BVP Partner, Byron Deeter: The Future of Venture - Why Chanel vs Walmart is BS

1. 0:00 – 1:18

   Intro

   1. BDByron Deeter0:00

      The stakes are way higher than they've ever been. I thought we understood this next phase we were going into, and how big this was gonna be. And very sincerely, we've probably added a zero to everything. I think there's (laughs) gonna be a lot of trillion-dollar businesses that are created from this. The game is on.

   2. HSHarry Stebbings0:16

      Ready to go? Byron, you know what, dude? I appreciate people who gave time when they really shouldn't have done to, like, 19-year-olds (laughs) who knew nothing and were so kind and supportive, and that was you. And so thank you for rejoining me when I am slightly older, but much less intelligent than I was. Um, it's great to have you back, man.

   3. BDByron Deeter0:50

      Uh, Harry, you big stud, it is great to be back. It is, uh, awesome to see you. It has been too long, but it is amazing to see what this thing has built into. So, congrats and, uh, thrilled to be with you today, my man.

   4. HSHarry Stebbings1:03

      Do you know what? I'm as surprised as everyone else, to be honest. (laughs) Um, I do wanna start there. We were chatting before and you said, "You know, a couple of years, um, hmm, but now it feels different and it feels great." And I asked you, this was not in this beautiful agenda here.

2. 1:18 – 2:24

   Why are the stakes in AI higher than ever before?

   1. HSHarry Stebbings1:18

      I wanted to start there. Why does it feel different and great now? And why are you optimistic bouncing into work today?

   2. BDByron Deeter1:26

      Uh, I mean, this AI stuff is just awesome. I'm a tech geek at heart and, uh, we all look a little taller and sound a little smarter when, um, there's an uptrend in a market. But, uh, this one's different. Like, this is, this is going to be the type of thing that we tell our grandkids about and that generations talk about this transitional moment. And, uh, it's absolutely awesome to be part of it. I, I think great businesses will be built and money will be made, but just from the technology side, what we're going through is so damn cool to see, and I'm just loving it. It, it's neat to see mind-blowing demos again and to be part of discussions of what can be, um, and things that you couldn't have conceived of a few years ago. And so it was, it was tough. It felt like a steady gut punch coming out of the, you know, the 2000s and, um, with the market pullback and people questioning tech and so many board meetings doing layoffs and just having to survive. Um, and i- it's just awesome to be back on offense again.

3. 2:24 – 8:09

   Is defensibility in AI gone for good?

   1. BDByron Deeter2:24

   2. HSHarry Stebbings2:24

      I agree in many respects. The challenge that I have though is the transience of wow, so to speak. And what I mean by that is, wow, that demo is amazing, this company is great. Three weeks later, new demo from a new company and, oh, wow, it really is quite average. It seems like the, uh, defensibility is completely gone. The commoditization is almost across everything. And so it's very difficult to know where to play. How do you think about just playing the game on the field, being aggressive because you have to, versus kind of pausing to see what shakes out?

   3. BDByron Deeter3:01

      So I would phrase it a little differently. I would just say that the pace of innovation is incredibly compressed right now, and the best teams are using that for their advantage a- and just iterating at mind-boggling rates, and the, the marginal companies are getting passed faster than ever. And we're gonna keep seeing that because the, the tech and the enabling tech is so damn good. Um, eh, I don't worry about commoditization in the sense of price erosion, which is often implied. It's often used as a derogatory term, but sure, you can think of, uh, perhaps foundation models as commodities in the way that hyperscalers are. And, and by the way, the best business in the history of software is sitting there with AWS in, in what people refer to as a commodity. And so I think the same playbook's gonna be run in the foundation models. I think that the layers on top of those models are gonna extract phenomenal value, um, because they're gonna deliver phenomenal value, and I think we're gonna see great businesses built at multiple layers in the stack.

   4. HSHarry Stebbings3:57

      To what extent do you care about margin when investing today? A lot of people are denigrating a lot of the specific app layer companies for having shitty margins. How do you think about the importance of good margins early when investing?

   5. BDByron Deeter4:13

      So, it was interesting how you worded the question. "How do you think about margins when investing today?" And I would separate, um, eh, I would add some words in there, which is, I care a lot about margins on investments we make today, but the margin profile of the future. And a lot of these businesses, um, that are doing transformative things may have really crappy certainly net margins, but more importantly where I think the question was going, gross margins, because of an investment profile that involves massive capex, um, et cetera. And so, eh, you can look at a business like a Snowflake that had negative gross margins very late in their, in their life cycle, um, and that was a, uh, a precursor to the LL- LLM world where these businesses have had, you know, uh, very tough gross margins in the early days and you're now starting to see the leverage kick in. And so, (clears throat) we are investing for the future. None of the investments we make, uh, are cash flow based in the short term. And in fact, very few of them are gross margin based in the short term, um, but a lot of them do require you to look over the horizon and see what can happen. And in a business like a, a Stripe or a Twilio or a Shopify, um, they went through those journeys as well. Um, many businesses have this really intense capital-intensive investment horizon, even outside of frontier tech.

   6. HSHarry Stebbings5:29

      When we think about, you said there, the capex required, these are in large part very capital-intensive businesses, even on the app layer, to the extent that we haven't really seen before. How do you think about the dilutive nature of these businesses, given how early we both are and how much cash is gonna need to go in?

   7. BDByron Deeter5:47

      Uh, we talk about this a lot, um, and I'd say, you know, we're excited in many cases to be small investors in very large companies. You know, you look at an Anthropic or Perplexity or a Canva, um, and we, you know, we have, you know, nine figures into, uh, into each of these companies, uh, and yet-... uh, we are still, you know, well below historical venture standards where you aspire to own 20% or something in these businesses. Uh, and it's a long journey where billions more will probably be raised by, um, by at least a couple of those. And so, it is a different venture-

   8. HSHarry Stebbings6:22

      Why, why did you decide to break the rules there, my friend? 'Cause there's always an opportunity cost of cash and you can put that nine figures somewhere else, and that multiple is just getting short. You know, I remember one of my friends in Canva and they did... Not Canva, Anthropic, and they did it at like four. And when it was done at 60, they had like a 3.8X because of the dilution, and that really struck me. And my question then is, well, amazing businesses and yes, generational defining, but the opportunity cost on that multiple is pretty high.

   9. BDByron Deeter6:53

      Uh, if-

   10. HSHarry Stebbings6:53

       How did you guys move up?

   11. BDByron Deeter6:54

       If you believe that's the end state, sure. But, um, you know, current, uh, reports suggest Anthropic may be raising at 170, and, uh, people are buyers at that number, believing that they could be one of the next hyperscalers in a trillion-dollar business. So, um, you know, 3.8X will keep you in business for a long time, but the reason to do it is because you believe it could be a 30X, and that's the basis of our Anthropic investment, is we believe that it is a generational company. Now, there aren't gonna be many of those, and so you have to be right, and that's the scary thing right now, is that the stakes are way higher than they've ever been, and these businesses, in some cases, could still go to zero. Uh, and so you've got this, uh, these hyper power law outcomes that are scary, and it is changing the nature of the game. I do think that scale matters from a... for venture firms to be able to play over this arc of private life. And on the flip side, the outcomes are gonna be bigger than we've ever conceived of. I mean, I, I sold my company years ago for hundreds of millions of dollars, and that felt like all the money in the world, and was the top outcome for our software cohort in that vintage back in 2005. You know, now that's a, a seed round for some of these businesses.

4. 8:09 – 9:43

   Investing Outside of Top 10 deals

   1. BDByron Deeter8:09

   2. HSHarry Stebbings8:10

      Well, I think one of OpenAI's rounds is about the size of the entire SaaS funding market for that quarter. So, you know, don't feel too bad. Um, my question to you is, I was chatting to Jason Lemkin before this, our mutual friend.

   3. BDByron Deeter8:22

      Exactly, he's really good.

   4. HSHarry Stebbings8:24

      What I'd love to really un- What is it? What I'd love to understand with him very much on this point is, when we look at the concentration of value, the concentration of funds, is there any point in investing outside of the mega top 10 deals today, given 40% of venture funding went to 10 deals?

   5. BDByron Deeter8:40

      It's a big landscape. And so there is a skew with the dollars raised stats because of, uh, that concentration. I think the numbers right now, the top three LLMs if you include, um, you know, Anthropic, OpenAI and, and X in there, uh, are gonna raise $100 billion in this six-month period. Um, which is just an inconceivable number by any historical standards. Um, and obviously people are betting that there'll be a venture return there. However, there are hundreds of other really compelling venture businesses that will be created in and around those ecosystems, and I do believe there will be great venture outcomes by, uh, from a number of companies in and around those businesses. And so the, the power law will play into the, the premium outcomes of those returns. But I also think there's a lot of, you know, 10Xs and many 100Xs that are gonna exist in and around those businesses. And so, um, I, I do think that the economy is still vibrant and healthy. It's just skewed much more than we've ever seen or, or literally could have believed, uh, just a few years back.

