Bessemer venture capital investment memo twitch

Twitch Investment Memo from Bessemer Venture Partners

Tl;dr: Bessemer Venture Partners invested $13 million in (fka Justin.TV) at $53 million pre-money at series-b. Read to understand how a venture capital investor thinks about investing in a company and how they communicate it to their partners and potentially their limited partners.

About the VC investment memo

The memo was released on the Bessemer blog along with a number of other memos. In addition, at the end of the blog, I’ve shared some commentary from another blog I found.

About Twitch

Twitch is a social video platform where gamers can broadcast, watch and talk about video games. Twitch’s video platform is the backbone of both live and distribution for the entire video game ecosystem. This includes game developers, publishers, media outlets, events, user-generated content, and the entire esports scene. In February 2014, Wall Street Journal ranked Twitch as the 4th largest website in terms of peak internet traffic in the U.S. fortifying the brand as an entertainment industry leader and the epicenter of social video for gamers.

About Bessemer Venture Partners

Bessemer Venture Partners is a $4B venture capital firm that funds consumer, enterprise, and healthcare startups around the world, from seed stage to growth. Their partners help founders lay enduring foundations to create companies that matter, starting with seed and Series A investments and sticking with our companies at every stage of their growth. BVP funded the early stages of Pinterest, Blue Apron, Skype, Skybox Imaging, Twitch, and Periscope and helped build 117 IPOs including Twilio, Yelp, LinkedIn, Shopify, and Wix.

They joined in the seed round and continued on in multiple rounds.

Announced Date 
Transaction Name 
Number of Investors 
Money Raised 
Lead Investors 
Sep 30, 2013
Series C – Twitch
6 $20M Thrive Capital
Sep 19, 2012
Series B – Twitch
3 $15M Bessemer Venture Partners
Mar 19, 2007
Seed Round – Twitch

Usual caveats

No investment memo made voluntarily public will ever be 100% as it was. The pressure is just too high for VCs to look smarter, and not make founders uncomfortable, etc. I highly praise the VCs that share their thought leadership so we can all learn.

If you’re learning to make a VC investment memo, don’t assume the memos are what you exactly need to do. Information will be redacted. Assume anything “delicate” or sensitive is not in the memos.

The only memo that is 1 to 1 is the Youtube memo because it was in a lawsuit.

Venture Capital Investment Memo

What We Saw That We Liked

The Team: We liked the team. They were passionate about the business, solid on execution and knew where to focus to build the organization. Emmett Shear was a first-time CEO, but up for the challenge. Although there were gaps in the team, they were off the charts on a number of “hard to hire” attributes: passion, product vision and empathy for their users.

With the Amazon acquisition behind us, it’s impressive to look back at the path Twitch travelled. The team killed it: Emmett proved himself to be a terrific CEO, managing the technical complexity of scaling such a large site cost-effectively as well as the business challenges of managing the community, cementing deals with both game publishers and console platforms while building a successful advertising and subscription business. In the process, he hired a strong management team, including a CRO, CFO and General Counsel to help him manage the growth.

It turns out we were wrong about the need for an experienced ad sales leader. Immediately after we invested, Twitch’s CRO Jonny Simpson-Bint took this on and built one of the best ad sales teams around.

Pattern Recognition: Twitch had some of the characteristics of a marketplace, which have inherent network effects, tend to be much stickier and are prone to consistent growth if both sides of the marketplace are working properly.

The Idea And Market Size: As we described it to the firm: “Twitch is based on the non-intuitive idea that watching other people play video games is entertaining.” Clearly, Twitch targeted a very specific audience. Maybe we weren’t their target demographic, but their growth was undeniable. We knew they were on to something and conversations with enthusiastic Twitch partners confirmed that.

We did have a long existential debate internally about whether the overall market size was big enough — and believed this to be the key risk to the investment — but, unfortunately, there weren’t many definitive data points we could point to that informed the debate.

In drawing parallels between Twitch and the viral growth of online poker and e-sports in Asia, we convinced ourselves video games could not only become a spectator sport, but that the market size was large enough for Twitch to become a massive site, which is necessary to have any sort of effective advertising business.

It also felt like a preexisting behavior, as even before the Internet, it’s pretty natural to find a group of friends watching each other play a particularly engaging console game live in the living room. So why wouldn’t this experience eventually migrate online?

Twitch’s metrics pretty much spoke for themselves:

What We Got Wrong

Twitch’s Advertising Monetization Efforts: When we first invested, Twitch was still in the nascent stages of figuring out its media sales strategy, having tried remnant optimization, rep firms and even direct sales. They were working with one specific partner to bundle Twitch’s inventory with theirs in order to garner premium CPMs:

This turned out to be wrong; having a partner rep their inventory actually degraded — not improved — its quality. The better strategy was to sell Twitch on its own. Fortunately, Twitch was able to amicably end the relationship and build their own sales team. By that point, they had grown enough that Twitch was by itself a premium site and didn’t need the help.

Financing Needs: Our memo is completely silent on this topic. Given that the team had operated JustinTV profitably for many years, I think we believed they would be able to scale the infrastructure needed to support Twitch in a capital-efficient way.

It turned out that as traffic continued to ramp faster than expected (and the partner-driven advertising efforts underperformed), we needed additional capital to continue scaling while taking advertising in-house. As a result, we raised a Series C one year later. We try to forecast things like future financing needs, so this was a miss on our part.

Competition For Broadcasters: While we talked a lot about competitive threats from other players like own3d (now defunct) and YouTube, we missed the key issue here: attempts to poach popular streamers would become a regular (and costly) occurrence. The team did a great job fighting and winning this battle through building the better product and attracting the biggest audience for live game viewing, but it was a constant distraction and more costly than we realized.

Mobile: The only mention of the word mobile in reference to Twitch is in this section:

This shows you how much the world has changed over the past three years (or how asleep I was back in 2012). We just didn’t focus our diligence on Twitch’s plans for mobile. Luckily, the Twitch team was more on top of it than we were and built a highly popular mobile app for viewing (which is consistently ranked in the top 25 in the entertainment category on iOS today) and several SDK-based mobile integrations for broadcasting.

Our Conclusion

Would Twitch be big? It was too early to tell, but we were optimistic. The niche was unusual, but we couldn’t deny the traction and potential. For a young company, Twitch exhibited some powerful early indicators of success: a meaningful and growing customer base, a powerful network effect and very strong engagement. We wanted to invest.

What do you think of the investment memo?

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