Link to podcast + transcript | 30th April 2023
Sajith: Bessemer Venture Partners is one of the OGs of the venture industry. Lots here to learn for a venture nerd like me, from this podcast where Patrick O’Shaughnessy hosts three of the senior partners at Bessemer including the legendary Jerermy Levine. I got to learn a lot about how they work together and the Bessemer OS. What i found particularly interesting – their investment decision-making structure, including the voting, the concept of roadmaps as a way to develop individual investor expertise in a sector (similar to Accel’s prepared mind), why they have a psychologist in each of their key meetings, how they groom and mentor the youngs, and how they look at content. Recommended for venture enthusiasts and VC partners.
How Bessemer Venture Partners is run
Jeremy: [00:09:27] I’ll start. I think Kent’s point that no one owns it is matched in importance by the fact that no one runs it. And by it, I mean something really specific, which is the investment decision-making process. And so we essentially split everything into one of two buckets. The core of investing, actually making investment decisions and everything else. The everything else part looks much more like a, what I’ll call, traditional company. We call it our infrastructure team. It’s run by a person. Her name is Sandy Grippo, she’s fantastic, and it has the functions of a more typical company. There’s a finance function and a marketing function and so forth.
On the investing side, it’s pretty unique in that nobody is in charge. And so one of the things I like to mention to entrepreneurs when I talk about this is that in the 22 years I’ve been at Bessemer Venture Partners, I’ve seen one investment. One, actually gets shot down. We have this investment committee. And by the way, every partner is a member of the investment committee, and every partner has an equal vote.
The way we vote on things is actually on a scale of 1 to 10, where as long as your vote average vote is 5.5 or higher, you have approval. So we’re not really asking anyone for permission to do something. We’re asking each other for feedback on what we individually want to go do. And so we feel the responsibility and the authority to make the decision, and we want to tell each other like gee Brian or gee Kent or gee Jeremy, that doesn’t look like a very good decision you’re making. I might vote that a six or a five. I’m not trying to tell you, you can’t do it. I could. I could try to vote it at 0, but frankly, even with a 0 vote from one partner, the average can still be well above 5.5, so there’s formal approval. But I want to tell you, honestly, I wouldn’t do it if I were you. And so we want the person who is closest to the decision who has the most information to make the actual decision and then we just hold each other to accounts. We write down who made the decision.
Kent: [00:12:09] It’s — one of my favorite parts of my week is when you meet with an entrepreneur and you have a great conversation. It’s the beginning of potentially a long relationship, and they say, “Okay, so what is your process from here?” and what they mean is, “I understand, I’m going to have to go jump through some series of 58 hoops and go shake a bunch of hands,” and we get to say like, “There is no process. This is the process. We’re going to meet. I’m going to decide if we want to invest and say yes, or no, and we’ll go from there.” They feel very relaxed at that point.
And then when you’re sitting on a Board of a company and the company is facing a tough decision and co-investors around the table say things like, “I have to go ask my partners what I can do here” It’s just like an insane statement like, well, you’re in the room, you know the situation is really empowering at Bessemer to be able to say, “Okay, here’s the right thing to do and make sure we can do it.”
How they groom and promote
Jeremy: And so we generally give people the authority, the checkbook after we’ve known them for five, seven, nine years. So there’s a high level of trust and confidence in people’s individual investment judgment by the time they’re actually writing a check. And then what we essentially say implicitly is there’s this great platform that has been created by generations of people who’ve come before you, and you’re now standing on it with the ability to screw it up or make it better, hopefully make it better. What we’re going to do is we’re going to reward you largely based on the performance of your investments for the first number of years in your career.
And there’s some shared common ownership, if you will, of the whole enchilada as well, but your thinking is going to be dominated by your own investments. And we think that’s really clarifying for a young investor because they can focus proving they can do it, if you will. And then as they perform, if those investments turn out to be the next, say, Shopify, they’ll do really well financially, but the firm will also do really well. And they’ll have essentially earned their share, if you will, to a coequal ownership, which is what everyone can get to over time.