5. 9:43 – 15:05

   Is vertical SaaS dead?

   1. HSHarry Stebbings9:43

      Can you help me, my friend? I'm a vertical SaaS nerd. Um, not quite as good as you, sadly. Um, otherwise I would own sports teams too. Um, but my question being-

   2. BDByron Deeter9:53

      Give it time, Harry.

   3. HSHarry Stebbings9:54

      I feel like-

   4. BDByron Deeter9:54

      You're far too kind.

   5. HSHarry Stebbings9:56

      I feel like an old man, if I'm honest. Like, looking for the next ServiceTitan or the next Procore when everyone else is shooting around with these incredibly cool companies. Is vertical SaaS as we know it dead in the way that honestly kind of who gives a shit?

   6. BDByron Deeter10:13

      (laughs) I think it's a, it's a legitimate question. Our view is no, but it's, uh, it's an area of debate and frankly, um, alpha comes from not only being right but contrarian ideally, because you're gonna get some, um, you know, some counter cycles in there. And our belief is that it's going through another cycle. And AI is a foundational part of what vertical SaaS is ahead. Um, data models, uh, matter much more than they historically did. Um, connectivity and collaboration up and down the supply chain matter much more. Marketplace capabilities, um, are a defensible moat. There's a lot of attributes, um, that matter a lot. And as I think back on our vertical SaaS investments, you know, like a Shopify, um, or a ServiceTitan or a Toast, when they added payments, it became that big next horizon unlock for them, and really doubled the TAM and the market caps for these businesses. I think AI is gonna do the same thing. That what it can do, um, you know, with ServiceTitan as they talk about automating the technician experience and the ability to go out there and have a co-pilot alongside of you. I was at the MaintainX board meeting yesterday. They're doing the same thing, um, on the factory floor. When you look at luxury presence in real estate, what they can do for the real estate professional to interact with their clients. And so, uh, the competitive landscape is, is heating up in the sense that more entrants are able to come over from horizontals and come up from infrastructure layers to try to make a run at these spaces. But I do believe great vertical software will still win. These are big markets. These practitioners deserve great tech and they will get it. And so in many ways I love that it's not as sexy right now and people are distracted because we're gonna stick to, you know, our core and work with great founders and great markets, and I think that those will be rewarded over time.

   7. HSHarry Stebbings11:55

      ... couple of kind of questions off the back of that.

   8. BDByron Deeter11:57

      Please do.

   9. HSHarry Stebbings11:57

      You mentioned that, you know, some great businesses, but some businesses that are already at scale, that's different versus a company that's, that's sub-a-million in revenue with next to no distribution and next to no customers.

   10. BDByron Deeter12:09

       Absolutely. We're doing both, Harry. So, um, you know, we're, we're slicing up verticals.

   11. HSHarry Stebbings12:13

       But, uh, if I, if I were to push you in a camp, does it favor ServiceTitan more, or your pre-seed company more?

   12. BDByron Deeter12:20

       Okay. So, that's a great question, and I will, uh, confess, we're in the challenger business, and AI gives the incumbents some advantages that didn't happen in Cloud One. So i- in Cloud One, you had a business model dislocation, going from license to subscription, and you had a delivery model dislocation, going from on-prem to single instance multi-tenant, you know, cloud delivered. In this AI wave, it's really the next horizon of cloud, and so you're layering intelligence on top of cloud delivery and business models, you're moving maybe to a token model s- or some other monetization of value, but essentially it's an extension of cloud, and the incumbents have platform advantage, data advantage, you know, massive distribution advantages. And so the fast-moving incumbents are absolutely gonna make a run at being the leaders in the next cycle, which hurts the challengers, and that is a reason to be scared. I still believe that the e- high execution s- uh, challengers will beat them over time, and they also have some inherent advantages and innovators and elements, and some of those things still exist. But when I look at our own portfolio, I look at a, a company like a Canva or I look at a company like Intercom that's at a scale where, in some ways, they're already becoming an incumbent in those markets, and yet they're disrupting themselves at awesome rates and have AI products that are already, you know, deep into the hundreds, uh, of millions in revenue. A- and it's just fantastic to see what they're doing, which then I think will be an indication of what, uh, the public incumbents may be able to do if they're nimble and act fast.

   13. HSHarry Stebbings13:53

       I think Intercom will be actually a case study for the most aggressive, uh, re-acceleration, rejuvenation in a world of very changing technology. I know what-

   14. BDByron Deeter14:02

       Oh, it's so cool what, what Owen and the team have done with this Fin product, and it's a great use case for AI, to be clear, like where you have the customer data, that interaction. But, um, I was at one of our portfolio company board meetings the other day, and they mentioned that they had switched from, you know, human-based, um, uh, interventions to the Fin product from Intercom, and they showed the stats of, uh, deflections went up, I forget, to, you know, 90% automated now, and their NPS went up. And I said, "Okay, I get that the deflections and costs are going down, but it makes no sense to me. Why is a robot better than a human in interactions?" And they said, "Look, they're giving faster and more comprehensive answers." And so the, the recipient, the, the customer who has the question is getting, you know, they're getting links and references and more information back than our humans were providing, so it's a better experience. And that was an unlock for me where I realized, like, actually this can be a, a win-win-win on so many levels, and it's starting to happen. And so, you know, customer support and service and, and messaging and, a- and help desk and ticketing and these things, you know, is one of these killer use cases that's just starting, but it's gonna roll through so many other areas.

6. 15:05 – 23:39

   Will AI Reallocate Human Labor Costs?

   1. BDByron Deeter15:05

   2. HSHarry Stebbings15:05

      I think the fundamental question that Rory addressed kind of shit scale, I don't like to tell them, but they actually make me quite a lot smarter by hanging out with them.

   3. BDByron Deeter15:13

      (laughs)

   4. HSHarry Stebbings15:13

      But, uh, one thing that he's really taught me is that really the real question we have to grapple with in this next wave is, will AI fundamentally transition the technology that we sell and create into the labor budget, not just the technology budget, or will it remain in the technology budget? If it does move, w- f- amazing. We open up a tr- multi-trillion dollar market. If it doesn't, much less exciting. How do you think about that fundamental question of the ability to move to the human labor budget?

   5. BDByron Deeter15:44

      Oh, that question's already being answered. I, I, it's not even a debate anymore, Harry. It, it's over. Um, these, th- these tech solutions are absolutely addressing, uh, you know, software, hardware, and services budgets comprehensively, and they're doing it, um, in a very successful way. And if you look at, um, early adoption in categories that skew this way, and so you asked are we still doing, you know, early stage vertical SaaS, we're going down accounting and legal and medical, we're going through these sectors where there's a lot of, you know, front edge humans doing busy work and paperwork, and we're supercharging them. We're taking away a lot of the, the manual, you know, transcription and summarization and error-prone laborious processes, and we're freeing 'em up. You know, Abridge is freeing doctors up in their patient interactions to actually interact and talk with a patient than having to turn around and type things into the, into the computer for most of the meeting.

   6. HSHarry Stebbings16:40

      Okay. That's a really interesting topic, because what struck me there was Epic coming out and saying, "Hey, we're gonna offer transcription." And I think you'll see this more and more, where the incumbent is fighting back. How do you think about that fight back from the 30-year-old incumbent?

   7. BDByron Deeter16:58

      Uh, it... The game is on, and I think that, you know, Epic has had this, this wonderful, uh, state-e- endorsed monopoly for a long time. I hope that they're gonna continue to be forced to be open as a system, and I think you're gonna s- see a thousand flowers bloom in the medical ecosystem, because that is one of the most important areas for AI to address. Uh, if you read Dario's, um, essay from Anthropic, Machine's a Loving Grace, I highly recommend everyone reads it, but it's a, it's a tech optimistic outlook of what AI can do. And one of the great statements he has is that 100 years of medical research is about to be pulled forward in the next decade, and so this certainly goes into diagnostics and treatments, but it also goes into patient care interactions. AI can be so damn powerful when you, um, use it to help patients in, at the point of treatment, at the point of care, for follow-ups, for, um, preventative medicine, those sorts of things, um, and Epic holds the key in terms of patient data that we need unlocked. And, um, a- and we need that treasure trove to be accessible for these apps and for innovation to happen, and I think it's gonna happen, and I'm, I'm very bullish, uh, on the potential for AI in medical use cases and healthcare more broadly to-... be utterly transformative into quality of life, um, and, uh, the- the treatment processes for patients.

   8. HSHarry Stebbings18:15

      We mentioned about moving into the human labor budget. We've seen, I mean, one of your companies, Shopify, uh, unbelievable, like 91% revenue growth in the last few years with a 30% reduction in workforce. You're seeing Alex Karp say the same thing at Palantir, reduction in workforce, massive (laughs) growth in revenues. Are we seeing the era completely where it's dramatic reduction in workforce and optimization of revenue, more with less, ruthless leadership on this behalf?

