Bessemer Venture Partners - Building a VC Firm that Lasts Centuries - [Invest Like the Best, EP.327]

I know firsthand how complex the tech stack is for asset management firms, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading compliance, and more all at scale. Ridgeline is revolutionizing investment management, helping ambitious firm scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm, schedule a demo at Ridgeline.ai. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like The Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like The Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com. Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum, and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guests this week are Jeremy Levine, Kent Bennett, and Brian Feinstein. They are partners of one of the oldest and most storied venture firms in the world, Bessamer Venture Partners. Our conversation is split into two parts. First, we explore Bessamer itself. It's over 100 years old and has a unique operating model with lessons for every investment firm in the market. We then discuss Jeremy, Kent, and Brian's investing styles and outlook. What they look for in businesses, their thoughts on various sectors like vertical market software, and we close in the discussion about AI and defensibility. Please enjoy this great conversation. The first voice you'll hear is Jeremy, then Kent, then Brian. Kent, Jeremy, Brian. Thank you so much for doing this together with me. I don't think I've ever done three people from the same firm at the same time, so this is kind of a fun experiment. And when we talk last time, we figured we'll give this a whirl and see how it goes. And I think in this case, it's going to be really fun because Bessamer is such a storied firm. It has such a long history. It also seems to be among the firms, the one that is most willing to evolve with the times, change its investing style, change, its stripes change, how it thinks about presenting itself to the world, really easily through time. And so I'd love to spend the beginning chunk of our conversation on the firm itself, its history, its unique history, and why that allows you to do interesting things as a partnership. Jeremy, maybe since you've been there so long, you could give the brief overview of Bessamer, maybe up to the point that you joined, and then we can all talk about the period sense. The truth is a bit like an oral history, I suppose, because none of us was around or even born when what became Bessamer venture partner started. But as it's been told to me, and therefore probably been massaged and edited over the years like all good oral histories, and therefore maybe 10% of it is still truly true, when Andrew Carnegie Henry Fips and Henry Frick started Carnegie steel together, they were three Scottish immigrants, and they commercialized the Bessamer process, which was invented by another Scottish individual. And if you went to grade school in the United States, you probably studied the Bessamer process in eighth grade US history, which was essentially a way of making steel and high volumes really cost effectively, and these three entrepreneurs figure how to actually build it, and it works really well. And then eventually, I think by 1907, as Carnegie steel was humming really well, JP Morgan got the bright idea to buy up all the steel companies, aggregate them into a single company called US Steel, and essentially create a monopoly, which of course led to the Sherman Antitrust Act, but that's a story for another show. And I think Carnegie ended up making $400 million in 1907, which is an ungodly sum of money, even in today's terms, but 116 years ago, it was unfathomable, and Fips and Frick both did really well as well. Fips is essentially the patriarch of the firm that we all work for today. He took some of that money and put it in a special trust for his descendants with the goal of creating a really long-term family office, and he was a private individual in great contrast with Carnegie, who put his name on everything he touched. Fips even named his own family company Bessimer in a nod to the brilliant inventor who created the process that generated all of his wealth, and Fips was a pretty good investor too, and he ended up investing in what he called high-risk, high-growth opportunities in the early 1900s, and some of the first ones were companies like Ingersoll Rand, International Paper, and WR Grace, and eventually, over literally 60 years, the companies migrated from industrial companies to technology companies as the IT industry was born in the 70s. And so it was essentially the high-risk, high-growth department of a family office became Bessimer venture partners formally in the 1970s, or maybe even early 1980s, but they were basically a group of people none of whom were family members who were working for this family office trying to generate really good long-term, compounded returns investing in technology projects with the enormous patients, and the family, who's a very close partner of ours today, invested in, or with a really long time horizon, which suited them really well, and ended up driving fantastic performance, because not many people have that sort of patience to be investing in 5, 10, and 20 year projects regularly, and it created this firm, which we're all part of today, with a very long-term time horizon, and a really stable capital base, because the family understood that, yes, performance goes up and down through the years and through decades, but in the long run, and they now have 116 years of performance history to understand it really well if your patient does an investor. So that's the short background. Today, we are about 200 people. We are about 20 investment partners who continue to work in the same way that our predecessors did for many decades for this one family. Although, say we have many causes that we support, they are essentially our LPs, other family offices, foundations, charities, hospitals, universities, the usual suspects, and we work in a highly disaggregated, empowered manner where each partner or team of folks can go make investment decisions, as long as they're putting up a meaningful amount of their own capital, and our LPs capital at the same time to hopefully invest in the next great technological invention, or trend, or business. So that's sort of bestment of nutshell, but maybe Cantor Brian can supplement that with more interesting tidbits. What I might ship in to your starting question is there is a ton of historical irreverence while we really benefit from that history in this strong capital base. We're also feel constantly free to rethink the entire model because nobody here owns it. There's no founder. We look at and think, "Well, you don't want to offend so-and-so in the corner office by questioning the way we did that thing." Our sort of historian and chief, when I joined, was a partner named Phil DeHardiman, and he was actually a professor at the business school at Harvard, and he's just a hoot. And he was the first to make fun of the traditions that we had, and just constantly questioning everything. So I think there's a long tradition of us saying, "This is how we've done it for years and years. It's probably somewhat wrong. Let's rethink it all the time. And in the 15 years I've been here, our operating system has changed in several major ways." We spend a lot of time studying the, I guess I'll call them like the heritage brands, the Hermeses and Rolexes of the world. And I've always been interested by the degree to which time cannot be accelerated. Like you need a certain amount of history and time to really build these incredible brands. Maybe someone can do it faster, but for the most part, these brands are extremely old. I wonder if there's something like that, and whether or not you think there's something like that at play here with Bessimer, Ventures and Industries and that old. And there just really aren't that many investment firms that are as old as this one. How does that heritage impact the organizational structure, the partnership, how things work, who's attracted to come work there, doesn't have a big day-to-day year-to-day impact, or had it been started 20 years ago, would it be roughly the same place? I think the important part is that there's no owner here who is the founder. I don't think people sign up to work here because Bessimer is 116 years old. In some ways, that can be like a bit of a marketing challenge because cool young entrepreneurs don't necessarily want to emulate what was done in the steel industry days 100 years ago. But I think the much more important thing is that we have an operating system here that's just set up to sort of endear past any one individual and that leads to lots of healthy characteristics of how we recruit people, how we develop them over time, how we promote them, and all of that, I think, is the really stabilizing stuff that makes the machine work. We just feel incredibly fortunate to have been given this platform by the prior generation. When someone hands something over to you, you're the beneficiary of it and you're able to build a great career and do incredible things. You just feel enormous responsibility to hand it over to the next generation and I think that's how the longevity comes into play. You described in literally how the firm works. Then I'm curious about without a founder really even in the visible history of the business, a leader that started the thing. How does then a group of 20 partners organize themselves and get things done? You read about like Valve software or something like those interesting examples of different organizational structures and how they work, what's Bessemer's equivalent? I'll start. I think Kent's point that no one owns it is matched and important by the fact that no one runs it. And by it, I mean something really specific, which is the investment decision-making process. And so we essentially split everything into one of two buckets. The core of investing, actually making investment decisions, and everything else. The everything else part looks much more like a what I'll call a traditional company. We call it our infrastructure team. It's run by a person, her name is Sandy Grippo. She's fantastic. And it has the functions