Once you’ve done that and you’ve demonstrated really meaningful individual success, you become a true owner of something, not like a fake owner, where there’s really someone else who’s still in charge who’s still — you work for, but a true co-equal owner. And that’s what, I think, keeps people at Bessemer for a really long time because you’re not thinking like, oh, I can keep working for some and so who started this place or who got here before I did, or I can leave and start my own firm.
That doesn’t happen very often because there’s not much incentive to do it when you feel like you can be a true coequal owner. That’s the system, and that’s essentially how we both try to balance giving people autonomy or responsibility, but not necessarily saying, here, you’ve inherited the earth on day 1. There’s a little bit of go prove yourself and those who are up for proving themselves tend to love it.
How they do investments, and Roadmaps
Brian: [00:16:26] Patrick, I would just say we encourage more autonomy than almost any other venture firm, both with respect to decision-making and style. That could be a speculative seed investment in team back of the napkin, all the way through a late- stage growth buyout in a mature business that’s generating profit across every area of high technology. I mean the breadth is truly extraordinary. A lot of folks associate us with software, that’s the bulk of the portfolio. That’s the bread and butter, but we have investments in life sciences, in fintech, in frontier tech, runs the gamut.
But the autonomy is important because conventional wisdom says you can’t scale venture capital. And that’s true in a small partnership with a consensus-driven decision-making model because if you try to scale that and try to arrive at consensus, you either end up with mediocre decisions or the decision-making process breaks down because not everyone can meet the company. We like to think we’ve cracked the code on how to scale to venture capital by enabling each individual partner to have that autonomy to pursue whatever investment areas they want to pursue and make the best decisions they possibly can.
Kent: [00:17:42] There’s an important part of the operating system we haven’t talked about yet, which we call the Roadmap internally. So it would be very odd behavior if I showed up to a partnership meeting and said, hey, everyone, I’m investing in a biotech company because the group knows I don’t know a thing about biotech, and they would think I’d lost my mind.
The behaviour we have here is roadmap based, which means every partner will pick up over time, a number of essentially themes they’re interested in, we call them roadmaps, and we go off and do a bunch of homework on those themes, typically, before we make our first investment, and we start talking to each other about them. At our off-sites and other periodic meetings will present a roadmap outside of the context of any investment, we’ll say, gosh, I’m interested in vertical software. Here’s what I’m seeing there, et cetera.
And then when you bring in a company that’s squaring that road map, your partners know that you’re within a lane that you’ve thought a lot about. Certainly, somebody could branch into like a new style of investing. So let’s say you wanted to do a ton of seed stage investing with like a very high frequency, but you would typically present that to the partnership as a strategy first and have a fierce discussion on that and that strategy and then begin to execute on it. And so it’s not as if you’re just showing up and saying, “Trust me, I’m doing something you’ve never seen before. It’s going to work out.” There’s a little bit of preconditioning.
The best Roadmaps have two factors in common – tech change, and inspired by real world experience
Kent: [00:19:10] I thought a lot about this because we did a retro analysis of all of our best road maps where they came from and what worked about them. Typically, I would say the best, but not all the best road maps, but most of them are positioned around some big change in the technology landscape. So cloud investing being probably most productive road map starting 20 years ago.
So they start with the tech change as opposed to starting with a problem space. So if you start with aging as a problem and you say, “Gosh, aging is really bad and mortality, that’s bummer. I’m going to go look for technologies to solve that problem.” It’s like, well, that problem has been around for a long time. Nothing has really changed to make that better. Whereas if you start with large language models and gosh, what could they do to make baby boomers lives better right now? You’re starting with the tech change and bringing that solution and pointing to the problem that’s really successful.
