10 Laws of Building a Unicorn

BYRON DEETER Bessemer Venture Partners

2016 BESSEMER’S 10 LAWS OF CLOUD COMPUTING BYRON DEETER www.bvp.com/cloud @bdeeter

Source: Flickr/Clemens Grün www.bvp.com/cloud 3

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Source: Blue Apron Blog www.bvp.com/cloud 7

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LAW 10: ONDEMAND EVERYTHING Source: Microsoft www.bvp.com/cloud 10

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Source: Docusign www.bvp.com/cloud 12

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LAW 09: GROW (EFFICIENTLY) …OR DIE Source: PCWallart.com www.bvp.com/cloud 14

TOP TIER $10M ARR COMPANY SHOULD GROW 300% YOY Public Cloud Company YoY Growth Best-In-Class Growth (Starting From Four Quarters Prior to IPO) % YoY Growth @ $10mm ARR 300% @ $100mm ARR 100% @ $300mm ARR 30% Source: SEC ﬁllings. BVP Cloud Index public companies. T = quarters 15

FASTER GROWTH IS REWARDED – 10% GROWTH = +1.0X IN REVENUE MULTIPLE 10.0x 45 Public Cloud Companies +10% growth results in +1.0x Rev Mult 9.0x 8.0x Atlassian Corporation Workday e 7.0x The Ultimate Software Group ServiceNow l Xero p i t Veeva l 6.0x Shopify Mu Proofpoint Zendesk NetSuite Instructure e 5.0x Salesforce u Medidata Solutions New Relic n Cornerstone OnDemand ve 4.0x Qualys Demandware HubSpot e Cvent LinkedIn Appfolio, Inc. R LogMein Benefitfocus Wix 6 3.0x RealPage BroadSoft Textura 1 y = 10.181x + 1.1297 0 Constant Contact Mindbody, Inc 2 2.0x Intralinks 2 Mobileiron R = 0.36068 Bazaarvoice LivePerson Xactly Castlight Health 1.0x Jive Software Lifelock Marin Software 0.0x 10% 20% 30% 40% 50% 60% -1.0x ’15-’16 Revenue Growth Source: 45 companies in BVP Cloud Index. CapIQ www.bvp.com/cloud 16

LAW 08: SALES EFFICIENCY IS YOUR OXYGEN Source: iStock www.bvp.com/cloud 17

Source: iStock www.bvp.com/cloud 18

CUSTOMER ACQUISITION COST - CAC PAYBACK TOTAL SALES & MARKETING COSTS OF PRIOR QUARTER CAC PAYBACK PERIOD = NEW CMRR ADDED IN PRIOR QUARTER X (Months) GROSS MARGIN % OF THE BUSINESS www.bvp.com/cloud 19

EFFICIENT CAC PAYBACK = MORE FOUNDER OWNERSHIP ResulKng P&L for 3 companies growing at 50% new bookings with diﬀerent CAC paybacks 1 Yr CAC Payback 1.5 Yr CAC Payback 2 Yr CAC Payback Total cash burn: $0M Total cash burn: $53M Total cash burn: $106M New Bookings S&M Costs Cash Flows (Gross Profit – S&M) $51 $51 $34 $51 $23 $34 $23 $34 $10 $15 $10 $15 $10 $15 $23 ($8) ($12) ($4) ($6) ($9) ($8) ($12) ($18) ($12) ($18) ($14) ($20) ($16) ($24) ($18) ($27) ($27) ($27) ($36) ($41) ($41) ($41) ($54) ($61) ($81) Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5 20 Note: Assumed 50% growth in new bookings every year, 80% gross margin, and other expenses equal 80% of prior year’s bookings. 20