of a more typical company. There's a finance function, and a marketing function, and so forth. On the investing side, it's pretty unique in that nobody is in charge. And so one of the things I like to mention to entrepreneurs when I talk about this is that in the 22 years I've been at Bestember Venture Partners, I've seen one investment. One, actually gets shot down. We have this investment committee. And by the every partner is a member of the investment committee, and every partner has an equal vote. The way we vote on things is actually on a scale of 1 to 10, where as long as your vote average vote is 5.5 or higher, you have approval. So we're not really asking anyone for permission to do something. We're asking each other for feedback on what we individually want to go do. And so we feel the responsibility and the authority to make the decision. And we want to tell each other, like G, Brian, or G counter G, Jeremy, that doesn't look like a very good decision you're making. I might vote that as sticks or a five. I'm not trying to tell you you can't do it. I could, I could try to vote at a zero, but frankly, even with a zero vote from one partner, the average can still be well above 5.5. So there's formal approval. But I want to tell you honestly, I wouldn't do it if I were you. And so we want the person who's closest to the decision who has the most information to make the actual decision. And then we just hold each other to accounts. We write down who made the decision. And sometimes we'll collaborate in pairs or more. We'll share the responsibility and the credit and the blame. But we write down at the time who made the decision who gets the credit and the blame. And as a young person growing up here, that's wildly exciting and empowering because you don't have to sort of work for the man or the woman in charge forever. You're essentially establishing your own track record and reputation. And at the same time, when it comes to working with entrepreneurs and the decisions related to their company, you're empowered to help them too. You'd have to run back to home base and ask the boss, hey boss, what should we do in this situation? Like you decide because you're responsible. We've been able to maintain that idea of individual responsibility with collective support for a really long period of time. It's one of my favorite parts of my week is when you meet with an entrepreneur and they say, you have a great conversation. It's the beginning of potentially a long relationship and they say, okay, so what is your process from here? And what they mean is, I understand. I'm going to have to go jump through some series of 58 hoops and go shake a bunch of hands. And we get to say like, there is no process. This is the process. We're going to meet. I'm going to decide if we want to invest and say yes or no. And we'll go from there. They feel very relaxed at that point. And then when you're sitting on a board of a company and the company is facing a tough decision and co-investors around the table say things like, I have to go ask my partners what I can do here. It's just like an insane statement. It's like, well, you're in the room. You know the situation. It's really empowering at the customer to be able to say, okay, here's the right thing to do and make sure we can do it. What about on the incentive side? So I understand the decision-making process and the individual autonomy and the power that that brings and the sort of partner that might attract. What about the reward on the back end? So if I'm the one that brings Shopify in the door or something or Twilio or one of these great investments that Bessemer has made over the years, how are the rewards shared amongst the partners? And what have you learned about tuning that incentive structure the right way over time? It has evolved quite a bit over time and honestly none of us is privy to like what happened 85 years ago, but the core principle is the following. Almost everybody at Bessemer has grown up at Bessemer. That's not entirely true, but I'd say three quarters of the partners. And that means we started like Brian did as an analyst when he was maybe 22 years old. Or I think I started in my mid 20s, I suspect, can't listen to the same zone and we grew up at the firm. And so we generally give people the authority, the checkbook after we've known them for five, seven, nine years. So there's a high level of trust and confidence in people's individual investment judgment by the time they're actually writing a check. And then what we essentially say implicitly is there's this great platform that has been created by generations of people who've come before you. And you're now standing on it with the ability to screw it up or make it better, hopefully make it better. What we're going to do is we're going to reward you largely based on the performance of your investments for the first number of years in your career. And there's some shared common ownership of you over the whole enchilada as well. But you're thinking it's going to be dominated by your own investments. And we think that's really clarifying for a young investor because they can focus proving they can do it, if you will. And then as they perform, if those investments turn out to be the next say Shopify, they'll do really well financially, but the firm will also do really well. And they'll have essentially earned their share, if you will, to a co equal ownership, which is what everyone can get to over time. Once you've done that and you've demonstrated really meaningful individual success, you become a true owner of something not like a fake owner where there's really someone else who's still in charge who's still you work for, but a true co equal owner. And that's what I think keeps people at best for a really long time because you're not thinking like, oh, I can keep working for someone. So who started this place, or who got here before I did, or I can leave and start my own firm, that doesn't happen very often because there's not much incentive to do it when you feel like you can be a true co equal owner. That's the system. And that's essentially how we both try to balance giving people autonomy responsibility, but not necessarily saying here you've been here to the earth on day one. There's a little bit of go prove yourself and those who are up for proving themselves tend to love it. How far does the autonomy go on the style of the investment itself? Because one of the things that seems to be about best humor is that the sorts of investments that it will make and has made has evolved a lot of our time and constantly change. If I came as a new partner and I brought a late stage buyout type deal or something that really clearly wasn't like a venture style investment or something like that. What reaction would that be met with how much are you pushing people to really pursue their own unique individual investment strategy versus conform to what the charity that is an LP of customer thinks that you guys do. I'm always interested in style drift and how much of that is good versus bad and how much the firm encourages versus doesn't so how does the customer manage that sort of thing. Patrick, I would say we encourage more autonomy than almost any other venture firm both with respect to decision making and style that could be a speculative seat investment in a team back of an African all the way through a late stage growth buyout in a mature business that's generating profit across every area of high technology. I mean the bread is truly extraordinary a lot of folks associate us with software that's the bulk of the portfolio that's a bread and butter but we have investments in life sciences and FinTech in frontier tech runs the gamut. The autonomy is important because conventional wisdom says you can't scale venture capital and that's true in a small partnership with a consensus driven decision making model because if you try to scale that and try to arrive at consensus. You either end up with mediocre decisions or the decision making process breaks down because not everyone can meet the company. We like to think we crack the code on how to scale venture capital by enabling each individual partner to have that autonomy to pursue whatever investment areas they want to pursue and make the best decisions they possibly can. There's an important part of the operating system we haven't talked about yet which we call the road map internally so it would be very odd behavior if I showed up to a partnership meeting and said hey everyone I'm investing in a biotech company because the group knows I don't know a thing about biotech and they would think I'd lost my mind the behavior we have here is road map based which means every partner will pick up over time a number of essentially themes they're interested in we call them road maps and we go off and do a bunch of things like that. And we go off and do a bunch of homework on those themes typically before we make our first investment and we start talking to each other about them at our off sites and other periodic meetings will present a road map outside of the context of any investment will say gosh I'm interested in vertical software here's when I'm seeing there et cetera. And then when you bring in a company that's squirreling that road map your partners know that you're within a lane that you've thought a lot about certainly somebody could branch into like a new style of investing so let's say you wanted to do a ton of seed stage investing with like a very high frequency but you would typically present that to the partnership as a strategy first and have a fierce discussion on that and that strategy and then begin to execute on it. So it's not as if you're just showing up and saying trust me i'm doing something you've never seen before it's going to work out there's a little bit of precondition. What's shared in common amongst the best road maps that you've seen presented across your collective histories at best and are like what is it about the road maps that are really effective. I thought a lot about this because we did a retinalysis of all of our best road maps where they came from and what worked about them typically I would say the best but not all the best road maps but most of them are position around some big change