   9. BDByron Deeter18:48

      We are. I just would push back on the, on the ruthless leadership point in the sense of I, I love the statements these executives are making, which is, um, "We're going to, we're gonna give you all the tools in the world to supercharge your daily job so that you're doing the cool stuff again. You're doing the strategic, the architecture, the direction. Tech is gonna work for you. You're not gonna be a slave to tech, um, and it's gonna enable you to have much more leverage. We're gonna grow the business, but we don't need to grow the workforce to do it, and we're gonna supercharge what everyone's doing." And so I think we're gonna see the era of the micro-business. I think that we're gonna have, you know, 10-person companies that are crossing billion-dollar valuations. And, you know, kids in schools are gonna be able to launch businesses in real time in, in ways that, you know, haven't been possible before. And so I, I think that is great for the economy. I've got three kids that are at various stages of entering the workforce. And so there's gonna be a disruption, and that's scary, and I absolutely admit that, um, that we're going to go through this cycle that we all need to understand in terms of what entry-level jobs mean, the training, the enablement, those sorts of things. Um, but society's been through this many, many times before, and I believe that we will w- work through this cycle quickly and positively.

   10. HSHarry Stebbings19:59

       You said that at the beginning when we chatted, you know, "I hope you've still got that kind of, you know, youthful naivety." Um, uh, sadly, no. Uh, in Europe, we say (French) , um, you know, "To the trash." Um, I'm really concerned that there's this generation of 23 to 30-year-olds who don't have a passion for the craft, who aren't experts in the craft, who are about to get hit by... I, I think it's this completely naive utopian view of like, "Oh, we're just gonna give you tools. You're gonna do more with, with them, and how beautiful..." It's a reduction in force, Byron (laughs) . It's not like, "Hey, just do more." Toby's cut thousands of people, which has been a good decision for the business. But these 23 to 30-year-olds are about to get hit with a train. Do you disagree?

   11. BDByron Deeter20:45

       There's this, uh, awesome history going back to, uh, Bessemer Venture Partners' namesake, the Bessemer Steel Process, which, uh, many people don't know. You look at newspaper clippings from 100 years ago, and there's, uh, these great headlines and articles about the coming workforce dislocation and factory workers, you know, being displaced because the Bessemer Steel Process is so much more efficient and the, the struggles the economy's gonna face and society's gonna face. And yet literally fast-forward, you know, a v- a few years later and buildings are built into the sky because skyscrapers are now possible with stronger steel, and railroads are built across the US, and transportation and connectivity and commerce unlocks. Um, you read the articles about, you know, the phone operators, and I think it was 4% of the female workforce was, um, doing manual switchboards and this idea of this huge dislocation of the workforce when that was automated. Um, you know, there's, there's hundreds of these microcycles that have gone through with different tech disruptions and things. Um, it's coming, definitely, and at the same time, more opportunity is gonna be created as a result. And the potential for these new workers to leverage technology to do amazing creative things, the, the micro film producer that can now, you know, release a, a, a movie that they can create on a laptop, the, you know, the ability to do apps, the ability to do fundamental research with agentic PhD-level supporters in new areas of, you know, biology and physics and chemistry. Um, we're, we're looking at, you know, fusion investments now that I think will be supported and accelerated by, by AI. Uh, there's just this whole different wave of innovative unlock that will be possible, that will favor the, the nimble and the reactive and the dynamic, but society at large will benefit.

   12. HSHarry Stebbings22:33

       You make me feel like I'm being too negative, Byron.

   13. BDByron Deeter22:35

       (laughs) It's a- it's an active point of public discourse. I, I get it. Um, I also, by the way, don't agree in the fully utopian era of abundance where we're all gonna sit back and, and, uh, you know, consume the arts and the robots are gonna work for us. Uh, uh, it would be good for sports team investments, uh, with a lot of leisure time for, uh, arts, entertainment, and, and sports. Uh, I don't, I don't go that far. But I do think we're gonna get some hours back in the day. I think we're gonna have a little more balance. And I think that, um, we're gonna benefit in, in areas like, like medical that we talked about, like education, where everyone can have a personal tutor and, and everyone will be able to have tailored learning pathways, um, for their benefit. Um, and again, in, in fundamental areas of scientific research, um, you're going to be able to merge fields where, you know, agentic PhD-level, you know, chemists and biologists and physicists will be working together at your side, um, to unlock things i- in ways that weren't conceivable.

   14. HSHarry Stebbings23:29

       We mentioned kind of the naivety that I've lost or the cynicism that I've gained, whichever way you wanna put it. I, I-

   15. BDByron Deeter23:34

       It's sad to see, Harry. Come on. (laughs)

   16. HSHarry Stebbings23:37

       Na- n- uh, yeah. Sorry,

7. 23:39 – 29:16

   Is treble-treble-double-double now too slow for AI companies?

   1. HSHarry Stebbings23:39

      dude. Um (laughs) , uh, D- Dario's writing is brilliant, but, you know, optimistic to say the least. Uh, I think he'd just raised a new round when he wrote it. Um, but m- my question to you is, I have been raised in this business, and as part of that, there's rules that are ingrained in you. Now, one of those rules is treble, treble, double, double, you know, the SaaS compounding growth, uh, journey. And I look at that, and I worry that what we've told founders with treble, treble, double, double is no longer enough.Do you think that is correct and we have now misled founders and that isn't enough now?

   2. BDByron Deeter24:18

      Don't get me wrong, it's still a pretty damn good business if you ride that arc and scale it. But, um, unfortunately, yes. Uh, w- we just released a state of the AI report that broke this down and quantified it. And, um, we, uh, w- we're again geeks at heart, so forgive the, uh, uh, st- um, uh, the analogy, but we, we referred to these AI ecosystems as galaxies and talked about, um, some of the supernovas and shooting stars (laughs) that are emerging where, uh, we're seeing businesses go from zero to 100 million in 1.5 years. That's the supernova profile. Um, and, you know, Dario at Anthropic's now been open with it, they're well past it so I think he's more comfortable sharing the numbers, but, you know, zero, 10 million, over 100 million, over a billion the next year, and, you know, he's openly said there's a chance to cross 10 billion, um, in the next year. And so i- it is, it- it's a curve (laughs) that goes like this. You know, we used to have this chart in our State of the Cloud report that had a seven-year journey and, and those were centaurs to 100 million, um, that, that, that has pulled in-

   3. HSHarry Stebbings25:29

      I do not remember it was zero to 10 million in like 18 months, was like holy shit, go deliver the term sheet with, you know, a dog and a golden, you know-

   4. BDByron Deeter25:37

      Yeah. Th- that's cute now, but it's off by an order of magnitude. T- to be fair these are the, um, th- this is a rare class of company and a rare breed, um, a small subset of even the companies we back, nonetheless all the companies that are started meet that profile, but we thought it was important to document and share it and say like, "This is actually possible now." Consumer-like growth for enterprise businesses is happening where, um, adoption curves can pull through great products in, um, inconceivable rates and, eh, of adoption and, uh, speeds. And the supernovas then, you know, yield to the shooting stars which is kind of a four-year profile and I would say that's, um, the fatter part of the curve for businesses we're fortunate to work with where you, you see a pretty good number of companies going from zero to 100 million in a four-year arc. A- and again, that's a, you know, that, that gets to this kind of quadruple quadruple, um, type cycle where the, the businesses are just, you know, scaling really steep curves. Um, and you had asked earlier about margin profiles. Some of these, um, early on are needing to invest at heavy rates, but, you know, far from all of them. You see a large number of these businesses that are doing it in pretty capital-efficient ways and that gets incredibly exciting. You know that you're a data nerd like me, we talk about the, the rule of X and these trade-offs between growth and efficiency and all that, and ultimately we do still believe that all businesses should be valued as a sum of their future free cash flows and that that ultimately is the mark of a good business. And the, the incredible thing is that these businesses still have those fundamental economic profiles in most cases where they can throw off real cash flow at scale.

   5. HSHarry Stebbings27:21

      But if I'm a founder now listening to you, what you're telling me is, hey, take as much money as possible, invest in fucking growth as fast as possible, and don't worry about margin?

