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We’ve been waiting for the opportunity to interview Byron Deeter for a while.

Byron is a Partner at Bessemer Venture Partners and one of the preeminent investors in, and authorities on, the enterprise cloud industry. We spoke at length about the state of the cloud, the venture capital industry, startups going global and, of course, Japan. I’m sure you’ll find Byron’s views interesting and inspiring.

The interview has been edited for clarity and divided into two parts. Part Two will be posted in a couple weeks.

Disclosure: Byron Deeter is an investor in Japan Cloud.

The Longest Standing Venture Capital Practice in the World

Aruna: Before we delve into the state of the cloud, I thought it would be helpful if you could give us some background on Bessemer and on yourself, how you got to where you are today, what drives you and what your vision is as a venture capitalist.

Byron: Sure. Bessemer has claimed the longest standing venture practice in North America and potentially the world. We go back to 1911. There are some family offices in Europe that I think have had some claims to being the oldest as well, but we're arguably the longest standing venture capital practice in the world.

And the consistent theme has been hyper growth tech through the years. Today, we have nine offices around the world. We have about $10 billion of active assets under management which in terms of portfolio value is several multiples of that.

We try to be in several of the core tech markets and then service the other tech markets from these launch pads, so we have several offices across the US on the east and west coast, India, China, Israel, Western Europe, and then certainly for markets like Japan, our strategy has been to provide support remotely and through partners.

My connection to Bessemer goes back 22 years when I was a CEO of one of the portfolio companies, an early cloud computing company that I founded, and Bessemer led our Series A. They became our anchor partner so I got to work with them from the other side of the table, so to speak. I had worked in venture a little bit before that, but this was really my entree into entrepreneurship, the cloud and then to Bessemer specifically.

Aruna: And how has the venture capital industry changed over the past 20 years in Silicon Valley?

Byron: I think people would correctly say that the industry over the past few years has seen more transformation than the prior decades combined. The size of rounds, the speed of rounds and scale of outcomes have all dramatically changed, for the good of entrepreneurs and for creativity and business innovation. It's never been an easier or a better time to be a founder. It's never been a better time to scale software businesses.

And the foundational layers, both in terms of technology and services, are more robust than ever. And so you’re seeing just a flood of great businesses and also a wealth of capital to support them.

I would say in terms of the art of venture, or the romanticism of it, what you see less of is collaboration between and among firms early on. It used to be that you'd have two or three top-tier firms that would partner on early-stage deals, share deals with each other and work on the best deals together.

Now, because there's so much capital available, you see less of that. And typically each round will be led by one firm, but there usually is competition to put dollars in and get larger ownership positions. And you see less of the syndication, or sharing of those deals, along the stages.

A Fundamental Replatforming of Business

Aruna: And what inspires you most as a venture capitalist?

Byron: Getting up every day and speaking with optimistic, awesome people who are trying to change the world. I just love the nature of this job, working with innovators and people who have big ambitions and crazy ideas. And often they have the ability to pull it off, which is just a shot of optimism and happiness every day.

And from my side, having seen the very early days of cloud computing back in 1999 and 2000, I had conviction early on that what we were seeing was the fundamental re-platforming of business and that there was a better way.

In the years prior to that, as a consultant at McKinsey and as an early investor, I'd seen a lot of crappy software out there that made business process painful. There was a lot of shelf-ware sitting around that was inefficient, wasted money, caused a lot of frustration and required a lot of professional services and implementation work.

And so I absolutely became convinced that this replatforming was possible and needed, and that's really been an underpinning of both my entrepreneurial journey and now my investment journey. And I love seeing that take hold. I love seeing innovation from entrepreneurs, how they are really making that happen for the software industry and for the customers that we serve.

Another “Amazon moment”?

Yasu: So where's the cloud industry now, in terms of its evolution, and what do you see out there that's inspiring and has potential?

Byron: Well, I can give you the state of the businesses, and the state of the market, which are different right now. In terms of the businesses, they've never been stronger. Adoption rates continue to scale. The transition from on-premise to cloud is happening. We are on pace to have that crossover point in the coming years, where a majority of software will become cloud delivery-based. And, fundamentally, we're seeing faster adoption rates and what were headwinds early on for these trends are now tailwinds and the inevitability of cloud adoption is becoming true.

Now, the short-term dynamics are that the rotation of the capital markets starting with public markets away from hyper-growth into value and into defensive stocks has caused an immense pullback in the multiples of these companies. What we’re seeing is an immense rerating of the category that is independent of the fundamental businesses and long-term cash flow.

And so we're going through a digestion. I was on CNBC this morning and the host asked, “Is this another Amazon moment?” He was of course referring to how Amazon separated itself from the rest of the dotcoms back in 2002. I think it's a prescient question.