in the technology landscape so clouds. investing being probably most productive road map starting 20 years ago. So they start with the tech change as opposed to starting with a problem space. So if you start with aging as a problem and you say, "Gosh, aging's really bad and mortality that's bummer," I'm going to go look for technologies to solve that problem. It's like, "Well, that problem's been around for a long time. Nothing has really changed to make that better. Whereas if you start with large language models and, "Gosh, what could they do to make baby boomers lives better right now," you're starting with the tech change and bringing that solution and then pointing at a problem that's really successful. The other characteristic of successful roadmaps tends to be that we didn't come up with the idea without any real world exposure. And so our best roadmaps, it's a little bit of a dirty secret here, but have come from an investment we made where it started going like much better than we expected. And we sit back and say like, "I thought this was going to work, but not this well. This is going amazing, why?" and it tends to point us to some go-to-market strategy that's part of that investment that's like driving the sort of outside success. So a lot of our roadmaps, we get inspiration from the portfolio where we accidentally stumble into some new tech trend that we didn't maybe even see up front. As part of that, there's often a core insight that's a little bit contrarian when Jeremy first started investing in user-generated content. We had this insight that content will generate traffic which will enter and generate more content and create this viral loop that you can ultimately monetize through advertising. And that led to his investments in Pinterest and Yelp and LinkedIn and all these great user-generated content companies. When we started investing in vertical software, we had this small core insight, "Yes, the markets are small, but you can often trade market size for market share and build these industry-defining companies that end up capturing 40, 50, 60% of their markets and ultimately become really valuable." When our partners Byron and Ethan and David started investing in developer platforms, conventional wisdom said, "Wait a second, there's no screen, there are no buttons, it's just an API, you can't build a business this way." And so there's often a bit of a contrarian point of view or a little insight that we exploit and mine and pursue and that drives the roadmap activity. One of the really interesting things, which comes back to some of the firm governance and structure that is connected to what Byron just said, none of us own any of the intellectual property or ideas, not the stages, not the geographies, not the roadmaps. We share them with each other to get feedback and then when someone says, "Wow, this is working." Great example, I think Brian was an analyst at Bessemer when he discovered MindBody and I was a partner at the time and we ended up investing in the company. We then realized, "Wait a minute, MindBody started to offer payments as a product. This is an unlock that will drive really significant revenue growth. Let's go find every other company that might do something similar in another category. MindBody has software for yoga studios and at fitness clubs and like, surely thereafter I think nine different partners at Bessemer were like, "That's a good idea." And we ended up investing in broker, toast, X time, Clio. I think literally we have the avenue vertical software companies invested in by nine different partners. If one partner owned it, was able to call it off limits, we would have been maybe ten percent as productive. But because it's an organized free for all, is maybe the best way to put it, we tend to end up helping each other by sharing the ideas and then benefiting from each other's execution against the best ideas. The challenge is that sometimes I think we're all relatively smart. We get attracted to the single best ideas, which may end up with a slightly more concentration of the portfolio in one spot. But honestly, I think we'd rather have that than be forced into these categories or groups trying to find the best investment in crappy area is a much less fun and less productive endeavor than shifting the resources of the firm automatically, if you will, to the most promising opportunities. If there ever is a major conflict then inside the partnership, what is the nature of that conflict under this incentive structure? Is there any? We've certainly had a conflict. How can you not? If you have more than one human in a room for decades, you're going to have conflicts. What we actually do to help resolve that is one, having no one in charge and having each of us able to talk to one another to kind of get through problems is productive. We've also had, in most of our internal and significant meetings for years, more or less since I've been a best person, so at least 20 years, we've had an independent psychologist or coach in the meetings. This individuals just change over time, but they tend to have some longevity, so they understand us. They get to know us. They have no ownership in the firm whatsoever. They have nothing at stake. They're just there as an independent to help referee anytime there is some issue or tension, and sometimes having an outsider who knows you call you out on something is really effective. It's one of many things we've adapted or adapted over the years in order to deal with an occasional strife. We're not perfect. Like any family we have around dysfunction. The other thing I'd point to that, and hopefully this doesn't sound too kumbaya, but we did our values exercise several years ago. The number one value, like if you pulled everybody a bestman said, "What's a top value at Bestmer?" Everyone's number one, essentially, was intellectual honesty. It was like the first thing they said, and it's something you notice very quickly if you join Bestmer is that people just say what they are thinking. There's zero politics. There's zero salesmanship, and that, as a core part of the operating system, is critical for really avoiding conflict, because if you're just saying what you think, you're not advocating for your own portfolio, your deals, etc., like the conversations just get direct to the issue and the resolution with much less friction than some of these organizations we are about that are much more political where people have favorites, and we don't have any of that, which is such a massive relief for all of us, and I think makes life much more pleasant. I'm loving these answers, because the ideas are so generalizable to any kind of investment partnership and firm, like it doesn't need to be early stage, so I have a few more. I'm interested in the same sort of question that I asked on roadmaps for the concept of the sort of apprentice model. I remember talking to Sarah Tavill about this when I first met her many years ago, and kind of learning about the way that Bestmer, like you said, you've all started there in her 20s, tends to get talented people very young and groom them for a long period of time before even giving them the checkbook in that five to nine-year period. What works? What have you found to be the most effective way to run this program that you think maybe others could borrow or steal? It's just a lot of time in the same room together. I sat next to Jeremy on two boards before I was a partner. I sat next to Bob Goodman, one of our senior partners, for 200 hours of board meetings and other conversations, and then felt a hard time in my first mentor. I spent several years in the same room with him, just listening to him talk to companies and occasionally chipping in at first, and there were time building confidence. I think that's the core part. There's no shortcut to that, but boy, you learn a ton over time, and you just take for granted how much you've picked up along the way. I think there's a second element to it, and I'll tell you an anecdote I got from, at the time, a young associate, and she had just joined the firm, and I was doing like a half an hour. Welcome to Bessemer. I hope you found where the bathroom is located, introductory session. I asked her, "Is there anything different relative to what you expected now that you've been here like a month?" She said to me this thing that shocked me, and I've told the story many times, and she said to me, "Yeah, there is. I can't believe how honest the investment memos are at Bessemer." I was like, "What do you mean honest?" She had been at another investment firm before she joined us, and I asked her, "Did they lie?" and then Bessemer memos at your old firm said, "No, no, it's just that." She realized, within just a few weeks, I think, really critical insight, which is that when we write these memos, we're not trying to convince somebody what to do at their old firm. There's really two people who ran the investment committee, and the goal was to convince them to give you permission to make the investment. So, yeah, you talk about some weaknesses or risks in your memos, but it was kind of like answering that silly interview question that you might get when you're interviewing for a job, and someone says, "Tell me about your weaknesses." I go, "Oh, I work too hard. It's like a bullshit weakness that you're saying because you have to have some weaknesses or risks, but it's not real." And in contrast, she said at Bessemer, it was very clear to her, people were writing in the memo what they really think, because not asking someone else to make the decision for them, they're explaining their decision. And the teams that work on investments at Bessemer are typically a partner and an associate, and sometimes an analyst. So, it's two or three people. So, it's not like there's nine people that you can hide behind. It's a really small group of people who are saying, "This is what we think. The right answer is, and you feel this responsibility." Again, you're not trying to convince someone, and so you end up learning much better when you think you're making the decision for yourself than when you're trying to convince someone else to do something, but it's really their decision, because you feel this responsibility. It's empowering, but it's also