   6. BDByron Deeter27:32

      So, so actually no, and that's why I wanted to make that second point that efficiency still matters. We do think that trade-off comes into play when you quantify it. The rule of X mathematically shows it's, it's about a two to two and a half X, um, multiplier value of growth over efficiency at mid-stage scale, call it 50 million ARR or so. Early on, you know, the math doesn't matter much, you're, it- it's hopes and dreams and you're just trying to get in market, so it's an infinite multiple of anything. Um, but when you actually get the engine going, there should be math, um, underlying the fundamental assumptions. And, and I assure you one of the coolest things about (laughs) the profile of Anthropic and Perplexity and Canva and these businesses is the math actually pencils out. Um, and y- you'll hear these founders talk about like in the foundation model phase, it's a bit misleading because, um, the, the, the P&L doesn't match beautifully but you should think of these model releases as a product in and of themselves and there's a healthy life cycle to that product. And so, you know, you, you're monetizing last year's, um, training in this year's, um, revenue line while you're investing in next year's model which is gonna be, you know, monetized in, in next year's release. And so there may be these order of magnitude step functions where each atomic unit of product is highly, uh, you know, successful and profitable and yet the P&L looks upside down because of this, uh, hyper-scale, no pun intended, uh, growth rate that they're enjoying in that forward investment cycle. And so even though it seems crazy, I believe it would be economically imprudent not to forward invest, um, when you have that market demand there and when you can show the unit economics working at each fundamental level.

8. 29:16 – 39:17

   From Incremental to Exponential: AI’s Scaling Curve

   1. HSHarry Stebbings29:16

      Totally agree and totally get you there. Can I ask you, a lot of people think that the excitement, although very real, will plateau in some respects, and that maybe GPT-5 is the first instantiation of that kind of incrementalism in terms of development. Do you agree in terms of that incrementalism coming? What do you actually think, given what you see today, we're still so early on the curve that actually more compute in the way that we're seeing Elon and Dario require it will lead to actually continuous exponential gains for the near 18 to 24 month future?

   2. BDByron Deeter29:49

      It, it's gonna be fits and spurts. And I think that was part of the people being underwhelmed with the 5.0 release and discussions, but, you know, we've had these cycles before. And there will be, you know, breakthroughs. But fundamentally, I do believe-

   3. HSHarry Stebbings30:01

      Does it remind you of other cycles? The thing I love about you is your wisdom, honestly. You've seen so much.

   4. BDByron Deeter30:06

      Yeah.

   5. HSHarry Stebbings30:06

      Does it remind you of other cycles?

   6. BDByron Deeter30:08

      Uh, it does. And there have been, there have been some hard miles here. We've been through a lot, Harry. Um, but the, the curve is still up and to the right, without a doubt, and I do believe that we will cross over this term. You know, people use, um, you know, uh, various different terms about, uh, you know, w- levels of reasoning and awareness, and, um, a- and AGI and the like. Um, I, I have no doubt we're, if we're not there, we're gonna blow past it, uh, very soon, and that we will get to this notion of, you know, higher level reasoning that does mirror, you know, the world's smartest scientists. And I think that's coming in the next 18 months, um, and that these curves are gonna continue. How we harness that, how it, um, instantiates itself will be, you know, the, the opportunity for us all to figure out and monetize. But, um, I, I don't think it's slowing down. Uh, I do think that we're also getting many more hardware approaches and solutions out there so that it's not, uh, as wonderful as NVIDIA is, it's not just an NVIDIA world anymore. Um, and the chipsets from Amazon, Google, and AMD and others are, um, becoming quite capable. And so you're also going to see, um, you know, different approaches, different optimization paths, you know, innovations in technology that, that unlock, uh, leap aheads in terms of, uh, training capabilities and, and cost to deliver inference. Uh, and so, uh, I do think that we're gonna continue to see innovation there, um, and these scaling laws continue to hold.

   7. HSHarry Stebbings31:33

      You know what I, I find really interesting that's changed a lot in my 10 years investing is levels of competition. I'm sure you remember when, 10 years ago, there'd always be one other competitor and you'd, like, hate them, you know, silently, because it's rude to hate them publicly. Um, and, uh, you know, there'd be one or two. Now there's 15 in every single thing. How do you think about them? How does that factor into your thinking when making investments?

   8. BDByron Deeter32:02

      Yeah, the social graces are gone, aren't they? It's kind of a bummer.

   9. HSHarry Stebbings32:05

      Yeah.

   10. BDByron Deeter32:05

       Uh, for one, I would say-

   11. HSHarry Stebbings32:07

       It's like, it's like the way, the way to win, Rory says this really well, which is like, the way to win in AI, enter a space and just, like, scream the fricking loudest and then, like, deliver on com- customer promises afterwards. But scream so loudly and raise as much fricking money as possible then, suck all the air out of the VC room, and then deliver from there. Like, Harvey is a good example of that, uh, he's mentioned. Interesting.

   12. BDByron Deeter32:32

       Yeah, I think that works in some spaces. Um, h- I, I think that's counter-

   13. HSHarry Stebbings32:37

       I think as well for Bridge.

   14. BDByron Deeter32:38

       ... my earlier point though, which was, um, the great products are being pulled through. People are finding them. Um, you know, ChatGPT didn't scream from the mountaintops. They, they delivered a, um, world-changing user experience and people showed their friends. And, um, Perplexity is doing that in, um, in search and answer engine world. And, um, these models, you know, at the API layer are doing this for business users who are, um, looking to connect them. And so I think the capital's important in terms of, of building and forward investing, as we talked about for the business model, but I actually think marketing and sales have less of a role in this new economy, um, than they did before. And that, uh, these products, in many ways, are, are selling themselves, and product-led growth and innovation is the unlock for, um, th- this, you know, supernova and shooting star aspirational growth profile, because you can't put, uh, human sales reps against these things. Just, just the, um, the, the sales learning curve that Mark Leslie talks about when we backed him, you know, decades ago in Veritas, i- is no longer applicable because you just can't possibly throw the bodies at a zero to 100 growth curve inside of two years. Um, just the, you know, the sales, uh, models don't support that.

   15. HSHarry Stebbings34:00

       I totally agree with you there. One of the things I love about Bessemer is your discipline, actually. And I think you've seen it play out across multiple cycles. I think people consistently think you're a very disciplined player, be it in terms of temporal diversification, in price. You've had to break that discipline (laughs) in a new cycle. I'd just love to understand, how do you think about breaking pricing discipline today, where respectfully you have in the names that you mentioned, and how do you think about when you're willing to versus when you're not? Is it clearly just an outcome scenario planning game?

   16. BDByron Deeter34:34

       So, um, y- thank you for the... I, I think what, uh, it was meant as a compliment, but I'll also say that, um, we spend a lot of time-

   17. HSHarry Stebbings34:42

       It turned into a bit of a negative. I'm so sorry. (laughs)

   18. BDByron Deeter34:43

       No, it's, it's, it's fair. And what I would say is, um, I mean, we're certainly not value investors. We, we pay market clearing prices. We, we, um, lean in where we believe it's there. And, and, you know, we're, we're, uh, we're buyers again in, uh, in, you know, at some of these top pegged rounds deep into the hundreds of millions. Um, and so, uh, I think it's very clear that we, we, uh, we play to win.I think the, the distinction there is that, um, we are, we do fundamentally wanna understand how the businesses become self-sustaining and scaled. And we will walk from a lot of things that w- we don't see the unit economics penciling. One of the most famous and most painful for me was Tesla early on. It's on my anti-portfolio. If you go to the Bessemer website, we have a page dedicated to our screw-ups, and that's one of mine. And it was because, uh, I couldn't fundamentally see how the unit economics of the Roadster were ever gonna work. And, to be clear, they didn't, and without the, you know, the DOE bailout loan and things, Tesla wouldn't have existed. But what I missed was that Elon's a force of nature, a generational entrepreneur, and he put that company on his back and powered through so many subsequent layers that the next arcs of the model worked and pulled everything else through it. And that's one of my big regrets, is that our, our job is to see that potential in entrepreneurs to, um, to create those unlocks, a- and that's the challenge that I put back on myself, is how to, how to break this notion of short-term discipline, um, for the long-term horizon of what's possible.

   19. HSHarry Stebbings36:15

       What price does, do you do Perplexity at, then?

   20. BDByron Deeter36:18

       I mean, we've done the last several rounds. So, um, I, I forget the valuation of the first round. I give, uh, Pete Sonnsini, by the way, a lot of credit, who's a good friend and a great investor. He also did Databricks. But he was very early, uh, with Arvind, um, as that business was being formed. We did the, the, I believe what was technically the second round. Um, uh, so I, I think that was branded a B. It may have been technically an A, and then, and then subsequent rounds. But again, I wish we were earlier and larger shareholders, and still regret that we didn't see what, what Pete saw early in that business.

   21. HSHarry Stebbings36:49

       Do you think about taking chips off the table at any point? You know, we're seeing the extension of private m- I'm not talking about Perplexity here, but just generally.

   22. BDByron Deeter36:56

       Yeah.

   23. HSHarry Stebbings36:56

       We're seeing the extension of private markets, um, in a way that we've never seen before. You know, Horsey Bridge taught me that, you know, fundamentally, venture's a very challenging category or asset class unless you know the small windows of hyper-liquidity and can recognize and act on them. Do you think we are in one of those small windows of hyper-liquidity in these assets today? And do you act on them?

