Meet the Cloud Expert: Mary D’Onofrio of Bessemer Venture Partners
Mary D’Onofrio is a Vice President at Bessemer Venture Partners (BVP), one of the oldest venture capital firms in the U.S, with over $6 billion under management. In 2018, Mary joined BVP to start the firm’s growth investment practice. She primarily focuses on later-stage investments in cloud software and has recently invested in Forter, LaunchDarkly, Hyperscience, HashiCorp, and BigID. Mary is regularly featured on TechCrunch as a “SaaS guru” and was recently named a Forbes 30 Under 30 Honoree.
I spoke with Mary about how she helps start-ups scale, what she pays close attention to in the public markets, and which cloud metrics you should know.
How did you start your career in VC, and what motivates you in it?
Mary D’Onofrio: I started my career in venture when Bessemer Venture Partners hired me to start its growth investing practice. Before Bessemer, I worked at Morgan Stanley in Equity Capital Markets, serving as an advisor to private technology companies as they raised capital and went public, and I also worked at Apple in Procurement. I wanted to marry my interest in finance with an opportunity to continue to be close to technology, which led me to venture. I joined Bessemer as the firm was looking to build a growth practice, and since then, we have raised a $525 million dedicated growth fund. I love partnering with entrepreneurs as they grow their businesses; that is what motivates me every day.
What personally led you into growth rather than early-stage venture?
Mary: There were a couple of things. First, growth-stage companies have a different set of challenges than early stage companies, and the questions that you ask as an investor are different as well. By the growth stage, team, TAM, and market are generally working, and it is really about whether or not a company can scale: Is this the market leader? Can the product become a platform? How will the company layer on different segments, user profiles, and geographies? These are the questions that I love answering as an investor and the areas I love helping companies develop in as a board member. Second, my experience as an investment banker made me a more natural fit for a later, more quantitative investment stage; at the growth stage, team and product still matter the most, but the numbers need to work, too.
What does that support look like at the growth stage, and what is the best value add beyond capital that Bessemer gives its growth-stage portfolio companies?
Mary: There are many areas in which Bessemer has a strong value-add at the growth stage. The first is go-to-market, especially for cloud companies. We’ve invested in over one hundred and fifty cloud companies. From that vast experience, we have been able to pattern match on what does and doesn’t work as growth companies build go-to-market orgs, from demand gen tactics to building customer success functions to launching a new geography. We can provide advice and access to our vast network of entrepreneurs and Executives-in-Residence who provide tactical advice to individual companies in our portfolio. The second place that we can be really helpful in is access to our talent network and recruiting. For growth-stage companies, building a strong management team is critical to success, and getting strong advisors on boards also helps to propel success. At Bessemer, we help companies recruit independent board members to help shepherd a company’s growth. Third, Bessemer is very helpful with IPO readiness. Bessemer has been fortunate enough to have been invested in about 25 cloud companies that went public, from Shopify to PagerDuty to Twilio, and as such we can help companies with the financial planning and business readiness milestones they need to achieve before beginning life as a public company. Bessemer is also helpful with international expansion, given our global presence, and is particularly insightful on certain markets like vertical SaaS and developer platforms given our early and extensive investments in those spaces.
What cloud trends are you the most excited about?
Mary: One particular trend that I’m really excited about is automation at scale. In a world where software platforms, data, and applications are proliferating, companies are moving towards using software to reduce operational complexity. The automation of workflows, business processes, and even application development itself allows companies to reduce error rates and increase productivity. Two of my portfolio companies play meaningfully in this space: Zapier, a leader in Integrated-Platform-as-a-Service, and Hyperscience, a leader in Software-Defined Management.
Another trend I am very excited about is the globalization of SaaS. More and more, transformational SaaS businesses are being developed and built around the world, and Silicon Valley doesn’t have a monopoly on innovation. There are established success stories like Wix in Israel and newcomers like Contractbook in Denmark that are defining themselves as leaders in their categories. SaaS has grown internationally, and it will continue.
You are one of the key architects of the BVP-Nasdaq Emerging Cloud Index (EMCLOUD), which tracks public cloud companies and was licensed by WisdomTree into an ETF that was listed on the NASDAQ in 2019. You also authored the 2020 Cloud 100 List, the definitive ranking of the top 100 private cloud companies.