scary, and most people when they feel responsible end up doing better work, and then a learning faster. And we should also say that everybody is then all the investors were invited into our Monday meeting. And so, they all join that meeting, they all read those memos. And then because we're not selling your potential investments at that meeting, you're just discussing them, I feel much more open to tell Jeremy, like, "Hey, I read your memo, and I think you totally missed something. This is how I would have thought about it." And that's not really threatening or offensive to them, because he knows he can still do whatever he wants. And so, we can have this open intellectual conversation, and everyone is there to hear it, participate in it, tell me I'm wrong. There's just a ton of that open dialogue, and that couple of hours we spend every Monday together, and that's massive learning for all of us, even those of us who've been here for a long time. The irony is, are three most successful vertical software investments, Shopify, Toast, and Procore, were all relatively unpopular investments, when first discussed in the partnership [BLANK_AUDIO] And, or a ton of his decision-making model made those possible. And when you're a young investor, you see that dynamic, you put yourself in a different headspace. It's not about doing what's popular. It's not about chasing momentum. It's not about pursuing that consensus opportunities. It's about developing a thesis and pursuing something that may be a little off the beaten path. I'm sure that during this apprentice period where someone's affected with a partner all the time, that there's this development of taste that happens, some of which I'm sure is borrowed from time spent with the partner, but some of which in the perfect world becomes their own. I'd love for each of you to describe your taste in companies, what that term brings to mind, and maybe even a little bit about how that taste was developed. It's funny, because I think we have three different tastes. If I had to project under the two of you, I'll start over time, Patrick, mainly as I've made some good but some bad investments. All of my learnings have come from my mistakes. And as I think about them, I've slowly honed in on, when I've gone wrong, it's that I haven't started with just very clear radical product advantages. So the investments that worked have had such clear, better products than the existing alternatives at the time of our investment. Almost all the ones that have failed, that was more of a question mark. Either the product wasn't fully formulated yet or it was out there, but it wasn't just a slam dunk in the minds of the people buying it or the consumers using it. I've just honed in tighter and tighter and tighter on, how can I get to the truth of, is this product radically advantaged on day one? And try to eliminate a lot of other noise, so you can talk yourself out of any early stage investment. It's like really easy to get scared about something. You can find something to be scared about. But if the business has this strong fundamental product value, one day one, try to like screen for the other noise and not scare myself because the market size or there's some regulatory concern that could come up that some of those noisy things that I think have historically talked us out of some potentially great investments. So that's my taste. And I think Jeremy and Brian are very different and you guys fill it in for yourselves. I hear Jeremy's answer. I've never asked in this question. Okay, I'll go next. The thing that I typically fall for hardest is wild capital efficiency. I love investing in companies that don't really need my money. I think that's the dirty secret of all investing. And that was really true for a lot of the companies in which I invested. Although ironically, I think the most successful investment I've been a part of from a penny's returned is Pinterest. And Pinterest, we invested in the Series A, which was maybe like an eight or nine million on investment, ended up raising a billion dollars of equity capital. Yeah, part one public, which is the opposite of highly capital efficient. And so even sometimes you get led away from your original tastes. And I think if you're not willing to have a bit of a flexible mind, you're going to miss a lot in this business, even with flexible minds. I think we still miss a lot. As evidenced by the anti-portfolio we published on our website, I fall hard and fast typically for capital efficiency. It just solves for so many potential errors down the road. From a business perspective, the thing I overindex on path to market leadership, I cover vertical software and in these vertical markets, they're these virtuous cycles. You're the market leader, you're the number one number two player, you get all the treasure. And so there's no prototypical path to get there. I want to have a conversation with the team and understand how they see their path to market leadership. As it relates to the founders, I think I index away from like prototypical 20-something-year-old tech genius who dropped out of Harvard or MIT. Most of the founders I've worked with look a lot like two of you. The founder and CEO of ProCore, Boulder came from industry, built his business in Santa Barbara, not Silicon Valley, just deep empathy for the domain and deep caring for the customers. I think particularly in vertical software, that translates to long-term success. Kent, when you're evaluating a product given your preference for like obvious product leadership or 10x better product or whatever, what have you gotten really good at to be able to do that effectively, especially if it's not a product that you personally would be a user of? I really don't overthink it. I think that's what I've gotten better at, which is recently invested in the company that's serving the construction industry. And I am not a contractor. I can barely replace a light bulb. So I immediately got on the phone and talked to 10 contractors and said, "Hey, here's a product I'm going to describe it to you." It was a very simple product to describe, which was it runs your payroll, your current payroll service, but it also provides for you a delightful piece of software on top of your payroll that runs all of the compliance and the union reporting and all these things. And that is free. And so I pitched this to 10 contractors and six of them were like, "Where is it? Can I sign up for it? I need it." And so that signal, so clear, I understood the economics of the product with the lifetime value or the annual value could be, and I understood that I had basically just generated a pipeline with an afternoon that was going to be an excess month of the value. So that's the clear signal. I don't overthink it, and I recognize that if I engage in 20 deep discussions, I'm only going to get that level of signal one or two times, and that's when I should invest. And if the signal is fuzzy or I can't understand it because I can't empathize and I can't find customers to tell me they love it, then it's just not for me. Jeremy, when you're assessing capital efficiency, especially if you get earlier in the spectrum and there's less historical financials, there's less to go on overall. Maybe there's not even like a mature product in pricing yet. How do you think through that problem? At the earliest stages, capital efficiency shows up in just a scrappiness, a willingness to do things that are the opposite of gold plated. In fact, slightly related anecdotes. So within our partnership, as we've told you, we've got 20-ish partners, and we all have different views. There's been a great debate over the years as to whether our offices should look like that of your typical dentist, or if they should look like that, of your typical fancy investment bank. I've always been a fan of the dentist's office, low-key, unordained, because when you work with scrappy entrepreneurs and they see you working in a scrappy environment, they're like, "Oh, okay, I get it." Of course, the counter is, you want really fancy offices to show people how successful you've been, so they want to work with you. But for me, I'm all about the scrappiness and at the early stages, you can see that in just the environment, the environment, the people, the team hires, they're typically less experienced, and riskier and cheaper hires, but if you get really talented people who are less experienced, and riskier early in their career, they end up growing into the next Toby Lutki, the Sea of Shopify. And I think too many entrepreneurs misunderstand the objective, which is like, "How do you build something really great without burning lots and lots of money to do so?" 'Cause burning lots of money means you've got to spend more time raising money, and you had a boning less of it in the end, 'cause you had to sell more of it off to get access to the capital. And I'll tell you one other related anecdote, which is when Shopify was preparing to go public, they were doing like a non-deal road show, which is basically when you go talk to a bunch of investors privately, not for the purpose of raising money in an IPO, but to try to get your story out well ahead of an IPO. The then-CFO Russ Jones was showing me the deck he helped prepare, and he was focusing on the fact that Shopify had raised $100 million. And I'm like, Russ, that's not something to advertise. In fact, you're missing the point, which is that Shopify actually only burned $2 million. In this entire lifetime, 'cause of the $100 million it had raised, I think something like 25 was for secondary selling of existing shareholders, and the other 75 of that other 75, 73 was still on the balance sheet. That's what you should tell investors. You built this incredible business while burning $2 million. That's an accomplishment. Unfortunately, the media headlines are often about how much company raises the truth headline that you want to understand. It's like, well, how big are you? Relative to how much you've raised? Well, how profitable are you? But of course, those stories really get told. Brian, on the go-to market side of VMS businesses, talked about path to market dominance or market leadership. What have you seen the best in the world at accomplishing that do consistently well? Every story has its own idea of singracies. I think in general, it's much easier to build a great business quickly if you're going after a grain-filled opportunity. Shopify, catering to online retailers who were coming online in a way that we've never seen before. Procore, catering to construction companies that suddenly had internet on the job site and mobile devices for workers to interact. Being able to deliver software to an industry that's never had it before is the ideal setup for market leadership. Now, there are exceptions, and I give Kent a lot of credit for the toast investment because toast was attacking a market that was fully vented. At the time, you had NCR, you had Micro, so you had countless restaurant point of sale systems so they did not have a grain-filled opportunity. And in those situations, what we've observed is the path to market leadership requires a dramatically better product. 