We’ve seen the two waves of internet and mobile roll through, creating massive value over the last two decades. Several of the world's most valuable companies, including Google Alphabet, Apple, and Amazon, were really birthed in those waves.

My belief is that cloud computing is going through that same digestion period now where we're getting this rerating and some separation of the names. The first step is that the whole industry gets hit. And then you'll see, over time, the separation of the names and some leaders emerge as real flag-bearers for the new economy.

Vertical SaaS, DevOps and the API Economy

Aruna: I'd love to know where the separation is happening and where you think we should be looking.

Byron: The sectors that have held up best have been those that are a little bit more resilient to supply chain or geopolitical issues, sectors like security, data, infrastructure, etc. I certainly think that those are interesting categories, but I would also include vertical SaaS. I would certainly include DevOps. I would put in some of the platform as a service, API-economy businesses. We're seeing just massive, repeatable companies and category creation. We see it happen time and time again within the sub-sectors.

And so there is a time statement to this, that the first waves of cloud really happened in the pure play application space for SaaS and then the infrastructure as a service layer for AWS, Google Cloud and Azure.

And what we're seeing now is that this middle is starting to emerge where you get the API economy layer, the next-generation infrastructure emerging and immense innovation coming from the top and the bottom.

We’re very cautious about the IaaS layer, given the incumbents and the billions that they're playing with. And so I certainly tend to have a mid- to upper-stack bias in terms of long-term defensibility and opportunity. However, I'll certainly note that several of the most interesting businesses have come out of slices of infrastructure where they've been able to navigate that.

We added 20 companies to the BVP NASDAQ emerging cloud index in the last couple of weeks. And there'll be another 20 coming in the quarters behind them. There's an explosion of super high-quality companies.

There are 150 private cloud unicorns that hopefully represent the next wave of IPO candidates. So your answer to that question of who's most likely to be successful here is going to be fascinating because you do have the opportunity to try to stack-rank that list in an interesting way.

This concludes Part One of our interview. Part two of our interview with Byron is now live here.

Part one of our interview with Byron can be found here.

Going Global

Aruna: As you know, at Japan Cloud, we're in the business of bringing leading SaaS companies to Japan. How much global market knowledge do the startups that you work with have? Are they still mostly product-focused, or do they have some awareness of how to grow globally.

Byron: I think one of the encouraging things that has come from the convergence of cloud and mobile is an awareness of global opportunities much earlier in a company's lifecycle.

Companies are often selling to customers globally from early days. Employees are based globally early in their existence. There's a mindset of scalability, multilingual, multicurrency and complex integrations. Architecturally, these products are much better built and internationalized from day one. Localization becomes much easier, so that can happen sooner.

Going to market, however, is more complex. With companies that have the product-led, bottom-up model, I would say, definitely, we see adoption happening in ways that you couldn’t anticipate.

In the enterprise, where you have enterprise products and an enterprise-selling motion, the selling process tends to be more staged and needs to be more purposeful across geographies. You need to hire sales and business development teams, secure marketing resources and develop skills to warm up regions and then have a more strategic, direct sales launch.

Aruna: Do you advise companies on how to go global? What's your role in the globalization of these companies?

Byron: So this is typically a very active conversation at the board level, both in terms of timing and geographic sequencing. And then what we'll often do is set up a series of offline discussions with comparable companies, regional experts and go to market professionals, like Japan Cloud, to help them work through that prioritization.

There's this kind of match between the pull with the push. The best companies often get pulled into regions with customers calling them, and that can be a leading indicator of market fit and any of the specifics needed for a region.

We will have a lot of these discussions with companies about what signals they're seeing, what the risks of entry may be, the cost of entry, the timing and the necessary staging. Often, as companies approach IPO, there's this question of, is this a pre-IPO activity or a post-IPO activity, to enter Western Europe, to enter Asia and Southeast Asia?

And, what's the sequencing for that? We get different answers by company size and stage. There's no one size fits all, but what we have, I would say, are companies with lower friction sales models tend to do it earlier and more aggressively. Companies that have more heavy-weight, push-based sales models have to be more purposeful in that geographic sequencing, and oftentimes will enter Western Europe pre- IPO, but they’ll have to wait to go to the rest of the world until post IPO.

Product-led Growth in the Enterprise

Yasu: Could you expand on what it means to have a frictionless distribution model in the enterprise?

Byron: It tends to correlate to deal size so you could look at it in terms of Annual Contract Value. You could look at it in quotas for sales reps. You could look at it in terms of what the ratios are of systems engineers or sales or business development reps to account executives. But basically, it comes down to how much touch is needed in the sales process, how push-based the product tends to be and how purposeful the go to market motion needs to be.

And so more and more of our companies are doing hybrid models where they're trying to create low- friction products that then can be sales touched and accelerated.

Canva, out of Australia, is a great example of a company selling into global markets from day one with a very self-service-oriented, pull-based product, but then they have an enterprise selling motion that they've layered on top.