   24. BDByron Deeter37:20

       I love that question, and I hope you continue to ask that question to, um, to LPs and later-stage investors as well because it's looked down upon right now. Um, you know, it's sort of a dirty word. If, if we went and sold, um, you know, a part of our position in some of these companies, people might think there's signal risk there or there's issues. Um, and to be fair, Bessemer has th- you know, this awesome, um, history and we've generated billions for our LPs, and so w- we don't have DPI pressure that some emerging funds might or whatever. But, um, I, I think that stigma's wrong. And if, if these businesses went public, um, as they used to... I mean, my very first IPO, Cornerstone OnDemand, you know, went public with 50 million of ARR and I think with 700 million market cap, and they traded up to billions over time, but, you know, that used to be a really successful IPO back many years ago. Um, and now you look at, you know, Canva, you know, 40 billion-plus and Anthropic at, what, 70 billion-plus? And Perplexity, you know, uh, uh, deep into decacorn status and, like, these businesses, you know, aren't going public any time soon. And yet, from an, uh, an investor standpoint, there's a, there's an argument that they should be handed off to later-stage investors and hedge funds and things. Um, and so I do hope and believe for the industry that liquidity in the secondary markets is, is viewed more favorably and more active. And this is a change in my view. I'll confess that, um, I, I was pretty hard-lined against this. Not for founders and teams. I always feel that taking some pressure off of them is good. But I didn't love it when our co-investors were looking for liquidity, uh, early in businesses. Um, but I do think that in these mid-stages when people are st- staying private so long, that an outlet's healthy. And I do think that LPs, uh, deserve that, and I think for emerging funds, um, it's important that you have these options and that, uh, the world doesn't judge you negatively for it but actually understands that, you know, there, there's some economic necessity in, in a healthy ecosystem, and capital flows both ways.

9. 39:17 – 49:57

   From Private Valuations to Public Markets

   1. BDByron Deeter39:17

   2. HSHarry Stebbings39:17

      For years, you've had a pricing premium in private markets, which has led in large part to the extension of these private markets. Now you're seeing that move to the public market and you're seeing your Figmas pop in the way that they do, your Core Weaves, your Circles, your Bullish pop yesterday. My question to you is, will we see this mass movement towards public markets-

   3. BDByron Deeter39:41

      (laughs)

   4. HSHarry Stebbings39:41

      ... given the reception that this first wave has had?

   5. BDByron Deeter39:44

      Oh, I hope so, Harry. God, I hope so. Um, it, definitely the discussions are heating up again, uh, and I do think we're gonna have, um, a healthier IPO market, uh, at the end of this year and, in particular, going into next year, but in many ways, we have to. It has been, um, record lows and record bad in the last several years, and, um, and that's not sustainable, uh, for the capital flow reasons we just talked about. Um, and this liquidity discount hasn't made sense. If you go back, um, in the markets a decade-plus, private markets traded at a discount because they're, they were illiquid and, um, there was uncertainty and less disclosure than those things. And, and logically, they should. Now it's a growth-adjusted discount. Of course, when private companies are growing faster, you have to normalize the, the multiples accordingly. But rationally, there should be a discount, uh, for the, the lockup characteristics and, and the information flows and those things, and, and we haven't seen that in many years. Um, I hope and would love it if the public markets, um, return to premium multiples and the private markets price off of those. I'm not convinced we will, but I am optimistic that we are finally gonna see more IPO activity. When you look at our Cloud 100 list, which will be, uh, released here shortly, um-... uh, I'll- I'll give you a little bit of a spoiler, um, uh, piece of news there. We're over a trillion dollars in private market cap now among just the top 100 cloud AI companies right now, um, i- which is, uh, just a astronomical number, uh, to consider. And so, there's a trillion dollars a month-

   6. HSHarry Stebbings41:22

      How much of that is legitimate, do you think?

   7. BDByron Deeter41:24

      What's that?

   8. HSHarry Stebbings41:24

      A trillion... How much of that is legitimate versus synthetic hype?

   9. BDByron Deeter41:29

      Uh, it... I think this is entirely legitimate, Harry, and that's the, that's the crazy thing. Now, of course, it- it's skewed towards the top. I think OpenAI, Um, X, uh, um, Anthropic, you know, Canva, Databricks, Stripe, go down the list, um, I think (laughs) those are incredibly high-quality companies that essentially are- are tradable public entities in a private wrapper today. So, I think that those are entirely accurate marks and- and very real, and the quality (laughs) level of this list has never been higher. And so, uh, I would, um... I- I think there's buyers and sellers at the marks all the way down the top 100. Now, you can make a case that, you know, 101 to 300 may have some walking wounded, some, you know, last round prices that are artificial, and the like, but I think we've cleared most of that out of the system. And when you look at, uh, uh, Mr. Irrelevant, if you use the NFL draft analogy, number 100, it's an awesome company on the list. It- it's a great business that, uh, you know, certainly people would be buyers at or above, um, the- the last round marks, and I think you're gonna see it across the list. And so again, there's a trillion dollars of enterprise value sitting there, um, that's not yet in the public markets and- and should be soon.

   10. HSHarry Stebbings42:38

       You said, like, we're not gonna see, like, your Canvas go out soon. Why? I said this to Cliff. I messaged him after the Figma IPO, "They should go public."

   11. BDByron Deeter42:49

       Uh, uh, they should and I- and I think they will, so I'm not, uh, not scooping any news. And I put them in a, in a general basket of very short term, um, meaning, you know, in the- in the Q3 window or the like, um, but clearly they could've been public long ago, um, and they're in no rush. And they, of all founders out there, are thinking incredibly long term. Um, the- the- the ultimate giving pledge that they did, giving away 30% of their- their economics, um, for, uh, for, you know, not... for public good including, um, you know, a lot of initiatives in- in Africa, um, uh, I think shows-

   12. HSHarry Stebbings43:21

       I told- I t- I told- I told him he could've just done the giving pledge to my funds.

   13. BDByron Deeter43:25

       (laughs)

   14. HSHarry Stebbings43:25

       It's okay.

   15. BDByron Deeter43:26

       Y- you would have absorbed the, uh, the 30 billion happily. See, Harry? The power of philanthropy at

   16. HSHarry Stebbings43:31

       ...you know, I- I- I- I- I would- I would- I would help a friend, Byron, okay?

   17. BDByron Deeter43:34

       (laughs) .

   18. HSHarry Stebbings43:34

       I'm here. Do you-

   19. BDByron Deeter43:34

       You couldn't have deployed more than 29 billion, Harry. Don't get greedy. Come on.

   20. HSHarry Stebbings43:39

       Well, I- I could. Sam, do you want it? Yes, please.

   21. BDByron Deeter43:42

       (laughs)

   22. HSHarry Stebbings43:42

       (laughs)

   23. BDByron Deeter43:43

       Oh, so... Uh, it's amazing how many SPVs have popped up with that exact value proposition. Uh-

   24. HSHarry Stebbings43:48

       Oh my God. I... It's like there's a wrapper on a wrapper on a wrapper, and my dentist is doing it now.

   25. BDByron Deeter43:53

       (laughs)

   26. HSHarry Stebbings43:53

       I'm like, "Okay."

   27. BDByron Deeter43:53

       I have no doubt when, uh, uh... and that is probably another sign that things may be a little heated, um, but, uh, but I do think that- that great companies ultimately, like Canva, you know, deserve to be public, will be public. Um, they've hired a great CFO in Kelly. They're, um... you know, they're- they're certainly giving indications that they're headed that direction, but they- they continue to think long term. And they have, uh, made it clear to investors that they do not want a short-term mindset, and we bought in. It's one of our largest investments in our firm history. We're hundreds of millions in, and we're thrilled to- to be part of it. And so, uh, they keep building value and, um, we believe that it- it will be a great public company when they choose to go public, um, but, uh, but, you know, the- the urgency level there is, um, i- is moderate.

   28. HSHarry Stebbings44:39

       What is your largest investment? When I had Founders Fund on, they said it was Anduril. It was their first and their second largest check (laughs) . I was like, "Whoa!" Uh, one thing to be your first, but your first and your second? W- what's yours?

   29. BDByron Deeter44:53

       That's awesome. Um, so it used to be Twilio, um, then, uh, you know, probably StubHub, Canva, Anthropic, um... yeah, probably- probably that bucket. We're... we- we now very comfortably go deep into the hundreds of millions. We understand that, you know, these- these rounds have gone, grown to a point where scale does matter and we need to be able to support our companies all the way up, and so we've- we've added a, you know, growth capabilities to be able to do that. And-

   30. HSHarry Stebbings45:28

       D- d- did- did you have to learn to get comfortable doing that, Byron? You and my friend, like, if I was to write, like, the transition from a $20 million check, which is an awful lot of money and we're both very grateful to have the luxury to write them, but that to a 200 million, whoa.
10. 49:57 – 58:20

    Reflection on Byron’s Mistakes

    1. BDByron Deeter49:57

       and we're aligned.