The other characteristic of successful road maps tends to be that we didn’t come up with the idea without any real-world exposure. And so our best roadmaps, it’s a little bit of a dirty secret here, but have come from an investment we made where it started going like much better than we expected, and we sit back and say like, I thought this was going to work, but not this well. This is going amazing. Why? And it tends to point us to some go-to-market strategy that’s part of that investment that’s like driving the sort of outsized success. So a lot of our roadmaps, we get inspiration from the portfolio where we accidentally stumble into some new tech trend that we didn’t maybe even see upfront.
Jeremy: [00:23:42] We certainly have had conflicts. Yes, how can you not, if you have more than one human in a room for decades, you’re going to have conflicts. What we actually do to help resolve that is, one, having no one in charge and having each of us able to talk to one another to kind of get through problems is productive.
But we’ve also had in most of our internal and significant meetings for years, more or less since I’ve been at base, so at least 20 years, we’ve had an independent psychologist or coach in the meetings. This interest has just changed over time, but they tend to have some longevity. So they understand us, they get to know us. They have no ownership in the firm whatsoever. They have nothing at stake. They’re just there as an independent to help referee anytime there is some issue or tension, and sometimes having an outsider who knows you call you out on something is really effective. It’s one of many things we’ve adapted or adopted over the years in order to deal with an occasional strive. We’re not perfect, like any family we have our own dysfunction.
Jeremy: I’ll tell you an anecdote I got from — at the time, a young associate and she had just joined the firm, and I was doing like a half an hour welcome to Bessemer, hope you found where the bathroom is located, introductory session. I asked her, is there anything different relative to what you expected now that you’ve been here like a month. And she said to me this thing that shocked me, and I’ve told the story many times, so she said to me, “Yes, there is. I can’t believe how honest the investment memos are at Bessemer.”
And I was like, “what do you mean, honest?” And she had been at another investment firm before she joined us. And I asked them like, did they lie in the investment memos at your old firm? She said, “No, no, it’s just that” — she realized within just a few weeks, this, I think, really critical insight, which is that when we write these memos, we’re not trying to convince somebody what to do — at our old firm, there’s really like 2 people who kind of ran the investment committee, and the goal was to convince them to give you permission to make the investment.
So like, yes, you talk about some weaknesses or risks in your memos, but it was kind of like answering that silly interview question that you might get when you’re interviewing for a job and someone says, “Tell me about your weakness” and you go like, “I work too hard.”. It’s like a sort of a bullshit weakness that you’re saying because you have to have some weakness as a risk, but it’s not real. And in contrast, she said at Bessemer, it was very clear to her, people were writing in the memo what they really think because they’re not asking someone else to make the decision for them, they’re explaining their decision.
Kent: [00:28:36] And we should also say that everybody is then, all the investors are invited into our Monday meeting. And so they all join that meeting. They all read those memos. And then because we’re not selling your potential investments at that meeting, you’re just discussing them. I feel much more open to tell Jeremy like, “Hey, I read your memo and I think you totally missed something. This is how I would have thought about it.”
And that’s not really threatening or offensive to them because he knows he can still do whatever he wants. And so we can have this open intellectual conversation, and everyone is there to hear it participate in it. Tell me if I’m wrong. There’s just a ton of that open dialogue in that couple of hours we spend every Monday together, and that’s a massive learning for all of us, even those of us who have been here for a long time.
…your taste in companies, what that term brings to mind and maybe even a little bit about how that taste was developed.
Kent: It’s funny because I think we have three different tastes, if I had to project on the two of you. I’ll start. Over time, Patrick, mainly as I’ve made some good but some bad investments. All of my learnings have come from my mistakes. And as I think about them, I’ve slowly honed in on when I’ve gone wrong, it’s that I haven’t started with just very clear radical product advantages. So the investments that worked have had such clear better products than the existing alternatives at the time of our investment.
Almost all the ones that have failed that was more of a question mark. Either the product wasn’t fully formulated yet or it was out there, but it wasn’t just a slam dunk in the minds of the people buying it or the consumer is using it. I’ve just honed in tighter and tighter and tighter on how can I get to the truth of is this product radically advantaged on day 1 and try to eliminate a lot of other noise.