What should private market investors in venture be paying attention to in the public markets, and why?
Mary: First, public cloud companies provide operational benchmarks for private cloud companies. Public company metrics such as growth rates and margin structures give private cloud companies guideposts for what they should target at maturity. The average BVP Nasdaq Emerging Cloud Index company is growing 40% year over year and is generating about 10% free cash flow margins. That’s what a private cloud company should be building towards as it matures, and as a private market investor and board member, you can help guide your companies towards that goal. If a private cloud company is not tracking to those metrics, there might be cause for examining operations more closely and making some changes, whether to product, go to market, or otherwise.
Second, by looking at the public cloud software markets, private investors are able to bound what they think an ultimate exit for an investment might look like. The average multiple for a public cloud software company today is 20x forward run-rate revenue. As an investor, for instance, you might underwrite your eventual exit to such a multiple, informing your willingness to pay for a private round today. The same goes for an employee that might be considering joining a private cloud company: they can get visibility into what their equity might be worth in the future.
Lastly, public cloud software companies are the ones that have perpetuated — some through decades of change such as Salesforce and Adobe. Examining not only their performance metrics but also their operational strengths and evolution is incredibly helpful to private companies. For example, rather than re-inventing the vertical software playbook, ServiceTitan, VTS, Procore, and others, and their investors, can learn from the experiences of Veeva, RealPage, AppFolio, and other public vertical software companies to inform their strategy.
There is a lot of conversation around different metrics in the start-up and venture world. However, it is not always intuitive or clear which metrics should be at the forefront.
What metric should our readers have an airtight understanding of when evaluating cloud companies, and why does it impact growth?
Mary: One of the most important metrics to track is churn, which is particularly relevant to cloud companies. In cloud business models, companies pay upfront customer acquisition costs to capture a market, but given that they only monetize monthly or annually, those costs are usually not recovered upfront, creating a negative cash flow dynamic. Over time, however, they are able to recognize significant, recurring revenue with very good margins from these acquired customers such that the cash flow recoups this initial investment and the customer becomes very profitable.
Key to the unit economics working, though, is the requirement that cloud companies retain their customers for long enough to repay customer acquisition costs and to generate profit. With high churn, cloud companies often end up spending their sales and marketing dollars only to fill the “leaky bucket” rather than adding net new dollars that would contribute to growth.
For SaaS companies targeting enterprise customers, a good rule of thumb is that they should have less than about 15% annual churn, but that number will vary slightly based on customer segment.
You also developed a new metric called the Cash Conversion Score in 2019, which looks at how efficient companies are with their fundraising dollars. Tell me the story behind it!
Mary: I developed the Cash Conversion Score alongside Jeff Epstein, who is an Operating Partner at Bessemer, after we had both spent a long time thinking about whether or not tracking capital-raised-to-date could help to measure company health. Was a company that had raised $10MM to get to $10MM of ARR really better than one that had raised $25MM to get to that same scale?
We analyzed years of Bessemer’s historic cloud investments, and public companies as well, and we found that high Cash Conversion Scores (ARR / (Capital Raised to Date minus Cash)) did indicate stronger underlying company health — from sales efficiency to growth. Fundamentally, the Cash Conversion Score measures return on invested capital, and it is a good proxy for investors to understand how efficiently companies are working under the hood.
Bet on yourself. The venture world is unique because every investor is a “special snowflake.” There’s no one size fits all model of what makes a good VC, so instead understanding what makes your perspective distinct and betting on it is the surest path to success.
What is a piece of career advice that you would share with someone in venture?
Mary: Bet on yourself. The venture world is unique because every investor is a “special snowflake.” There’s no one size fits all model of what makes a good VC, so instead understanding what makes your perspective distinct and betting on it is the surest path to success.
What is something you would like to see change in VC over the next decade in the industry?
Mary: Diversifying what the typical venture investor looks like! I’d like to see more diversity in background and the inclusion of women, people of color, the LGBTQ community, and other minority groups more fulsomely. I feel lucky to work on an incredibly diverse team at Bessemer Growth, and it is something I care a lot about personally. Not only is diversity and inclusion right from an ethical perspective, but it also produces the best investments and fund outcomes.
Follow Mary D’Onofrio on Twitter and LinkedIn.
This article has been edited and condensed for clarity.