10X better, or dramatically cheaper, 10X cheaper, in order to cut through the noise and drive that replacement cycle. And it's not easy to do. Kent can tell you the toast story, but my understanding is they did both. They showed up with an incredible tablet-based product in an industry dominated by incumbent crap. And they were able to sell it much cheaper because they were the first to bundle payments with the software, so they can underpriced on software and make money off the payments. So they were both better and cheaper. That's a way to cut through the incumbents. But otherwise, I would recommend trying to find grain-filled opportunities. Absolutely not enough to just show up and say, "Hey, this product's in the cloud." Nobody cares. You're running a restaurant. You don't care what the cloud is. It's not doing anything for you, but if you show up with a tablet that is 10 times cheaper because it's built on the Android platform than the $20,000 legacy thing they had to buy and it's more functional and you're told that you can change your menu when you're in bed that morning and you don't have to drive in and it bundles in the payments, which you didn't necessarily even know the name of your payments provider historically. And by bundling in payments all of a sudden you can look up that receipt from three weeks ago, instantly in the POS, all that comes together and it's just a complete no-brainer and that's when you get path to market dominance and market they may have some incumbents. Again, it comes back to product led for me, but it's funny to think that Brian, you're path to market dominance, taste, I think could have gotten you there with toast. I mean, I think all these things converge. Honestly, it's three sides of the same coin because when you have that incredible product, it leads to efficiency. Like I think all of Jeremy's efficiency stories are also stories of incredible product that made the sales payback unbelievable, even Pinterest. Yes, it was inefficient, but they drove hundreds of millions of users without spending a dime on the user demand. It was like incredibly efficient growth of the consumer engagement. Yeah, put it another way. If you've got an incredible product going after a green field market, you're going to check Kent's box because you're going to talk to customers and it's going to fly off the shelves. You're going to check Jeremy's box because you're going to be picking up the phone and taking orders and you're going to check my box because you'll be able to articulate a path to market leadership. In this period now, we're spring of 2023 and the period of furious, outrageous, quick deal cycles and huge funding amounts is a bit behind us. We have a bit more perspective on the sort of madness that was the 2021 market with benefit of having gone through that, but also invested for a long time. Do you think that our industry has the right tools, specifically like a preferred equity style of investment, a preference stack? Do you think that that continues to be the right primary instrument for investing in these kinds of companies, given that I have to imagine some part of the run-up evaluations was due to this preference being in place? I'm just curious if you think that we're properly equipped for the next 20 years of funding these kinds of companies with the traditional toolkit that we've had. I'll offer an opinion, Jeremy, correct me, but I don't think the high valuations were necessarily driven by preferred stock in many cases. I think for some of the pre-IPO rounds where you had a structure that would be reprised in an IPO effectively, maybe some of the later-stage investors were doing that math, but for many of us, I think we've come to realize over the years that value of our preferred stock to protect us in a downside scenario is actually not all that material to our fund returns. Actually, we're thinking about the returns. Most of the return profile is driven by the share price, not necessarily that it's preferred stock. Problem if we were to invest in another vehicle, there's a collective action problem. If all of our peers are just investing in preferred stock and we buy common stock and then we're buried under a mountain preferred, that doesn't feel good for us to somehow pioneer to one end. And so I think there's a little bit of a just perpetuating cycle that's the standard, but there are other factors that play certainly that led to the valuations aside of that structure. I agree with your conclusion. I think there's two other comments to make. One is, I think investors on average pay truly stupid prices most of the time in 2020 and 2021, and that they use any excuse they could come up with to justify those prices and maybe the existence of preferred stock was one of them, but it certainly didn't help. I think the other comment I'd make is that preferred stock really makes sense in the early days of a company, because you have this company which might be an idea on an Appkin and you're investing, say, $3 million for a 20% stake and therefore declaring that the company is worth $15 million, it can't be worth $15 million. It's an idea on an Appkin and a couple people. So the construct of preferred stock, I think, was invented by somebody cleverly to say, look, entrepreneur, if you go and sell the company tomorrow for $2 million, you got to give us our money back. You can't just give us $20% at $2 million because all you did then was eviscerate a million dollars of value by turning 3 into 2 and now you made money, it makes no sense. So the preferred stock construct makes sense to ensure interest alignment in the early stages of a company. And then at some point, it becomes irrelevant, but precedent is set from that early investment and how almost every future round of investment will look like. So people tend to just take the last structure that was used to make the last equity investment in a company, copy it, change a few of the numbers around, and then hit print. And so I think the reason why we have it at all phases is because it makes sense early. It's almost necessary for alignment and then it just sticks. One of the best predictors of future return in public equities is just some sort of normalized prevailing valuation. There's lots of measures you can do it with, price to sales or book or normalized earnings or something pretty predictive of what forward returns are going to be. And I'm curious what you think the forward perspective returns are for this style of early stage investing, today versus the 15 to 20 years that you've all been doing this in the past. I read that mind-body memo in preparation for today. And one of the things that pops pretty quickly off the page is that two and a half or three times AR multiple that was paid for that equity back at the time. And it was 12 million bucks of revenue or something like that. It was a real established business that now that would have commanded a multi hundred million dollar valuation a couple of years ago. So valuations matter for returns, even though sometimes the worst mistake you can make in this style of investing is not being willing to pay a rich price. But there's too rich of a price that can ruin any investment. And I'm curious how you all think about the perspective return opportunity in this style of investing over the next 10 or 20 years. It's lower that I can say with confidence because as you said, when the entry prices are higher, the returns have to be lower. There's a bear and a bull argument on today's prices. I think we're generally in the bull camp, so I'll tell you the bear argument first. The bear argument is, gee, when you're paying higher prices, which is, by the way, driven by the fact that there's much more capital out there, more venture funds, more growth equity funds, more firms who are at scale or scaling up, and you have to compete to invest in the best companies. And therefore, you're paying higher prices, therefore the returns have to be down. And that's the bear case. And I think there's real credence to that. In fact, I think that's true, question is whether it offsets entirely or only just partially the bull case. And the bull case may be best exemplified by the following anecdote, which is when I joined Vesmer in 2001 and started thinking all the time about tech investing. And I looked at what are the successful outcomes of great software and internet companies. I think there were maybe a handful of software companies in the world that had a billion dollars in revenue. In revenue, Microsoft, Oracle, HP, SAP, but it wasn't a long list, maybe parametric technology had a billion back then, and maybe I'm undercounting by a bit, but not by many. And internet companies, the most valuable ones were eBay and Yahoo, and I don't think either one of them had a $50 billion mark capitalization. And if you fast forward to today, I can't even count on all my fingers and toes the number of companies that had a billion dollars in revenue, maybe even just one of the best Smer portfolio alone. And so the outcomes are so much bigger, and when it comes to internet, there are many internet companies with $50 billion market caps, including a few with trillion dollar market caps, or maybe $500 million plus market caps. The bull cases, the market sizes and the potential outcomes for these companies is so much bigger that, well, sure, you'd always rather as an