Reflections on Bessemer Venture's Anti-Portfolio
Introduction
In the high-stakes world of venture capital, hindsight often provides lessons that are as valuable as a successful investment. Imagine having the chance to invest in companies like Airbnb, Apple, or Google—only to pass on the opportunity. Sounds unthinkable today, doesn't it?
Yet, even the best in the business have their list of 'the ones that got away.' For example, Bessemer Venture Partners openly shares this list in their The Anti-Portfolio page.
Curious about what could be learned from these passed-over investments, I took a deep dive into each company listed on that page to look for common threads. I've condensed these findings into 7 lessons that might just be game-changers in how you approach venture investing.
If you're interested in avoiding the same pitfalls and sharpening your investment acumen, keep reading.
The Lessons
1. Don't Get Lost in the Valuation Hype
Sometimes a startup’s growth can outpace what even seasoned investors expect. If a company is growing like wildfire, a seemingly "high" valuation might actually be a bargain.
For example, Airbnb’s early revenue numbers showed rapid growth, but even a veteran investor would have found the initial $40M valuation steep. Missing out on this opportunity was a classic example of underestimating a company's growth trajectory. Always consider the speed of a company's growth and how that might justify seemingly "high" valuations.
But there's another layer to consider. Market dynamics, like competition among venture capitalists vying for a stake in promising companies, can also accelerate valuations. When multiple savvy investors start competing, it creates a reinforcing cycle where the valuation rises, sometimes at a pace that even outstrips aggressive growth metrics.
So, if you're evaluating a startup, it's not enough to just consider its financials or growth rate alone. Take a hard look at the broader investment landscape and the buzz around that company. Both can provide crucial clues as to whether a 'high' valuation is justified, offering a more nuanced understanding of your potential investment.
2. Don't Underestimate the Market
Never make the mistake of trivializing a market without a thorough investigation.
When eBay—initially started as AuctionWeb by Pierre Omidyar in 1995—sold its first item, a broken laser pointer, many might have scoffed at its business model. A platform for auctioning off what seemed like garage sale items? Sounds like a hobby project, not a business.
Yet, eBay didn't just remain a 'hobby project.' It a grew into multibillion-dollar business with operations in about 32 countries, as of 2019. What made eBay more than just a site for stamps and coins was its embrace of a burgeoning trend—online auctions—that tapped into a consumer appetite for peer-to-peer sales.
So when you evaluate a startup, it’s not just about the product or service; it’s about understanding the larger market landscape. Is this a trend or a fad? Is there room for growth? These are the kinds of questions that can save you from missing an investment with huge market potential.
3. Don't Let Your Biases Cloud Your Judgment
We all have biases that can cloud our investment judgments. Make a conscious effort to set them aside.
Take Google as a case in point. When the founders were simply "students" tinkering with a "new search engine" in a rented garage, they were easy to dismiss. Yet, that unassuming garage would later become ground zero for a company that didn't just transform industries—it redefined the very fabric of our digital lives.
Don't let age, market novelty, or other biases impact your investment decisions.
4. Don't Be Scared Off by Competition
Don't let a crowded market scare you off. If a startup has a unique angle or superior product, it can rise above the competition.
Consider Zoom, a video conferencing platform. The company sought Series B funding in 2014, at a time where the video conferencing market was already crowded with established players and newcomers. So, Bessemer took a pass on this opportunity.
However, Zoom's story didn't end there. Bessemer did end up investing in Zoom's IPO in 2019 at a 100 billion valuation](https://www.cnbc.com/2021/07/24/zooms-fast-ascent-to-100-billion-made-acquisitions-a-sudden-priority.html).
The key takeaway here is to focus on the intrinsic qualities of a startup, such as a clear technological advantage or superior user experience, even when it's a small fish in a big pond. Sometimes those are the companies that defy odds and redefine markets.
5. Don't Be Too Price Sensitive
Evaluating an investment's worth is never solely a function of its current financials—it's an art form that balances data with the predictive qualities of market disruption, technological innovation, and management prowess.
Take the case of Apple, whose 773K, and their net income was 47M and 60 million valuation?
I'd argue that it does when you delve deeper into Apple's strategic position at the time: The company's success was driven by the Apple II computer, which in addition to taking avantage of the latest advancements in computer engineering, they uniquely positioned to appeal not just to hobbyists and businesses but to the general public (source: How Innovative was the Apple II).
Had investors looked beyond the valuation and seen the seismic shift Apple was about to instigate in the personal computer market, they would have realized that the seemingly steep price tag was, in fact, a bargain.
Valuation is but one variable in the multifaceted equation of investment decision-making. Miss this, and you miss the forest for the trees.
6. Don't Let Regulatory Fears Be a Deal-breaker
While it’s vital to consider regulatory hurdles, don't let them be an automatic deal-breaker if you believe in the company’s mission and ability to navigate these issues.
Case in point: PayPal. Bessemer declined their Series A round, labeling the firm a "regulatory nightmare" coupled with a "rookie team". Nevertheless, PayPal managed to secure a 46.6 billion valuation in 2002.
It's worth noting that many industry-defining companies—think Uber, Airbnb—have faced their own Goliaths in the regulatory arena, only to emerge stronger and more resilient.
The lesson? Due diligence on regulatory matters is indispensable, but don't let it overshadow an otherwise compelling investment thesis.
7. Don't Ignore the Importance of Founding Teams
Investing in startups is not just about markets and metrics; it's also about the people leading the charge. Strong founders often turn seemingly insurmountable challenges into durable moats.
Take the example of Okta. While Bessemer acknowledged the product's potential, they declined to invest in 2009, primarily because they thought the task of creating an integrated Cloud Area Network from web apps was overly complex. As it turns out, that complexity was not an obstacle; Okta IPOed in 2017 at a 10 billion.
Don't underestimate the ability of a strong founding team to tackle complexities that may appear daunting. When you're making investment decisions, the human element should always be a significant part of your consideration.
Conclusion
Navigating the perilous waters of venture capital investment is a complex affair, tinged with both the promise of massive returns and the threat of costly mistakes. For anyone looking to invest in the next big thing, the history of missed opportunities can serve as both a cautionary tale and a roadmap to future success. Bessemer's Anti-Portfolio isn't just a laundry list of what could have been; it's a master class in understanding the nuanced dynamics that influence investment decisions.
Each of the seven lessons outlined above speaks to a different facet of the investment process. Whether it's the danger of fixating on valuation, the risk of underestimating market potential, or the importance of recognizing the capabilities of a startup's founding team, these insights come together to offer a more holistic framework for evaluating investment opportunities.
So as you ponder where to place your bets in the increasingly competitive landscape of startups, remember that the lessons from the past can often illuminate the path to future success.
Invest wisely.