LAW 07: CUSTOMER SUCCESS = COMPANY SUCCESS Source: iStock www.bvp.com/cloud 21

1% IMPROVEMENT IN CHURN = $100M+ IN VALUATION $140 ARR of 3 Diﬀerent Businesses ARR in Y6 Mult Equity Value $120 $115 $100 1% Monthly Upsell ~$115M 5x $575M $95 (+1% growth; Net NegaZve $80 $75 Churn) ARR $60 $ $40 0% Churn ~$95M 5x $475M (100% renewal + upsell) $20 $0 1%Monthly Churn Y1 Y2 Y3 Y4 Y5 Y6 ~$75M 5x $375M (-1% growth) ARR (0% monthly churn) ARR (1% monthly churn) ARR (1% net negaZve monthly churn) 1% Churn = $20M ARR = $100M in ValuaKon Note: Assumes monthly new bookings increases by $5k per month. www.bvp.com/cloud 22

CUSTOMER SUCCESS MANAGEMENT www.bvp.com/cloud 23

LAW 06: CONTROL YOUR OWN DESTINY… CASH IS KING Source: iStock www.bvp.com/cloud 24

BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 12/31/2015 12/31/2015 25

v BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 2/5/2016 www.bvp.com/cloud 26

$63BN MARKET CAP LOST IN 5 WEEKS www.bvp.com/cloud 27

PRIVATE CLOUD MULTIPLES ARE TRADING AT A PREMIUM TO PUBLIC CLOUD MULTIPLES… BUT IT CANT LAST The public / private gap will converge Public cloud multiples are cheap Source: 45 companies in BVP Cloud Index as of 2/4/2016. CapIQ. Note: Private cloud transactions based on 69 private transactions. In the last 6 months, the average ARR multiple paid was 14.0x. BVP Cloud Index multiple and Legacy software multiples are both NTM GAAP revenue. 28

LAW 05: 5 C'S OF CLOUD FINANCE Source: iStock www.bvp.com/cloud 29

5 C’s OF CLOUD FINANCE 1 2 3 4 5 CARR & ARR CAC PAYBACK CHURN CLTV CASH FLOW Committed Customer Logo Churn Customer Gross Burn Rate Annual Acquisition Cost Lifetime Value Recurring (Gross Margin Revenue MRR Gross Affected) Net Burn Rate (CARR) Payback Period Churn Free Cash Flow Annual MRR Net Churn Recurring Revenue (ARR) www.bvp.com/cloud 30

BUILD YOUR DASHBOARD TO FLY YOUR ROCKETSHIP…or RIDE YOUR UNICORN www.bvp.com/cloud 31

MULTIPLE WAYS TO BE SUCCESSFUL: KNOW YOUR MODEL AND NAIL IT 1 Yr CAC Payback, 100% Retention 2 Yr CAC Payback, 115% Retention Revenue Results in same cash ﬂow S&M Costs $24 Cash Flows (Gross Profit – S&M) $24 aber 4 years $16 $13 $15 $10 $12 $12 $10 $10 $10 $10 $8 $0 $1 ($8) ($8) ($16) Year 1 Year 2 Year 3 Year 4 Year 1 Year 2 Year 3 Year 4 Note: Assumed 80% gross margin, and no other expenses. www.bvp.com/cloud 32

TAKEAWAY: GUARDRAILS FOR VALUATION Representative SaaS Business ($15mm ARR) 1 2 3 4 5 CARR CAC PAYBACK CHURN CLTV / CAC CASH FLOW % Fwd Growth (Mos) (Monthly) (New ARR/Mo Burn) Good 50% 24 1-3% 3x <1x Better 50-100% 12 - 24 <1% 3-5x 1x Best 100%+ <12 Net negative 5x+ >1x www.bvp.com/cloud 33

POST SERIES A: THE 1-1-1 RULE! 1x 1% 1yr NET NEW ARR <-1% MONTHLY CAC PAYBACK NET BURN GROSS CHURN >+1% NET CHURN www.bvp.com/cloud 34

LAW 04: THE BEST PRODUCT IS FINALLY STARTING TO WIN Source: iStock www.bvp.com/cloud 35

