Bessemer’s Investment Framework

February 8, 2019

This week I listened to Jeff Epstein, Bessemer partner and former CFO of Oracle, present to CFOs and finance execs at Intacct’s Finance Summit. The Summit content was well done and kudos to Sage Intacct for organizing it.Jeff described the stages, pre-money valuation and milestones at each stage, from pre-seed to Series G and beyond.  I think it bears reviewing here because the milestones represent how a leading venture fund measures the operational focus of a SaaS company at various stages. More importantly from a benchmarking perspective, the milestones define what key metrics a growth company should be tracking at various stages of growth.   And heck, we can all learn from the models of one of the most successful venture firms in the world.

Here’s Bessemer’s chart, reprinted here with thanks to Jeff for sharing:

Follow on series investments fund new products, new markets, major expansions with related milestones to measure the return on investment.


The above milestones are seen as the critical factors to support a company growing at the Triple, Triple, Double, Double, Double (T2D3) growth rates that leading investors are looking for from venture-backed SaaS companies in 2019.  For example:

And so on.

Capital Efficiency

Because venture investing has become an even higher stakes game with larger amounts staked per company, Bessemer focuses on measuring capital efficiency, which ties invested capital to revenue growth and the cost to deliver those revenues.   The simple calculation and rule of thumb Bessemer uses is:Annual Gross Profit     > 100%Total Invested CapitalHere’s the example with real numbers:  take a $3M ARR company running at a 70% gross margin, they are producing $2.1M in operating profit and shouldn’t have taken more than $2M to get to that run rate to be using capital efficiently.$2M+ operating profit$2M total invested capitalYou can apply the same analysis to bigger companies, say a $50M ARR company with 80% gross margin.  To be capital efficient, they should not have taken more than $40M in total invested capital.As Bessemer typically invests in a company with a run rate of about $5M of ARR, they are looking for a company which is throwing off $4M in operating profit, and to have taken less than $4M in invested capital to get to that point.

Gross Margins

What’s interesting is that the primary focus in the first $100M of ARR growth is on a rapid, scaleable growth model, AND strong gross margins.  Operating profit didn’t come up.Gross margin is one of the key metrics that’s changed the most for SaaS companies in the past 5 years. With AWS and competitive hosting services, plus low cost Agile product development tools and methodologies, gross margins have been steadily improving for SaaS companies.

What to Benchmark

Bessemer’s investment model focuses on outstanding achievements in key performance indicators such as ARR growth rate, net retention rate, and gross margin.  Achieving best in class results that investors are looking for, requires firing on all cylinders on the drivers of those KPIs.  SaaS is a complex model which requires a variety of inputs in Sales, Marketing, Product Development, and Customer Successto achieve fast and consistent revenue growth at a reasonable product delivery cost using capital infusions justified by the results.SaaS companies need to track and benchmark the key drivers, or forward-looking metrics, such as:

  • lead and pipeline metrics,
  • sales productivity and ratios,
  • product development ratios,
  • R&D efficiency,
  • % spent on tech debt,
  • hosting expense,
  • NPS, and
  • retention rates (retention rates are both forward and backward-looking metrics)
  • among others

Tracking against benchmarks for all these operating metrics helps a company stay on track and make sure that resources are allocated effectively across operations.  These operating metrics have to come together to hit the revenue growth rates in the T2D3 model and achieve capital efficiency of more than 100% that venture investors are looking for.  If one or more underlying drivers of performance are off or under the benchmark for growth companies, then the results will be off as well.