    2. HSHarry Stebbings49:57

       Peter Thiel always says his biggest investing mistake is not doing the next round of Facebook. If I were to ask you what was the biggest mistake you made when you didn't double down again, what would it be and how do you reflect on that personally?

    3. BDByron Deeter50:11

       Oh, I mean, (sighs) uh, not only do I have the anti-portfolio of the misses that we didn't do, the, you know, the Tesla, and Atlassian, and companies like that front and center.

    4. HSHarry Stebbings50:20

       (laughs)

    5. BDByron Deeter50:20

       But, um, but yeah, doubling down on, on every (laughs) one of our winners. I mean, I'm fortunate, I, I think ServiceTitan was my 13th IPO. Um, and, uh, you know, have, have a couple dozen unicorn investments. And so, um, mathematically, every one of those I should have done every subsequent round and wish I did.

    6. HSHarry Stebbings50:39

       Is there one that comes to mind more?

    7. BDByron Deeter50:41

       So, um, (sighs) I would say on the positive, um, Twilio we did exactly this. I would say with a company like Procore or ServiceTitan, we, um, we still were very large shareholders but we had a lot of, um, a lot of people come in follow. And I think this was one of the things, actually you talked about vertical SaaS, so there is a good lesson in this. We underestimated TAM and weren't sure these could be $50 billion businesses because we didn't yet unlock the payments expander. And so we misassessed the, um, the total TAM, and therefore got weak need investing, you know, into the billions, and we should have. But we left a lot of money on the table. We owned 28% of Shopify and Twilio at IPO, and we owned, you know, well less than that of, uh, of Procore and ServiceTitan just because we, we, you know, i- included a lot of other investors downstream.

    8. HSHarry Stebbings51:33

       Market size misunderstanding, misestimation, is the single greatest reason why great investments are not made. Do you bother doing outcome scenario plans given for your best you wildly misread them?

    9. BDByron Deeter51:47

       N- not only do we do it, we require it. Every one of our, uh, IRs, investment recommendations is, uh, is our memo terminology, has a center analysis at the end. And, and we also have actually published, uh, many of these on our website where we'll go back and publish the memos. And it's kind of embarrassing when we do because you look at the just goes nuts upside (laughs) scenario, and they're embarrassingly small. And it's not because as investors at the time we don't believe that they could be much more, but we're trying to be rational and we're trying to, you know, bracket it in like a, in a medium term horizon that our partners will understand. And, and yet the tiebreaker of these deals is always the one that you in your gut believe can just go nuts, and where the 100X scenario is there. And so, i- it's always this amusing back and forth where m- the vast (laughs) majority of our deals that we put forward, you know, solve to a 3X. And you're sitting there and you're like, uh, y- you know, you look at these scenario analyses and it's like, "Why is it that every memo I'm reading solves to a 3X?" And it's because, you know, people are trying to balance and be rational and talk about capital loss and all these things, but at the end of the day, the deals that get done, it's the ones where the, the, the partner's sitting there saying, "I'm pounding the table that, that the high end and more is possible." And, um-And- and that's- that really is the- the qualitative overlay that has massive quantitative implications.

    10. HSHarry Stebbings53:07

        But if you think about the mistakes that have been made in terms of the misreading of markets and TAMs, is it not actually detrimental to the quality of your investment decision-making if we consistently misunderestimate or underestimate them?

    11. BDByron Deeter53:22

        It- it's incredibly detrimental. Um, and, you know, you go back-

    12. HSHarry Stebbings53:26

        (laughs) That's amazing.

    13. BDByron Deeter53:26

        ... go back and look at, you know, the Facebook.

    14. HSHarry Stebbings53:29

        (laughs) .

    15. BDByron Deeter53:29

        If you did a TAM analysis on, um, you know, Harvard, you know, Hot or Not, it would have been pretty small. Um, when-

    16. HSHarry Stebbings53:35

        But then- but- but then I- I- I go to what Jason Lamkins taught me, which is, like, "Don't do it, don't do it." He's like, "Hey, you know what you do? You go, is the founder world-class, one. And then, two, can I see a 3X by the time of the next round? If I can, do the deal." World-class founder and I can see it. Don't try and think, "Is Twilio gonna be a $10 billion business?" 'Cause t- no one thought Twilio would be a $10 billion business (laughs) . Now, it's much bigger. Just do the 3X.

    17. BDByron Deeter54:02

        Yeah. And so I (sighs) I don't fully concede that, which is, um, e- and maybe the- maybe the tiebreaker here in my mind is I look for at least exciting adjacencies. So you've got to have some killer unfair advantage to get started. You've gotta have this mindset of, okay, they know what they're gonna go attack first. They're gonna build a killer product they can get into some vortex of growth and- and launch. And the... I may have a lot of questions about the TAM, but there's enough adjacencies, enough things that could go right, that they could layer things on. And so, you know, I wanna see the- the- the three-dimensional cube of- of segments and products and users that- that can flex over time. And we don't have to have it figured out. We don't have to know exactly what it's gonna be. But I have to believe that they're playing in a big enough pond where, you know, good things can happen, and I- I think that's the difference. And I will totally concede that- that there are times where we're not imaginative enough to go after it, um, and great founders will- will break through at times. But I think that combination is still powerful, and- and the investments that we're making today, and certainly that I'm making personally, tend to still overweight massively those two things, you know, team and TAM, and- and at least our vision of the TAM horizons. But I would say, um, like the analogy we were talking about, a vertical SaaS before, where you go through workflow automation, then you go into payments, now you go into AI, and you go into services, like, even what seem like small markets can unlock massive dollars when you're creative about the horizons, and- and that's what great entrepreneurs will do. They'll- they'll go attack those markets, suck up the value, and really deliver awesome product, and- and can build great businesses. And- and as long as you, you know, you price things rationally at each step and walk it up, um, uh, it probably back-solves into Jason's math also, but from a top-down rather than bottoms-up point of view.

    18. HSHarry Stebbings55:55

        I- I think the unwavering lesson is truly great founders always find the sack in that. The payments for Toast, which completely unlocks a business that was never there before. You said about 28% of Shopify at IPO. My question to you is, famously, you guys sold pretty early, and the outcome since has been so astronomically larger than anyone anticipated there. Do you sit and reflect on that as a partnership and change your go-forward stance on liquidating positions once public as a result?

    19. BDByron Deeter56:27

        So importantly, we distributed early. We didn't necessarily sell. So what we did is we gave people the choice. Um, and a lot of our LPs, mind you, do sell, um, pretty quickly after getting stock by mandate, and so that, um, that did, uh, you know, that left a lot of money on the table for a lot of folks. We absolutely wish that we had, you know, held onto, uh, Shopify and not distributed, you know, when we did, um, and- and, uh, yeah, hopefully, some of our LPs and- and certainly some of my partners have held and- and been able to benefit from the run-up. Um, but, uh, but at the end of the day, you know, it's a fantastic company. I think there's still a long journey ahead, and that's why you see people still buying even at these valuations.

    20. HSHarry Stebbings57:08

        Crushing. Absolutely crushing.

    21. BDByron Deeter57:10

        Yeah, Tobi is a- one of those force of nature, generational entrepreneurs as well.

    22. HSHarry Stebbings57:15

        I completely agree with you. Do you agree with Sequoia's evergreen fund structure-

    23. BDByron Deeter57:20

        Uh, I-

    24. HSHarry Stebbings57:20

        ... in terms of a strategy?

    25. BDByron Deeter57:21

        Yeah, yeah, it's a- I agree that there's a lot of positives to it, this idea that, um, you- you have incentives to manage all the way through. Bessemer actually has a heritage where many decades ago, we had some evergreen components to it. Um, but I do think it's hard. I think that public management's a different beast. I do think that the economics should be different. Um, and the end of the day, especially, um, in a DPI world, our- our LPs get paid to manage capital and do the allocation and- and a lot of them want the capital back. And so, um, you know, what the merits of consistency and- and fund flows and those things, um, have some trade-offs with hold periods and- and public duration, and I love innovation in capital markets. Uh, we're seeing, you know, other firms adding asset management businesses and debt products and roll-ups and doing all sorts of things. Um, you know, there's- there's some kernels in there that we agree with. There's a lot in there we- we probably aren't gonna pursue. But, uh, as a fan of capital markets and innovation, just I- I applaud creativity and pushing bounds.

11. 58:20 – 1:09:57

    Is venture now just a game of scale?

    1. BDByron Deeter58:20

    2. HSHarry Stebbings58:20

       Capital markets and innovation, baby. Is Venture a game of just pure scale? We're seeing General Catalyst. We're seeing Lightspeed. We're seeing Andreessen. You need money to play this game now, it would seem. Do you agree with the world that is being often articulated, I call it Chanel and Walmart, which is boutique provider with specialist customer, and then Walmart, enormous provider, wall of cash, sells everything? Do you agree with that or not?