investor pay less than more, the outcomes allow you to afford stretching more on price. And of course, if you take anything to the extreme, you get into trouble pretty quickly, and one exercise I go through all the time on an investment is, if I take this deal and I pay 10% more, is it still okay? And the answer is always, yes, it's still okay. The problem is, if you then take that number and you say, well, what if I pay 10% more than that, is that still okay? If you do it enough times, you've gotten so far away from your initial investment that it becomes unsensical, you could literally pay 100 times more, but each individual question, the answer always has to be asked because we just don't have enough confidence or precision to know what a 10% difference is, the conundrum, if you will, of investing particularly at the early stages. And practice the way that this manifests across the software portfolio is we have different flavors of ice cream. We've got growth at a reasonable price where your entry multiple matters, your exit multiple matters, the model matters, and then we've got investments where we're paying 100 times revenue and swing for the fences. On the aggregate, it tends to work out. You've got this concept of bestamer of the Centaur, like a better unicorn because it's based on an actual fundamental metric, which is companies that have achieved that $100 million milestone. Why is that milestone significant and interesting T-Wall? What does having coined that term and written about it and thought about it due to the way the partnership thinks and operates? I'm curious why it's useful. So a year ago, as we were reeling from what we'd labeled the sassacre, all the multiples of way down, we took a step back. We'd remained, I'd say, reasonable layers through the two fraughtiest years, not to say that we didn't do some unreasonable things as well. But we took a step back and it was kind of like, what the heck just happened to this entire industry? Where did we go wrong? And it was pretty obvious. We had all fallen into the valuation trap of unicorn counting and having press headlines tell us how great our industry was doing. What hadn't changed was that these businesses, especially these cloud businesses with recurring revenue, they remained incredible businesses. I think the greatest business model I've ever seen, said the basic thing, which is like, what's an indicator of the overall health of this market? Regardless of valuations, let's count how many businesses are doing a hundred million of revenue. The reason we picked that number, a nice round number, also we couldn't tell you about a hundred million recurring revenue software company that had gone out the business in our recent career lifetime. So it felt like a measure of immortality. And so taking that count of centaurs, first of all, we're like kind of heartened that the number last year was on track to be the highest number we'd ever seen. So despite massive collapse and valuations and unicorns, wow, this indicator of the health of this economy still looks pretty good. And we just knew going forward is something we could count to ground ourselves in the reality of our new great future great software businesses still being born at a pace. Is that pace speeding up? Is it falling off? Truthfully, we counted it again, this year after the Inventing it last year. And it was slightly down this year versus the year before, but it's still the second highest count number in the recorded history. So we still think the pace of fundamental creation of future great software companies is still about as high as it's ever been. Checks with our experience that we're seeing incredible companies founded every day, even in like a gloomy macro environment. The grounding is important because I think the biggest sin that was committed by our industry or asset class during the boom was convincing ourselves that the value of the business was equivalent to the valuation of the last round. And the performance of a venture fund was based on Mark's set at the last round price. We all know the last round price is not the value of the business. It's one investor, one bitter buying an option. You can't sell the unicorn for a billion dollars in many cases. And so the centric concept was a way to reground ourselves in what matters, which is the financial performance of the business. When I think about investment firms that do a good job on, I guess I'll call it the content side, I think of Bessamer in first round as being really interesting firms and having created a lot of concepts like the Centaur, like the Cloud Index that Bessamer has created that's cited all over the place in the industry, you've done a ton of stuff like this. There's just an embarrassment of riches of old memos to read and frameworks to read through and roadmaps and ways of thinking about different kinds of businesses. There's obviously a ton of effort that's gone into all this stuff. How does that help you? Why are you doing all that? Does it manifest as better deal flow? Is it a brand building exercise for a customer? It seems like everyone sort of feels like they need to do this now. Bessamer's been doing it a long time. So can you give us a report on whether or not it's worth it? Well, first of all, it just stems from the work we do to hopefully sharpen our investment judgment and that's probably the biggest benefit. And often we will have an idea that we will circulate internally and we won't tell the world for a while because, oh gosh, we're paying attention to payments being bundled in vertical software. Like, why would we announce that the first couple of years? Then the moment tips often where it becomes a little more obvious and we make the decision to launch that content externally where we can earn some thought leadership. It may drive some incremental deal flow when we do that. I mean, we're not celebrities. We're all pretty nerdy, not particularly good at self-promotion. I think the most valuable thing it does once we launch that content is that when we meet entrepreneurs who are doing something that we're going to like, they often see this welcome mat as they're coming in the door that is a white paper that speaks to their business in a way that they're like really nodding their head. The number of times I've had a first conversation where there's just a mutual sense of, okay, you understand what I'm talking about and you get this. That's hugely valuable, leads to some self-selection of the business models that are like, Jeremy's going to understand my user-generated content business model and I think may have them select us versus another investor who may not have already had that thought or at least put it out there. The only thing on our website that we created just for the purpose of marketing is our end-to-apportfolio and we try to be funny. The rest of it is really repurposed and sometimes we'll modify it or polish it or as Kent then delay it before we put it out to the public but we're creating it internally anyway and so it's a free opportunity to show people more about who we are and it actually does lead to people reaching out to us because we publish something relative to them like, "Oh, I need to know you invested in that area. I want to talk to someone at Bessamer." Speaking of which, the reason that four of us originally got connected was because of a vertical market software that topic, my firm was doing a big deep dive into it and Bessamer came up over and over and over again, like if you're interested in this topic, you need to talk to these guys immediately, having made a lot of these investments like you mentioned in ProCore and Toast and many others. How mature do you think that whole style of business building is because if I do some quick Googling between your site and TideMark site and a few others, you can get these like incredibly rich, incredibly detailed playbooks for how to build a VMS business. It feels to me from the outside, quite mature in terms of our understanding of how to build one of them but I'm also curious how mature you think it is in terms of how many markets there are that have yet to be addressed by a VMS solution for a given industry. Obviously you've made, "Hey here, it would be hard to say that there's no more opportunity but what do you think it is in its life cycle?" I have 12 vertical market software investments and I actually counted before we hopped on the call. I was surprised at that number. Five of them I made in the last 12 months but I would say that there have been some cycles of this model and what it looks like from my body which started as pure SaaS initially bundled in payments and then made by doing that inspired and kicked off a next wave of vertical software where embedded financials were a big part of the business model and we saw some derivations of that with business-to-business transactions being part of certain platforms and that's another embedded financial wave payroll as we've had API-driven payroll opportunities and other wave that is powering some more and then along the way we've seen the percent of total transaction revenue going through these markets that the core platform that provides not only the software but maybe some of the embedded financial products can command over time and is that ticks up from half a percent to one percent to one and a half percent to two percent. It just continues to open up other markets that 10 years ago we might have thought were too small and now look like absolutely opportunities for billion dollar plus outcomes. I would agree with you that clock is getting late-ish. I'm sort of betting it's seven at night and we're not sort of at 11 yet and then I look at this wave of language model driven AI we had a conference last week where we had dozen plus vertical software leaders in the same room and they were all excitedly and furiously scribbling down notes of what their peers were doing to innovate on their products and certainly for the embedded vertical software leaders I think there's a huge moment of adoption of these language models which I think power obvious things across that suite of technology but it's also going to open the window for many verticals that previously didn't have a reason to adopt software strong enough to have a real