So you can talk yourself out of any early-stage investment. It’s like really easy to get scared about something. You can find something to be scared about. But if the business has this strong fundamental product value on day 1, try to like screening for the other noise and not scare myself because of the market size. Are there some regulatory concern that could come up that some of those noisy things that I think have historically talked us out of some potentially great investments. So that’s my taste.
Jeremy: The thing that I typically fall for hardest is wild capital efficiency. I love investing in companies that don’t really need my money. I think that’s the dirty secret of all investing. And that was really true for a lot of the companies in which I invested. Although ironically, I think the most successful investment, I’ve been a part of from a Penney’s return is Pinterest, we invested in the Series A, which was maybe like an $8 million or $9 million investment in end up raising $1 billion of equity cap went public, which is the opposite of highly capital efficient. And so even sometimes you get led away from your original tastes.
Brian: From a business perspective, I think I over-index on path to market leadership. I cover vertical software. And in these vertical markets, there are these virtuous cycles. You’re the market leader. You’re the #1, #2 player. You get all the treasure. And so there’s no prototypical path to get there. I want to have a conversation with the team and understand how they see their path to market leadership.
As it relates to the founders, I think I index away from like prototypical 20-something-year-old tech genius who dropped out of Harvard or MIT, most of the founders I’ve worked with look a lot like Tooey, the Founder and CEO of Procore, older came from industry, built his business in Santa Barbara and not Silicon Valley, just deep empathy for the domain and deep caring for the customers. I think particularly in vertical software, that translates to long-term success.
Capital efficiency and office design
At the earliest stages, capital efficiency shows up in just a scrappiness and willingness to do things that are the opposite of gold plated. In fact, a slightly related anecdote. So within our partnership, as we’ve told you, we’ve got 20-ish partners, and we all have different views, there’s been a great debate over the years as to whether our offices should look like that of your typical dentist or if they should look like that of your typical fancy Investment Bank.
I’ve always been a fan of the dentist office, low key, unordained because when you work with scrappy entrepreneurs and they see you working in a scrappy environment, they’re like, “Oh, okay, I get it.”
Of course, the counter is, you want really fantasy offices to show people how successfully you’ve been, so they want to work with you. But for me, I’m all about the scrappiness this and at the early stages, you can see that in just the environment, the people, the team hires, they’re typically less experienced and riskier and cheaper hires.
Why they do content and how it benefits them
Kent: First of all, it just stems from the work we do to hopefully sharpen our investment judgment, and that’s probably the biggest benefit. And often, we will have an idea that we will circulate internally, and we won’t tell the world for a while because, oh, gosh, we’re paying attention to payments being bundled in the vertical software. Like why would we announce that the first couple of years.
Then the moment tips often where it becomes a little more obvious and we make the decision to launch that content externally where we can earn some thought leadership, it may drive some incremental deal flow when we do that. I mean we’re not celebrities. We are all pretty nerdy, not particularly good at self-promotion.
I think the most valuable thing it does once we launch that content is that when we meet entrepreneurs who are doing something that we’re going to like, they often see this welcome mat as they’re coming in the door that is a white paper that speaks to their business in a way that they’re like really nodding their head.
The number of times I’ve had a first conversation where there’s just a mutual sense of, okay, you understand what I’m talking about and you get this. That’s hugely valuable. It leads to some self-selection of the business models that are like Jeremy is going to understand my user-generated content business model, and I think may have them select us versus another investor who may not have already had that thought or at least put it out there.
Jeremy: The only thing on our website that we created just for the purpose of marketing is our anti portfolio, let me try to be funny. The rest of it is really repurposed. And sometimes we’ll modify it or polish it or us can’t then delay it before we put it out to the public, but we’re creating it internally anyway. And so it’s a free opportunity to show people more about who we are. And it actually does lead to people reaching out to us because we published something relative to them like, oh, I didn’t even know you invested in that area. I want to talk to someone at Bessemer.