    3. BDByron Deeter58:49

       Do I agree with the Walmart analogy? No. But do I agree that scale is important? Yes (laughs) . So, uh, um-

    4. HSHarry Stebbings58:56

       Why don't you agree with the Walmart analogy?

    5. BDByron Deeter58:58

       Uh, well, actually, the direct analogy of the low-cost provider, lower cost of capital, you know, sort of push to the bottom, um, I think you're seeing a maturation of the asset class. And I think the analogy might be the investment banking world.... and that you have, you know, platforms like the Goldmans and Morgans and JP Morgans that are providers of, you know, broad, global, multi-asset, multi-stage, multi-sector, um, that can be full-service shops, and that's very much the path that Bessemer is on. We have nine offices around the world. We manage tens of billions in assets. We're multi-stage. We want to be able to support our companies all the way through. Um, that's very much the mindset we're in. I do also believe that there are specialists and, and maybe, uh, you know, the Tiffany's analogy is maybe... I don't know. In the banking world, maybe that's the catalyst or, or what have you where very good at very specific things, um, and that's, uh, that's, you know, very much the strategy you're running. That's the strategy that Benchmark, you know, continues to run, um, and I think that there's a lot of opportunity there. And so there can be a bimodal curve in terms of approaches. In particular, I think geographic firms or very specific sector firms, um, healthcare has been an example where, uh, sector expertise has been really an advantage, but you need scale, and so I think healthcare-specific firms have had success for that reason. But, um, this maturation is gonna make it tough in the middle.

    6. HSHarry Stebbings1:00:18

       How do you think about... Well, that's an interesting one. I, I don't like thematic funds. I think you... Healthcare and cyber are two areas where it really pays to be thematic because I think it's just so deep sectoral knowledge and networks that are so required. But if you actually look at the majority of great venture firms in terms of the winners they've had, they've been in generalist funds. Um, I don't buy the defense firm, climate firm, fintech-focused firm. Actually, do you know what? Stripe's been won by your general catalysts of the world, not by others.

    7. BDByron Deeter1:00:52

       So, I actually agree with you for the most part. I would say that you will get alpha from some of those funds, but the important thing is not to get ossified in an approach, and this is very much why we don't hire sector-specific investors, and we don't give you air cover if your sector goes out of favor. Meaning, our job is to make our LPs money, and if you're in a sector that's cooling off, you better get the hell out and go somewhere else that's going to make money, or, like, you should stop investing. And the risk of having a semiconductor fund or a semiconductor team is that, you know, you carve out... Pick a number, 500 million to invest there. Like, you bet your ass they're going to invest 500 million in semi whether the right answer was two billion or zero, and, and that's the risk. And so we have a very different approach which is we are constantly optimizing the incremental dollar across sector but also, um, stage and geography, and we compete for dollars. And that is a mindset that we love, and it requires constant reinvention. The term we use internally is roadmaps. At every one of our off-sites, partners are presenting new roadmaps, and they're talking about themes, sectors, sub-sectors, um, uh, you know, investment hypotheses that they have that they're going after. They're getting feedback. They're sharing it. They're iterating. And if you don't constantly reinvent yourself, like, you don't have a future at Bessemer because the markets are moving fast, and it's our imperative to, to get ahead of the next trend, not sit comfortably in a sector that has had a good run and believe that you're entitled to another good 10 years ahead.

    8. HSHarry Stebbings1:02:26

       Byron, I, I love you, dude, and your track is just so good. Did you ever have a bump in the investing period? Like, did you ever have a... No, I'm being serious.

    9. BDByron Deeter1:02:34

       I, uh, no, I, I've had many which is why I'm laughing. It's not a silly question.

    10. HSHarry Stebbings1:02:37

        But, dude, you've like 13-

    11. BDByron Deeter1:02:37

        It's a painful question.

    12. HSHarry Stebbings1:02:39

        ... unicorns. I was chatting to my mother before this, and she said, "Oh, what are you doing this afternoon?" I'm like, "I'm in- interviewing Byron," and I told her about you. And I'm like, it's like you got 13 unicorns of, like, I don't know, 30 companies. I mean, your hit rate is, like, ridiculous. Like, did you d- did you have a moment of self-doubt, crisis of identity as an investor like many are having post the 21 ZIRP era?

    13. BDByron Deeter1:03:02

        Oh, Harry, I've had so many. I mean, you... In our industry, you just wake up, and you read Tech Crunch or, or listen to some of your podcasts, and you're reminded how bad we are in the, at this job because there's so many cool things happening that we've missed. Um, my first roadmap at Bessemer was RFID, radio frequency identification, which, uh, was and is a $0 trillion market. Um, it was a total dud, and thankfully, I only made one investment there, and it also had a, a SaaS underpinning, so we ended up pivoting and making a few bucks. But, um, it was a stupid idea, and what I credit my partners with is, um, one, you know, uh, patience, but two, direct feedback. And so we iterated and pivoted, and because I wasn't hired as a radio frequency identification investor, I was given the opportunity to pivot. My secondary roadmap was cloud, by the way, which ended up being a pretty nice, you know, uh, uh, second act. But, um, it was a, it was a really bad idea, and so, you know, I had... My first three investments were all very bad. My next two ended up being, you know, billion-dollar IPOs.

    14. HSHarry Stebbings1:04:07

        I spoke to Doug Leone about this where you have young people who make bad first investments. I certainly did the same. I thought WhatsApp for doctors and nurses would be a good business. (inhales) H- wha- wha- what? Um, how did you get out of the trough or not get in it? Three bad is tough.

    15. BDByron Deeter1:04:26

        Yes, um, again, I think that this is, uh, patience and support from the partnership to, to make, uh, enough shots on goal to, to get some statistical relevance out of the sample size. I, I remember, uh, uh, one of my great senior partners, Phil De Hardeman who was a professor at HBS for years, um, and I would go sit in one of his classes and, and have a long dinner or lunch with him, and, and he drew on the board my career which was basically this straight line, you know, w- uh, you know, with s- some bumps and then, like, a little bit of a tick up with Cornerstone OnDemand and Eloqua and some of my early things. But he's like, he's like, "Just give it time, dude. Like, you're, you know, you're wandering in the desert a bit. I know you're anxious. You're type A. You want success, but, like, uh, this business is all about, um, you know, building a portfolio a- and putting yourself in position to be successful. And don't, don't, you know, shoot out of the gun, you know, crazy big checks out of the gate so if you go oh-for-three you're done, um, but, you know, ease into it." And, and that.... was hard to take at the time because, you know, we're all aggressive and enthusiastic in this industry. But it was the right feedback. And, you know, just, just resetting and learning and trying to get better, um, allowed me to be in a good headspace for subsequent investments and, and to keep going and to have some confidence. And I do remember, um, back when I was an entrepreneur, one of my board members w- was Robin Vasan, he was at Mayfield at the time, and I went to see him when I was going back into venture and joined Bessemer and getting some advice and he said, "Your first investment's gonna suck. It always does." Um, you know, so I was talking about a deal specifically and he basically said, "Well, so don't do it." And I'm like, "But Robin, like, by definition then, like, I'll never do an investment 'cause you have to, you have to get over that first one." And he's like, "Yeah, but, like, this one really sucks." Um, unfortunately he was right on both. Uh, my first investment did suck and I shouldn't have done that one. Um, but I think the point kind of applies, which is it's a learning game, so just you need to be in it to have enough shots on goal to, to score some. Uh, and cycles matter a lot. I really feel bad for great potential investors who joined our industry with checkbooks in 2000, y- 2020, 2019, um, a- and they did great deals but at market prices which were way too high, and many of those people got washed out of the industry and never got a chance to make their fourth and fifth investment like I did, and, and we may never know if they could have been great investors. And so, um, cycles matter a lot and, and having, you know, enough bullets in the gun (laughs) , uh, to hit a target matters a lot.

    16. HSHarry Stebbings1:06:53

        I think that's why temporal diversification is so important. I, I look at our, our first fund and it's like, you know what? A lot of it is high-priced, and good companies but high-priced, and then the second half is much more reasonably priced. And that's where, like, not shooting your load in 18 months is so important.

    17. BDByron Deeter1:07:08

        Very much so. I mean, time diversification is one of the few things we can manage in our industry. You mention it in terms of exits, with the LP comment, where concentration matters. That tends to be true but it's not something we can control because there tend to be IPL windows, M&A windows, and our job is to try to, you know, take advantage of them and they'll cluster but we can't usually create those when markets are closed. However, entry diversification we can create, and few of us are good enough to actually, you know, play the markets, um, counter to trends and be most aggressive when things are, are cool and to, to really pull back when they're hot, which is probably what you should do. But at least some notion of, of, um, smooth and consistent, um, to, to weather those, those storms so that you can take advantage of the cluster of exits, i- it tends to be, uh, about the most successful model for time diversification in venture.