leader and then for some of the in verticals with the sleepy incumbent watch out we could see another wave. One other thing to note which is that if today cloud software gets the most attention with investment and obviously other areas biotech and health care and consumer and deep tech and space tech they all get attention also but the biggest and most important category over the past let's say 10 years has certainly been cloud software and as you pointed out we're constantly worrying about when is the end and not that these companies are going to go away or they'll be left innovation will just be harder for to remain the most important category when I joined it a one that was shortly after by far the most important category of investing for besmer had been telecommunications equipment I'd say more than half the firms returned from 1996 to 1999 came from telecommunications equipment I can't remember the last time we made a telecommunications equipment investment and so to your point Patrick I think the most important thing to do is get off the train before it runs into a brick wall at the end and we think about that a lot I agree with can't I don't think we're at the last stop yet but we can sense it coming much more now than we could even just a few years ago. Is your sense that the markers of that might still be software just something totally different LLMs usher in some whole new hype of software right it's hard to even imagine what that might mean but is that the sort of thing that you're watching for a change in platform or enabling technology that might just render the past generation of style of company less relevant and or just create a new greenfield this way more exciting than the telecom of 1996 1999 it's hard to imagine the thing that's not software that is innovation these I think it's going to be another wave of software but it may look radically different than it does today and I think what we will look at is we've got close to 200 portfolio companies who are reporting back every day what they're seeing in the field what competition they're seeing out there so that gives us a real edge when it comes to looking at a next wave of type of companies I think more likely what we'll see is this just as we saw with huge innovations in the last 20 years in the cloud software is this software will just continue to evolve itself people building these companies are paying very close attention to the language model technology and what that can do for them and in many cases it doesn't disrupt them it just feeds right into their products my bet is it's not going to completely flip their businesses upside down if they're awake to it yeah Patrick I come back to your question where are we in the evolution of vertical software I kind of segment the opportunity into three buckets one is the greenfield play that we talked about and I think you're right I think there are fewer greenfield opportunities today than there were five ten years ago what's different today is as Ken points out you can go after a smaller greenfield market opportunity and build a much bigger business because you can capture more take rate than you've been able to in the past by layering on multiple layers of software and then providing financial services and value ad services on top of that software so I think the greenfield opportunity He's still there, less obvious, but someone with domain expertise can find it. Then there's a replacement cycle opportunity. And the way I think about that is if you look across all the private equity firms, all the aggregators like Constellation, all the publicly traded legacy software businesses, there's tens of billions of dollars of ARR that's locked up in incumbent vertical software that is ripe for the picking. Now you've got to be 10X better, 10X cheaper, you have to take advantage of platform shifts, but it's there for the taking. And so that's the second bucket of opportunity. And then the third is what you alluded to, this new type of model that likely leverages AI. And the way I think about that is within these verticals, there are software businesses, and then there's billions of dollars being spent on services. And a lot of that service is dollar is going to be digitized and automated using LLM technology. As an example, in the legal vertical, there's a company called even up. And even up is taking the process of generating demand letters, which are these 100 page book reports that lawyers sent to insurance companies to help their clients get paid. That historically has been done by human beings with weeks of labor compiling these book reports, you can now use LLMs to generate it in heartbeat. Those types of services offerings will be digitized and become software. It's crazy to think about all the shifts that we might see in the next five years because of this new layer of technology. When companies come to you, let's say you're on the board of some software company, when they come to you, they're not naturally an AI company, they're just a software company, and they ask you, what are you seeing? How should I think about this? How should I prepare my company to be ready for this new technology? What are you telling them? I have to plug Patrick last week. We put out our annual State of the Cloud report, and we spent 65% of our time answering the question. He was asked, so we talked a lot about the current language model moment and practical tips for application software leaders. We did that, not just best summer whiteboarding and coming up with our idea because the three of us couldn't operate a New York City deli, but we talked to a couple dozen of our software leaders who are doing things about this already. So we got some practical tips, and the general answer is, you don't need to wait until you have a language model PhD on staff to do something immediately. There are tons of companies who have pulled aside like a 20-year-old hacker and said, hey, why don't you spend this weekend playing around with this stuff and see what you can do, and they've come up with real applications, and we've got dozens of examples of product features that are already rolling out. The advice to companies that haven't yet started is to find that willing hacker advocate for this technology and empower them and say, look, you're the green team captain of the language model tech. Go figure out what we can do here. A second version of that is to host an internal hackathon. A hundred-dollar bonus for anyone who can come up with a cool project idea in this hackathon that leverages this language model technology, both for our internal efficiency, all the things we could do to be twice as productive with the people we have as well as for product roadmap. I guarantee you any application software leader who does this will come up with ten actionable great ideas like this weekend. The only thing that's a little unsettling is this technology is changing every single week. The best-in-class idea you come up with this week, a month from now you could come up with a set of better ideas because just the speed of enablement of that platform is changing a lot. A hackathon needs to start having every month for at least the next several months as this technology continues to stabilize. Do you think about this scare you about all of them? Yeah, absolutely. So to leaving aside the existential questions, I haven't seen anyone point to a direct existential path to risk, but obviously there's, we're all paying attention to that conversation. But I think to bring it to where our pay grade level is applicable, yeah, this is going to shift the ground for all of these categories of software and for all these businesses. Any of them who are asleep at the wheel, I think, should be very scared. And us as directors of those companies should be very nervous that somebody could come in with just a much better, more efficient mouse trap if we're not careful. So I think there's like a healthy actionable paranoia for these companies just as software leaders that they need to be on top of this. Jeremy, does this feel to you like other platform shifts that you've seen since being a customer starting back in 2001? That was right in the heart of the big one in the internet. How does this feel relative to cloud and internet and mobile and some of these other big shifts? It certainly feels like it could, but you mentioned cloud internet mobile and with the benefit of a little hindsight, it's quite clear how big and important those were. But when they were first emerging, I'm not sure they felt all that different than VR and blockchain. And so these things all feel incredibly exciting at the beginning and some of them make it and some of them don't. And oftentimes, even the ones that don't, sometimes there's a company or two that kind of make hay out of it. So we got to look for it. And so, yes, it certainly feels like the potential is there, but I think it's way too soon to declare victory. And I guess 10 years in, we'll know for sure, and five years in, we'll have some confidence and now that we're maybe nine months in to the true arrival of these elements on the scene, I think it's very fuzzy, but we're certainly enthusiastic. We think there's much more likely than not to be a huge impact. Whatever Jeremy's enthusiasm is, I'm taking the strong over, just in classic Bessamer spirit. We would argue about this internally openly, but the speed at which we've seen our portfolio companies build things with this is way different than what we saw in terms of mobile technology adoption. Mobile came out when the iPhone came out. We saw new companies show up within the year, certainly, but it took a while for our portfolio to see what they could do with it and have it change. I'm trying to think of the first portfolio company that impacted in a huge way versus a new company, whereas again, I can point to a couple dozen of our companies who have features in development right now that they can describe to you that are obviously jaw-dropping. Wow, that would be incredible. If you could roll that, a very simple one is the potential for any SaaS company that has an operating system to empower their customers to use natural language to query their database. Because most customers can't write SQL queries, but LLMs can. So with some