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.