    18. HSHarry Stebbings1:08:01

        We've seen a shit ton of young people, um, start their own firms. Uh, you've seen people even leave Bessemer. Do you think, though, that the spinout time is, is up? We saw this, like, compressed time where, like, there were a lot of fricking spinouts very quickly. Do you think that was a new normal or do you think that was a compressed time where people realized the carry would be less than they thought and it would actually better to be a solo GP or a GP of their own fund?

    19. BDByron Deeter1:08:25

        Uh, the latter. I do think that this was a point in time where people were looking for that reset, where, um, for positive or negative reasons, um, they, they wanted, you know, a fresh start. And, um, because in venture, eh, I do think partnerships and, and platform matter, and ultimately, um, a lot of those goals are to then go out and build up another firm. And so, um, you're, you're either running from something or to something, but, um, the end of the day, I think the best firms are pretty flat at the top, an- and so you're not seeking better economics, um, you're really seeking, you know, a, a better environment or better structure. And so, um, I, I do think that a lot of great partners were able to, to launch out and get funded and, and kick off and we'll see platforms then built out of some of those new funds and s- probably more reinvention in the industry than we'd seen before. But it is one of the few asset cycles where past performance is an indicator of future success. Private markets are very much networking ecosystem-based, and you see, you know, very analytically, I reference my partner Felder Hardeman who taught at, uh, Harvard before, he would quantify this and he wrote the Private Equity and Venture Capital textbook and would do the data, but I forget the exact numbers but it was something like eight out of the top 10 firms in one cycle would repeat in the next because there was this virtuous cycle. And so, um, the challenge is which of the new funds are gonna break in and be those, those next two that disrupt? And there's opportunity there and maybe it goes up to three or four, but I also think that, um, there's a benefit to being a consistent stable platform and, and, uh, many of those will persist.

12. 1:09:57 – 1:13:43

    Can PE Turn the Tide in Tough Markets?

    1. BDByron Deeter1:09:57

    2. HSHarry Stebbings1:09:57

       Final one before we do a quick fire. Everyone's always saying, like, "PE is gonna come save the day. There's gonna be a wave of PE acquisitions." Um, do you think PE will come in and save the day, and do you think, number one, and, and do you think, number two, the roll-up strategy that they're trying now with your sales loss and your Claries will actually work?

    3. BDByron Deeter1:10:17

       I think the next wave of liquidity is gonna come from a combination of several buckets. I think PE will be one of them, and it's gonna be a pretty fun time for PE as these, um, companies are long in the tooth, vast majority are not gonna get public, um, and consolidation will make sense. Because at the core, a lot of these businesses are very high gross margin and are run pretty inefficiently because we've got a growth mindset (laughs) and we're certainly not optimizing for cost in the early days. Um, and, and so there will be a lot of opportunity to, to work through those portfolios, and I think, um, private equity will have a run there. Um, I also think big M&A's coming back. I do think that the, the incumbents responding to the cloud AI imperatives, um, are going to need to get back in the buying game. The FTC i- is finally taking a more rational posture on, um, antitrust and, and, you know, blocking deals and these things. I, I think they're gonna let market forces, you know, operate there again, and so there will be this buying imperative that rolls through the, the public markets. And companies like SAP and Oracle and IBM need to buy or they're gonna get crushed. Um, and then I do think that the IPO markets are gonna open up again and we're gonna see a pull-through there. And the big wild card, this fourth bucket, is what we talked about briefly and I thought one of the great questions you asked was, will secondary liquidity start to flow through, um, from different, you know, capital providers, and will crossover investors be comfortable doing more secondaries and things? And I, and I think yes. I'm not totally sold on these exchanges for private markets or these sorts of things, but I do think incrementally we're gonna see people get more comfortable with secondary, um, transactions.... um, stop looking for signal risk in that, and we're gonna take pressure out from all these sources which will then get capital flows coming back, which ironically may then just feed the engine at the front end even more.

    4. HSHarry Stebbings1:12:12

       Did Tiger do more to help or to hurt the ecosystem?

    5. BDByron Deeter1:12:15

       Oh, boy. (laughs)

    6. HSHarry Stebbings1:12:18

       (laughs)

    7. BDByron Deeter1:12:19

       Uh, the foie gras analogy comes back to me there. Um, incredibly mixed. You know, I, I think that there was a lot of, um, happy disruption and big thinking and creativity that, that I applaud, and there was a lot of, um, reckless over-funding and, um, and deal work and non-governance that, um, that we're gonna have to clean up for quite a while.

    8. HSHarry Stebbings1:12:45

       I think their returns will be better than people give them credit for. When I look at Scale, when I look at OpenAI, and I look at quite a few that actually they're in with me, they're at the top of the pref stack, and they're in, like, 50, 60 million ARR companies at three, 400 million prices with three to five years of runway. I'm like, "They're not gonna lose money on those deals. They're not gonna make huge money, but they'll be okay."

    9. BDByron Deeter1:13:09

       I mean, that's the amazing thing. Over these cycles, an index of the venture industry may be fine. Um-

    10. HSHarry Stebbings1:13:15

        Yeah.

    11. BDByron Deeter1:13:16

        Historically, it has underperformed the S&P and probably will again in this case, um, but you'll make money. And, uh, and I think that, that very well could be the case there. Um, it certainly wasn't an optimal portfolio construction, but, um, but at the end of the day, I think you're right, that they're gonna have some home runs in there that, that more than make up for a lot of the, the zeros. And then in the middle of the pack, there's gonna be a lot of one to three Xs that, um, that, you know, carry the load.

13. 1:13:43 – 1:16:45

    Quick-Fire Round

    1. BDByron Deeter1:13:43

    2. HSHarry Stebbings1:13:43

       My friend, are you ready for a quick fire round?

    3. BDByron Deeter1:13:45

       Let's do it. I'm in your hands.

    4. HSHarry Stebbings1:13:47

       Who's the best sourcer in your Bessemer team?

    5. BDByron Deeter1:13:52

       Oh, boy. (laughs) Everyone on a, in our partnership is constantly outbound. I would probably put Jeremy Levene there in terms of just his ability to see unique deals, um, that are contrarian. And I think, you know, part of sourcing we think of it as just, hey, outbound, aggressive, creative, et cetera, but I think the insights, um, to see what others don't is, is the, uh, central part of that that's often overlooked. And, and I give many of my partners credit for that, but, uh, but you asked for one, so that'd probably be my answer.

    6. HSHarry Stebbings1:14:25

       Best picker. Who do you think when it's the accuracy of shot, (blows raspberry) they're good?

    7. BDByron Deeter1:14:33

       David Cowen.

    8. HSHarry Stebbings1:14:35

       Ooh, why?

    9. BDByron Deeter1:14:37

       Steadily, um, finds, you know, great people in weird places doing, y- you know, bizarre things. Um, i- eh, you know, and I mean Rocket Lab is one. You know, uh, Peter Beck's sitting in New Zealand, um, you know, recently or, or Auth0 or some of these things, um, where he just has incredibly high conviction and will pound the table at times, uh, you know, things that may seem non-obvious and, uh, and just has an incredible nose (laughs) and has been doing this a long time.

    10. HSHarry Stebbings1:15:12

        Dude is a hero. Um, one seed firm, one series A firm, and one growth firm that you can invest in as an LP. Go.

    11. BDByron Deeter1:15:23

        Oh, boy. Um, and to be clear, you gave no prep, so I'm gonna give this on reaction. Um, uh, you, you, you didn't do the nice thing to give your, uh, your speaker the prep notes. Um, seed fund, I mentioned, uh, Pete Cincini before. Um, what they're doing at, uh, Lod Ventures, I've got immense respect for. Where they're going in at inception stage. They're literally sitting, um, in the, you know, classrooms and labs at, at Cal and Stanford working with professors. Um, and, you know, Pete's done this many times already with, um, with Perplexity and Databricks and many others where, uh, I mean, he literally was there at the inception stage of these decacorn businesses. And, you know, any one of those deals would be, uh, you know, a great firm run or, or a great career for an investor, and he's done multiple. So, from a seed stage, um, I, I think they're gonna do some really special things. Um, early stage, oh God, there's so many. Um, you know what, uh, you know, I think that, that the First Round folks, I think, um, uh, oh, this is horrible, I'm forgetting Unqork's new name. Remind me. Um, uh, oh, no-

    12. HSHarry Stebbings1:16:29

        Unqork. Is that-

    13. BDByron Deeter1:16:29

        ... sorry, Unqork is the new name. That's right, the predecessor. I think Unqork, um, does awesome things, um, and, uh, and actually is very aligned in kind of investment style and approach. Um, you mentioned, uh, you know, Lemkin and what he's done in very selective ways. Um, I just, I have a lot of appreciation.

Episode duration: 1:23:11