building my 20‑year legacy, as you asked earlier.

Harry:  I cannot wait to see the 20‑year legacy. As I said, I heard the most phenomenal things, both from Jeremy and from Byron, so thank you so much for joining me today, Kristina.

Kristina:  Thank you so much. This was so much fun.

[musical tone]

Harry:  What a fantastic guest Kristina was to have on the show today. You really must check out some of her writings and work, and you can find that on Twitter @kshenstr.

As I said, that really is a must. Likewise, we’d love to see you behind the scenes here at SaaStr. You can do that on Instagram @hstebbings1996, with two Bs. It’d be fantastic to see you there.

As always, I’ve so appreciated your support today, and I cannot wait to bring you next week’s episode.

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