VCs Underestimate Startup Potential

Sam Parr and Shaan Puri discuss how even professional investors consistently underestimate the potential upside of successful companies, using Bessemer Venture Capital's investment in Shopify as a prime example.

Key Points:

• Jeff Bezos' Philosophy on Risk and Opportunity:

  • "It's generally human nature to overestimate risk and underestimate opportunity"
  • Entrepreneurs should try to compensate against this bias
  • Even Bezos himself fell victim to this, initially thinking Amazon might become a $100M revenue company at best

• The Bessemer Shopify Investment Case:

  • Bessemer invested when Shopify was raising $5M at a $20M valuation
  • At the time, Shopify had:
    • 10,000 total customers
    • $5M in revenue
    • $132M in GMV (gross merchandise value)
  • Bessemer's best-case scenario in their memo projected:
    • A potential exit value of $400M in 4-6 years
    • This would represent a 15-20x return on their investment

• The Reality vs. Projections:

  • Shopify is now worth approximately $130-140 billion
  • They now add more than 10,000 paid customers every week
  • Their GMV is approaching $1 trillion
  • The $132M in GMV they once did in total is now likely generated every hour

• How Dramatically Wrong Even Experts Were:

  • After Oracle acquired a Shopify competitor for $500M, the Bessemer associate emailed Toby (Shopify CEO) saying that outcome seemed "too aspirational"
  • Some Shopify employees and advisers thought the company would be worth at most $50M
  • The Bessemer associate tried to get Toby to agree not to sell for less than $50M
  • Toby gave a "handshake offer" promising not to sell for less than $75M

• The Pattern of Underestimation:

  • This underestimation happens consistently, even among top 1% investors
  • Many opportunities that seem obvious in hindsight were difficult to predict at the time
  • Shaan admits being wrong about numerous successful products, including meditation apps that became billion-dollar companies