Source: docs.oracle.com

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Source: Slack 38

Source: New Relic

LAW 03: THE ASCENDANCY OF DEVELOPERS 40

APIS TO ACCELERATE YOUR BUSINESS Uber Growth Mapping Global bookings, in billions $30.0 Payments $26.1 $25.0 Communication (Messaging/Voice) $20.0 Email $15.0 $10.8 SSO $10.0 Customer Engagement $5.0 $2.9 $0.6 Storage $0.0 2013 2014 2015 2016 Source: Reuters. www.bvp.com/cloud 41

LAW 02: INSPIRE (AND HIRE) WITH VISION Source: iStock 42

INSPIRE (AND HIRE) WITH VISION Vision - The dream; a team's true north. Primary objective is to inspire and create a shared sense of “ purpose throughout the company. ” LinkedIn’s Vision: Create economic opportunity for every member of the global workforce www.bvp.com/cloud 43

LAW 01: MOBILE IS EATING THE WORLD ....WIDE WEB! Source: iStock www.bvp.com/cloud 44

MOBILE IS A GAME CHANGER FOR THE ENTERPRISE ~EVERYONE IN ENTERPRISE B2B GLOBAL PENETRATION NOW HAS A SMARTPHONE 85% 1 –> 73% Americans between 18-29 Global Mobile PenetraAon 1995 - 2014 INTERNET USAGE TIPPED TO REACHES AN UNTOUCHED MOBILE WORKFORCE >50% 80% Internet usage on mobile vs desktop Workforce are non-desk workers Source: Pew Research Center, April, 2015, “The Smartphone Diﬀerence”. Source: eMarketer 9/14 (2008-2010), eMarketer 4/15 (2011-2015). Note: Other connected devices include OTT and game consoles. Mobile includes smartphone and tablet. Usage includes both 45 home and work. Ages 18+; Zme spent with each medium includes all Zme spent with that medium, regardless of mulZtasking. KPCB Internet trends, 2015

USE CASES THAT SPEND >50% AWAY FROM A DESKTOP ConstrucKon Field Services Field Sales AL C Healthcare EducaKon Retail I T R E V Events Agriculture SMBs AL CollaboraKon T N O Z Paper Replacement (Forms/Invoicing) RI kk O H www.bvp.com/cloud 46

WAVE 1 = CONTENT CONSUMPTION WAVE 2 = CONTENT CREATION 2010 2015 2020 CONTENT The mobile version of the cloud app CONSUMPTION Paper replacement Collaboration/Communication CONTENT CREATION In the field working ??? www.bvp.com/cloud 47

LIMITED REAL ESTATE = CONTEXTUAL AWARENESS IS THE FUTURE DOWNLOAD NOW @ www.speakeasy.co 48

MESSAGING IS THE KILLER MOBILE EXPERIENCE •  The average Millennial (18-24) exchanges an average of 67 text 1 messages per day •  Text messages have a 98% open rate, while email has only a 20% open rate2 •  Over 80% of people use text messaging for business, and 15% said that more than half their messages are for business purposes3 •  First example of success – Slack4 •  2M DAU •  570M paid users •  800M+ messages sent a month •  4k platform apps Source: (1) Business Insider. (2) Velocify., (3) eWeek. (4) Slack. www.bvp.com/cloud 49

BESSEMER’S 10 LAWS OF CLOUD COMPUTING 10 09 08 07 06 OnDemand GROW Sales Customer Control your EVERYTHING: (efficiently) or efficiency is SUCCESS = own destiny… die. your oxygen. company CASH is king. success. 05 04 03 02 01 5 C's of cloud Best The Inspire (and hire) MOBILE is finance. PRODUCT is ascendancy of with vision eating the finally starting Developers world...wide to win. . web www.bvp.com/cloud

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Don’t live up to your expectations, live up to your potential” www.bvp.com/cloud “