Bessemer Ventures: The Memos That Didn't Get Away

Who is the oldest venture capital company in the world? It is almost certainly Bessemer Venture Partners, who were created as the venture arm of Carnegie Steel. The Bessemer process for making steel was the first economical process for making steel from impure (pig) iron. It was invented by Englishman Henry Bessemer in 1858. Carnegie was also born in Britain, although in Scotland. One of the big breakthroughs for Carnegie was the adoption of the Bessemer process, which brought down the price of steel, which was in especially high demand to build the railroads.

In 1911, Henry Phipps, one of Carnegie's co-founders of Carnegie Steel, established Bessemer Securities as a family business. It became Bessemer Venture Partners in 1974 and ceased to be purely a family trust. Its headquarters moved to Silicon Valley in 1975.

Bessemer's Anti-Portfolio

All venture capital companies have a portfolio page of companies where they sold them for a lot of money or took them public. Bessemer is almost unique in having an anti-portfolio, which I wrote about in my post How Can I Get Out of This House Without Going Anywhere Near Your Garage?

As they put it on their Anti-portfolio Page:

Our long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up.

There are several fun stories in that post, and this is the one they describe as the "crown jewel of them all":

Bessemer's partner, Cowan’s college friend, rented her garage out to a couple of guys in 1999 and 2000. Whenever he came over, she tried to introduce him to “these two really smart Stanford students writing a search engine.” Students? A new search engine?

In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, "How can I get out of this house without going anywhere near your garage?"

Yes, those two students were Larry and Sergey. They missed Google offered on a plate.

Bessemer's Memos

More recently, Bessemer has created a Memo Page and made public some of the Investment Recommendation Memoranda written for the partners' meetings to justify the investment. They are fascinating reading. There is a very real sense in which this is the anti-anti-portfolio, the ones they somehow managed not to miss.

As they put it on their website:

For VCs, learning from mistakes is easy. In fact, we make so many that we’re experts on what not to do. What’s hard is to learn from success. How did we spot those baby unicorns in the wild? Did we just get lucky? Because we really want to find more of them.

To glean patterns from those particularly beneficial early-stage decisions (and sometimes just to nourish our fragile egos), we find it helpful to publish and scrutinize the Investment Recommendation Memoranda that we circulated years ago. One pattern that consistently emerges is that Bessemer’s best investment decisions centered on people. In retrospect, the early products themselves are barely recognizable today. Rather, passionate, analytical, and relentless founders zigged and zagged their way to that elusive “product-market fit”, and these memos provide a glimpse of those winning entrepreneurs before they were famous. They are the prequels of our heroes, as inspirational to us as The Hobbit, Solo, Batman Begins, and Better Call Saul.

The memos you can read are about:

• Shopify
• Pinterest
• Twilio
• Twitch
• Wix
• Yelp
• Dropcam
• MindBody
• LinkedIn
• PagerDuty
• Lifelock
• Fiverr

Let's look at one, Shopify. I assume you know who they are. You've almost certainly used them, perhaps without knowing, since they run the storefronts for many of the eCommerce sites on the web (obviously apart from Amazon). But the investment wasn't obviously going to be a hit, since it was received wisdom in the VC industry that you couldn't scale selling to small- and medium-sized businesses.

Typical customers are small online-only or brick-and-mortar retail businesses as well as “stay-at-home capitalists” who are looking to supplement the family income with a side business. On average, a Shopify customer is selling $13K of online merchandise a year. This average is very much skewed by customers who are selling just a handful of items a day. Shopify’s largest customer is selling $10mm of merchandise annually.
...
Like most businesses selling to SMBs, there is a sharp drop-off in the first few months following sign-up. For Shopify, this is no different. By month 3, Shopify retains roughly 75% of its customers. By month 12, 50–60% of customers remain. Once stabilized, monthly churn ranges from 3–5%.

Bessemer invested $5M at $25M pre-money valuation. Today, a decade later, it is the most valuable company in Canada.

Learn More

Bessmer's website has both the memos and the anti-portfolio under the "Philosophy" tab on their website.

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