In this edition of SaaS Talk, Golub Capital Senior Director Rob Sverbilov chatted with Bessemer Partner Brian Feinstein to discuss trends in the hottest sector that every VC wants a piece of: SaaS.
Bessemer is the world’s oldest venture capital firm. In the last 50 years, we’ve participated in more than 120 IPOs. We achieve that kind of success by investing in great founders who go after big market opportunities. That’s the simplest way to put our investing thesis, and it keeps working.
We’ve found great success in the SaaS market since we began the practice 20 years ago. We’ve IPOed more than a dozen SaaS companies, including Shopify, DocuSign, Twilio, SendGrid and Box.
My focus is on picking the winners in vertical software—in other words, the software providers that are serving the needs of a specific industry.
When we began investing in vertical software about 10 years ago, the conventional wisdom was that vertical software wouldn’t be able to generate returns that warranted VC investment. The markets were too small. But we’ve found that great founders with fantastic products can capture disproportionate market share in their vertical markets and build massive companies. We’ve seen this time and time again—Shopify in retail, Guidewire in insurance, Veeva in healthcare—the list goes on.
Since we’ll invest at any stage, we look for different metrics at different stages of company growth.
At the series A stage, you’re betting on great founders, great products and large market opportunities. We hope that the combination of those three will make magic happen. This kind of bet has paid off in the past, with Twilio and Shopify, among many others.
When we get into series B and C stages, we look at companies doing between $5 million and $15 million ARR. At this point, we’re looking for evidence of a scalable go to market engine. The founders have achieved product / market fit, and are now building a scalable, repeatable sales engine that will continue to drive revenue.
We do plenty of later stage investments, too. Once we get into the C and D rounds, we look for $15 million or more in ARR, driven by a scalable sales engine and a deep product roadmap. The question here becomes, how long can the company sustain rapid growth? Is there a path to a multi-billion dollar outcome?
Through all investment stages, the core question remains: Does this company have great founders, with a great product, going after an exciting market opportunity? If the answer is yes, we’re interested.
I see billions of dollars of potential value in vertical software. According to Gartner, the biggest category of software spend is vertical software. In the next decade, we’re going to see more SaaS companies mature in each industry. Despite the progress that’s already been made, the majority of software is still on-premise or custom built and most industries are still radically underserved by SaaS products. The banking industry is a great example. The legacy on-premise software used by banks represents over $50 billion of market cap. We think a new generation of cloud vendors like Mambu and nCino will capture enormous value in the coming years.
You also have industries with large numbers of non-desk workers that have historically been neglected by software companies which mainly catered to knowledge workers sitting behind a desk. Now that everyone carries around a computer in the pockets, those industries are ripe for software adoption. The rapid growth of companies like Procore, ServiceTitan and Toast in the past few years speaks to this trend and its long-term potential.
We remain very focused on software opportunities in cybersecurity, where we’ve been actively investing for the past 20 years. We have a special partnership with Team8 in Israel, which is launching innovative new cyber startups, and continue to look for opportunities in areas like cloud security, orchestration/remediation and products that help CISOs identify the signal from the noise.
Developer platforms are one of the most important areas for Bessemer and led to our early investments in companies like Twilio, SendGrid, Auth0, Zapier and LaunchDarkly. Every company is now a software company with over 20 million developers globally who are adopting developer tools at an unprecedented rate.
We’re also spending time investing at new software applications of machine learning. For examples, Qventus helps hospitals use machine learning to optimize patient flow and predict staffing needs. Shift Technology is using machine learning to fight fraud and identify insurance scams for large insurance companies.
Software is the gift that keeps on giving. As long as smart founders come up with ways to help companies better serve their customers or be more productive, there will be no shortage of growth and value creation.