An inside look at Bessemer Venture Partners’ investment process for Twilio

Mark Twain once said that history doesn’t repeat itself, but it does rhyme. If Twilio provides any indication of what’s to come, we believe now more than ever in the future of the business-to-developer (B2D) space. As we reflect on 2016, Twilio’s IPO is a real highlight.

We recently published Eight Laws for Developer Platforms. Looking back at our early investment memos recommending an investment in Twilio, the company exemplifies these laws in practice. With permission from Twilio, we’re open sourcing an inside look at our original investment memos, which Byron Deeter, David Cowan and I co-authored.

We diligence each company before investing and compile our findings into an investment recommendation that forms the basis for our internal discussions and consideration. Interestingly, we can clearly pattern match Twilio to almost all of our Eight Laws.

Law No. 1: Delivers a service that can be metered

Not unlike SaaS businesses, successful developer platforms need to deliver predictable, recurring revenue — ideally that expands on a customer basis over time. Twilio charges by the call, phone number or text message, and this pricing schema has been core to Twilio’s 155 percent dollar-based net expansion rate (from their Q3 2016 10-Q).

Law No. 2: Grows with the business

This law runs in parallel with the first. Developer businesses sometimes mirror consumer businesses in that an initially free or cheap product becomes so valuable that developers are later willing to pay for it. Consider the number of companies that rely on AWS. Amazon allows customers to provision EC2 instances for as little as several dollars a month and scale as usage (and dependency!) grows to some very large numbers. AWS now does more than $13 billion/year in revenue with 60 percent year-over-year growth; a large part of this growth comes from existing businesses. In our Series B investment memo, we called out one such customer for Twilio:

Series B investment memo ~ 2010

The Series C investment memo shows Twilio was growing, as planned, with their customers. Our concerns that the company’s revenue was solely from smaller startups were largely erased:

Series C investment memo ~ 2011

Developer platforms need to be so mission critical and such a step function improvement over the status quo that customers don’t mind paying up as their business succeeds.

Law No. 3: Replaces something that companies already pay for

It’s hard to get enterprises to make major spend commitments to new categories that aren’t replacing existing budget lines. We noted some examples of this in action at Twilio in our seed memo; here’s one case in point:

Seed IR memo ~ 2009

Law No. 4: Offers an amazing user experience for the developer

This one is self-explanatory. Enterprise products aren’t traditionally known for a focus on user experience or design (of course, there are exceptions). Twilio was an outlier here with an insane focus on making the experience super smooth and beautiful for the developer. We called this out in our memo:

Seed investment memo ~ 2009

Law No. 5: Receives tons of explicit developer love

This law runs in parallel with No. 4. Developers are the consumers; if they are unhappy with a product, they will quickly go elsewhere and not return. True story: Twilio CEO Jeff Lawson used to kick off every board meeting by reading tweets from happy Twilio users. When people are vocal about their love of a product, something is being done right. This only partially dawned on us at the time of the original Twilio memo as we did scour Twitter for complaints — but only as it related to their support team:

Series B investment memo ~ 2010

The product love was so strong that Twilio was able to hold off on building a large sales team early on:

Seed investment memo ~ 2009

Law No. 6: Exhibits strong network effects

Networks effects aren’t only for consumer social applications. Developer platforms often exhibit similar characteristics. The marketplaces that exist at GitHub, npm and Stack Overflow are both made increasingly valuable as more developers become active users and contributors. Twilio clearly has economies of scale through an advantageous cost structure; as higher volumes of communications are routed through their Super Network, they have increasing leverage. This network effect is subtler, but equally present in the case of Twilio, although it wasn’t until the Series C in 2011 that we called it out in our investment memo — and even then, it’s a fairly minor mention:

Series C investment memo ~ 2011

The truth is that as Twilio has grown, the network effect has become more prominent, given the large number of developers with active accounts (34,457 as of the company’s Q3 2016 10-Q — active account defined as spending at least $5 in the most recent month). The more developers trained on how to use Twilio, the more likely an enterprise or ISV will turn to Twilio to build a particular piece of functionality.

Law No. 7: Eliminates the need for non-core skillsets that no one enjoys

Developer platforms can have incredible leverage if they obviate the need for companies to build functionality that isn’t core to their competitive advantage. For example, payment processing was a headache for many until the advent of Stripe and other payment APIs geared to developers. Stripe eliminated the need for expertise in this area — well outside of most businesses’ primary domain — thus freeing up time to work on core product features. The opportunity cost of a developer’s time is not to be discounted. This is from our seed investment memo:

Seed investment memo ~ 2009

Law No. 8: Democratizes development

Developer platforms that enable and empower non-developers are truly a needle in a haystack — but extremely powerful once the core mechanics are working. As we note below, we loved that some of Twilio’s earliest customers were from ordinarily non tech-enabled organizations, such as the DNC and RNC. Twilio enabled them to power voter outreach, which felt especially prescient given the election around the corner (by which we meant the 2010 mid-term election) and how candidates were trying to capture constituents on their platforms of choice (e.g. on mobile!).

Series B investment memo ~ 2010

Twilio was Bessemer’s first investment in the business-to-developer space, and the first pure B2D API company to go public. It has been a pleasure to get both a backstage pass and front-row seat to Twilio’s success from a seed investment to an extremely successful company by any measure. Working so closely with Jeff Lawson and Twilio’s team over the years is not an honor we take lightly.

We are excited for the future of developer platforms, particularly the role they will play in transforming traditionally non tech-enabled industries into the modern framework of Web development.

We feel strongly that Twilio’s success in enabling developers to build creative and engaging applications in an area with clunky, inefficient alternatives — e.g. communications — is a trend we are going to see more and more of in the future.