Musings on Bessemer Venture's Shopify Investment Memo: In Search of the "Double Unicorn"
Bessemer recently released investment memos for some of its most successful VC investments (click here to check them out). This is a treasure trove of knowledge, and I immensely enjoyed reading all of them and trying to gleam some knowledge in the never-ending quest to improve as an investor. For this article, I focus on Shopify, since it was a huge winner, earlier stage (Series A) and a product most folks are likely familiar with either directly or indirectly.
Generational Tailwinds at Shopify
Bessemer (memo here) invested in Shopify in late 2010, when revenue was roughly $5M. In short, the upside case thesis was that in six years, Shopify could ~20x revenue to $100M, and exit at $400M (a ~4x revenue multiple). In many ways, this upside case was remarkably accurate. Shopify did in fact achieve $100M revenue, but it actually did it ahead of schedule, in ~2014, and the IPO priced similar to the memo (~5x revenue).
Since the IPO Shopify has done another 10x increase in revenue, and that incredible growth combined with macro factors, has increased its revenue multiple to roughly 50x revenue (!!!). And so while Shopify was a unicorn and provided an incredible exit (I have no idea if Bessemer held onto their shares of not), it was a unicorn AGAIN after IPO-ing.
That, my friends, is a truly mind-boggling, cuckoo-for-cocoa-puffs outcome. So what are some quick take-aways, with the benefit of hindsight?
#1. Invest in inevitable secular shifts
We (as in the general public) already knew that the brick-and-mortar shift to online was happening at the time of the Shopify Series A. At the time of Bessemer’s investment, Amazon was already a $50B+ e-commerce company. Shopify happened to be positioned brilliantly by playing in this space, without competing directly against Amazon. You didn’t have to be a fortune teller back in 2010 to know that e-commerce would continue to grow.
#2. Invest in companies that help other people make money
Apologies for the platitude, but people like it when you help them make money. AirBnb, Uber, Instacart, Etsy, eBay and Shopify are all platforms that are fantastic at helping millions of their users generate income.
#3. Invest in management teams with exceptional technical talent
I don’t necessarily mean programming skills — technical talent could be in the form of growth hacking, product, distribution, sales or marketing (see Glossier), but there has to be evidence that the founder has some unique skill, and furthermore that they can supplement that skill with other founders / key hires to continuously out-execute the competition (in this case, Magento, eBay, Amazon, Bigcommerce).
While it’s hard to garner this from a memo, since it is very subjective and often based on in-person (or nowadays, Zoom) meetings, one thing I did note is that the founder was part of the Rails core development team (which is clearly a sign of exceptional engineering skill), and despite (or perhaps because) of that engineering talent, they built a product that anyone (not just programmers) could use, which is rare (programmers often build products that are easy for them, the genius programmer, to use, but hard for the rest of us mere mortals to figure out).
In addition, Shopify has cleverly built an app ecosystem around their platform, that both fills in the gaps in their product offerings, fulfills #2, and makes it that much harder to compete with Shopify.
Double Unicorn
However, the Shopify investment memo made me realize it’s possible to look at it through another lens, which is where the company is actually a “double unicorn”. In this situation — where a company scales from sub-$5M revenue and less than 10 employees to the $100-$200M ARR range (and probably in the 500-1,000 employees range), and then goes on to do another 10-100x increase in scale due to its secular tailwinds, exceptional management team and organic growth in the ecosystem it has built around its platform.
Shameless Plug
In my next article, I’m going to break down some of the other Bessemer investment memos, and also talk about how the framework above led to some of my own personal angel investments — please subscribe if you’re interested in receiving my next article!