guardrails on this, you can turn any SaaS app into having its own natural language driven reporting. That's wild. It's a nerdy, actionable example. There's a company in my portfolio that built that last week. It's a good example and it's a measure how quickly existing companies adapt or adopt these new technologies. I was thinking back to Pinterest. The iPhone was 2007. We invested in Pinterest in 2011. Pinterest didn't have an iPhone app until 2012. A couple of five years after the iPhone. On that measure, Kent is absolutely right, but I wouldn't overweight that one. It brings to mind the question of defensibility. I'm always curious about how investors, like you all think about this concept, especially because it's kind of hard to squint and see it early on in the business life cycle. But how do you think about defensibility and light of a technology change like this? Because I personally, just one guy, have seen, I don't know, 20 companies that effectively say they're going to be this service you just described, Kent, like a BI analyst, almost like in a box in a chat interface or something like that. And I'm sure an amazing one or 10 will get created, but it makes you wonder how the hell are these businesses going to make money over time if there's so many options. So how do you think about what something like this does to existing companies' defensibility and new companies, how they might build that over time? You could have asked the same question about cloud technology. I think this is largely going to be a completely ubiquitous commoditized offering that will be equal opportunity for all these software companies. I don't think with maybe a few exceptions, you'll hear people discuss, if you have a proprietary set of data, maybe you could build some custom language model that works only on your proprietary set of data where you don't let it out. I've heard very smart people say, like, no, as these models get bigger and bigger, like, they don't really need access to the proprietary data to be really, really effective. So I think it's like everything. It's just another golden hammer in the tool belt of incredible software and you just need to use it to build the best possible product and own your market that way with the best possible product. And long-term defensibility comes there and occasionally we'll have a company that will be lucky enough to have a true network effect. I don't think this AI is more likely than other technologies to lead to a network effect. I do think when the companies that leverage this tech to make a jaw-dropping product roll their product out, it will be adopted even faster because it will be a holy crap moment, like, oh my god, that product is incredible. And like the word of mouth that's a key feature in the spreading of a lot of great companies will be even more accelerated with this. The ability to onboard customers leveraging this technology will be accelerated. The efficiency of these companies will be accelerated because they'll be a more productive per person. As you can tell, I'm a little bit of the bull in this group on this tech. But I think the long-term defensibility is just classic software, long-term defensibility. Speed to market, own that market, build a great team that provides the best product and service in a market. That's the real defensibility. This change brings to mind another question as we wind down here about building a great investment firm, which when it comes to the partnership, the partnership is the firm at any given point in time, making these investment decisions. And I understand how you recruit and train through the apprentice model, great investors over time. What's the other side of that? Like, how do you get people that just aren't working out as partners out of the organization, whether that's a young person that started. and just isn't a fit, or someone that's been there forever and is towards the end of their useful life as a partner at Bestmer for whatever reason. It needs to be a new young partner that is more specialized in AI or something like that. How do you think about, I guess I'll call it pruning and tending to the partnership, especially as it relates to having people leave when they're not right for it any longer or in the first place? Well, like anything, practice makes perfect in the 20 years. So years I've been here, I've probably seen 50 to 70 professionals leave Bestmer and virtually all of them have gone on to do something really successful. In many instances in the VC industry. So one of my favorite games to play is just talk about the people who are partners at other firms who spent an important year or two or three at Bestmer, Sarah at Benchmark, Christina and Chris at Andrews and Horowitz, Philippe at Excel, Mitchell and Brian at Lead Edge, Larry at Volition, Lisa at Northwest, Anna at CRV. The list goes on and on and on. I think Bestmer to this day has exported more professionals to the rest of the venture capital industry than the rest of the industry combined. And so the good news is you can find it's not the right fit for you at Bestmer and still be really successful in venture, level on in other places. We have people who are writers and comedians and in politics and so forth. But the better is it's still hard and it's awkward. And so I think the important thing is what we realized and it's sort of obvious when you say it. In order to attract the best people, they need to feel confident and comfortable going to a firm. And when the firm can show that you have a really good chance of succeeding at that firm over a long period of time or the exceeding outside that firm, it's a no risk proposition. The scariest thing is when you join a firm is either you're successful here or we're going to publicly humiliate you. If you're not successful here and good luck with the rest of your career, that's a much tougher proposition. We want to get the best people, even those who might be a little bit nervous about what the future holds. So we're really careful to do that pruning or the trimming as you describe it in an extremely discrete way. So nobody really knows other than the person. And by the way, it's often not about keeping someone's weaknesses a secret. It's often about just it's the wrong fit. Like we have a particular model. The model works really well for us. There are many people who want to do it in a different way. The most sharp contrast I might offer is the hold hands, say kumbaya together and make an investment together. That's not what we do. We support each other. But as we mentioned earlier in this conversation, we do it in a way where we're individually empowered to make decisions. That's not for everybody. And so in many cases, the folks who don't stay at best for the long haul are really talented. They just are going to thrive better in a different system. Jeremy spoke to the Oppencomers. You asked about the veteran investors. One of the healthiest aspects of our partnership is there's no tenure. Every year we evaluate each other's performance. It doesn't really matter what you did 10 years ago. If you're not performing today, we have a very graceful and elegant model for transitioning folks out and making room for the next generation. I go back to the intellectual honesty where we're having open conversations with each other all the time. So it's not like there's a surprise moment. It's like, "Hey Jeremy, you lost a billion dollars last year and you haven't performed in 10 years." That's not true for Jeremy. It's a constant open conversation. So it's not political. It's not personal. It's slow friction as it can be. I've loved learning about best from U3. I think it's such a unique firm. I love collecting these different models. There's lots of ways to do this, but really like the interesting advantages that your model has conferred on the partnership and obviously the results have spoken for themselves. My traditional closing question for everybody is to ask what the kindest thing that anyone's ever done for them is. Kent, maybe we'll start with you. Oh boy. I mean, so many people. I go back to Felda Hardiman, professionally my first mentor at Bessmer who did sit next to me in a room for hundreds of hours to no benefit for himself of just telling me like, "Here's why I did that thing that way. Half the time I just sat there," but like, "Why are you wasting your time telling me these things?" He was just a natural teacher and professor and he certainly did not have to do it. He could have been having a lot more hobbies and free time if he hadn't bothered educating me. So that was professionally the kindest thing that anyone did for me. Brian, do you want to go next? Yeah, I was born in the Soviet Union and when I was four years old, I got on a plane with a box of legos, came to America and my parents uprooted their lives and came to a country where they didn't speak the language and had no money and built a better life for me. So I'm grateful for that. Amazing. Jeremy? That's a hard one to compete with. Yeah. Sorry, Felda. You can't be successful in this industry or a little in any industry with enormous amount of luck and luck typically comes at the extension of help from somebody else. And I don't think any of us would be here without it. I'll pick on one specific professional situation and it was actually there at tap who's now at benchmark who was working at best and at the time. She was the first person who I ever managed in my life and my career. We were a couple of years into working together and she wrote a public blog post about me which she didn't run by me first where she mostly just said, "Thank you." And it made me feel so good that I basically resolved at that point to say like, "I want to do this 10 more times in my lifetime, find someone who's younger than I am less experienced than I am and help them." Had she not done that? I don't know if I would have taken to it in quite the same way, but I'm really grateful for that. Wonderful story. Love that point of connection. I'm very thankful to EG for your time and for being willing to share a lot of how the business runs and what you've learned in the past. Thank you. It was a pleasure. If you enjoyed this episode, check out JoinColossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week. you