Yasu: Slack and Dropbox are like Canva in that they’re product-led growth companies that shifted to enterprise sales. They have a large number of enterprise account executives. So do you think such companies, at some point, need to shift to enterprise sales or can they survive exclusively as product-led companies? What advice do you give such companies in your portfolio?

Byron: Increasingly I see it as an "and" not an "or.” The ideal go to market would be to have a fantastic product that you can get market pull through organic adoption and light touch onboarding but it also has enterprise value and where you can upsell and do a sales enhanced motion. That's the Atlassian model from years ago. It's the Twilio model. It's the Canva model. Zoom is trying to figure out their model. Enhancing the product-led motion with a band of push-based, enhanced sales is really the ideal. You get the best of both worlds. This allows you to extend and control your destiny as much as possible.

The upside of organic growth is that it's efficient. The downside is you can't really control it, and when it starts to decelerate, it's much harder to impact.

Whereas if you can layer in a known, programmatic outbound motion on top, then you can choose to dial up or down your go to market spend and play with those ratios to get your target growth rates. And, of course, there'll be some degradation of those models as well over time, but the combination can be really powerful. And so I'd say probably a full third of our companies are able to benefit from that real combination.

A “wonderful enigma”

Aruna: Then where does Japan fall into in terms of these companies going global? I think Japan is perceived to be a tough market, but you have to be in Japan, I would assume.

Byron: So Japan is one of those wonderful enigmas that is hard for our U.S.-based companies to fully figure out, which creates a lot of mutual excitement.

A bit of a digression, but early on, back when I was an entrepreneur, two of our customers came out of Japan. And it was a very purposeful sale, through which we had this recognition that it was one of the world's largest software markets and that it had great software buyers and consumers, and yet it called for very different go to market needs, motions and dynamics. And so I learned 21 years ago, selling firsthand, how unique the market is, with those anchor customers and relationships.

Salesforce set a great example, obviously, in terms of what's possible there. And that's the complex nature of it, where it's a massive market but one that's very tough to unlock, and requires a much more purposeful strategy than some of the adjacent markets, like Canada or the UK or even the rest of Western Europe.

Aruna: And do startups have this awareness?

Byron: I think most of them have the awareness and therefore they don't even try. They just accept that it's hard. And they just say, we'll get to that sometime, often well past IPO, and as a result, most of them never even take it up.

I think that's the important message here, which is that scale helps and success in the other markets can really take out some of the friction. For messaging, awareness, adoption, relative risk and reward of the investment, it has to be a multi-year commitment. It has to be a sizable strategic pillar for the company, and until they are ready to take that on, they probably shouldn't try.

There just aren’t that many examples of companies that have had success selling directly. Salesforce Ventures has a number of portfolio companies that have had some modest success, and then Salesforce themselves obviously.

And within our portfolio there's a handful. Several of them, of course, have relationships with Japan Cloud, including nCino. Coupa, while not a portfolio company, is a close friend of the firm.

And so I would say on a scale, you have a market like China which is massive, but largely unaddressable and probably in the "don't even try it" camp.

So on the degree of difficulty, China is at one extreme. And then you’ve got Western Europe, which is a fairly obvious step out, at the other extreme. Japan is somewhere in the middle. In terms of sequencing, it's certainly after some of the more adjacent geographies.

“Run fast and have fun”

Yasu: What would be your advice to Japanese SaaS startups?

Byron: Run fast and have fun. I do think that the Japanese domestic market is compelling. And this is an opportunity for real domestic providers to get in on this exciting replatforming. And then they certainly have the opportunity to address global markets as well, which means you've got a virtually unlimited market size if you are aggressive and go after it.

The time is now to get out there while the tailwinds still exist. They need to take advantage of the inevitability of the transition to cloud, and also this notion of "you can see the future from other markets that have done the heavy-lifting for you today."

There’s an opportunity now to benefit and be fast followers and hopefully then leapfrog the rest of the world by going cloud first, and taking advantage of this next-generation replatforming.

And there’s the Cloud 2.0 serverless architecture type vendors. I think that's the opportunity for Japan, as well as, frankly, India and then China through their domestic cloud market.

Aruna: Final question: what keeps you up at night?

Byron: What keeps me up at night is that we have a number of companies that have employees in both Russia and the Ukraine. We don't have any Limited Partners or any financial exposure per se.

But we've got several of our founders who have family ties or employees. We've got one company this morning that was basically chartering private flights to get 70 people out of Russia. We've got another group that did the same last week for the Ukraine. They’re just trying to protect their people. This is what keeps me up at night.

As for the business, I have no concerns about the fundamental longevity of the cloud movement, though questions around geopolitical instability and whether the world is going into recession will impact every business, ourselves included.

That said, I’m confident cloud businesses are more resilient than most.