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Partner Mike Droesch on the value of persistence and the $100 trillion opportunity to shift B2B commerce online

By The Bessemer Partners 4.13.21 FIRM

Some big startup trends feel like they happen overnight (remember when Apple opened its app store to third party developers?), while others, like the emergence of B2B marketplaces and open source software, have been slower burns until recently. And for Mike Droesch, one of Bessemer’s newest partners, that’s where he sees possibility.

“At Bessemer, I am looking for companies that help our largest industries transition into the digital economy, this includes digitizing B2B commerce, optimizing supply chains and modernizing digital tools and infrastructure” says Mike. Today he serves on the boards of Tackle and Cypress.io and has championed investments in many companies including Cargo.one, Electric, and ACV Auctions. As a partner, he focuses on two major roadmaps — open source software and B2B marketplaces. Along the way, these themes have led him to invest in many companies outside of what are considered core startup geographies.

“Whether it be open source companies that tend to skew towards remote-first, or B2B marketplace businesses that tend to pop up near the industries they serve,” he says. “These companies can be anywhere. I work with teams that are based in Buffalo, Boise, Atlanta, Germany and New Zealand. We are simply looking to find the best teams anywhere in the world tackling massive markets.”

Mike’s path into venture capital was far from traditional. His degrees in mechanical and naval engineering led him to the consulting firm Navigant, where he got a firsthand look at emerging energy infrastructure technologies and the venture capital that often fueled it. He worked on a broad range of engineering and consulting projects taking him from structural analyses of research vessels in Alaska to working on solar power plant projects in Dubai, all the while, being inspired by the innovation he saw being backed by the venture ecosystem.

“I saw the VC firms helping these ambitious companies and thought how do I get to work with all these super passionate founders tackling audacious problems?” says Mike. “Bessemer is a special place. The firm prides itself on giving each partner the autonomy to follow their own passions and pursue new investment theses. This has enabled me to find my own way and work with outstanding entrepreneurs at the forefront of the industries that I am most excited about.”

The $100T B2B opportunity is still offline

When he began to dive into researching B2B marketplaces, Mike was astounded at what a massive opportunity digitizing them presented. Underneath nearly every B2B sector is a series of transactions guided not by cold calculus and efficiency, but warm phone calls, handshakes, reputations, trust, and often, waste.

“I found a book from the 1990s proclaiming that online B2B exchanges would be the future of B2B commerce, yet the industries they sought to serve are still mostly analog because people still haven’t solved the trust issue,” says Mike. “B2B buyers are naturally risk averse. They see a lot more downside than upside to new suppliers. If they have to take a risk on buying something cheaply online from a stranger or expensively offline through someone they know, they often choose the latter—especially for large transactions.” This, Mike explains, is one of the reasons why so many of these marketplaces have failed in the past. They were Craigslist-like listing sites with scant moderation. Many succumbed to a negative spiral, a race to the lowest price that no reasonable vendor wanted to partake in. But today, things are changing.

“If you can provide a mechanism for the marketplace to assess and determine quality, and allow high-quality suppliers to distinguish themselves on more than just price, you can create an ecosystem where buyers are willing to pay a premium for quality,” says Mike. “Then, you get a virtuous cycle. The opportunity in most industries is massive, but cracking the nuances required to establish trust online can be a daunting challenge.”

Case in point: ACV Auctions, the wholesale used car marketplace and Buffalo-based startup that Bessemer first invested in back in 2016. Having recently celebrated its IPO, the company was a change agent in a complex industry.

“Unlike new vehicles, every used car is a unique snowflake, and there is an inherent lack of trust between buyers and sellers given the information asymmetry between them,” Mike explains. “All of these traits made this market ideal for what we have termed a high-friction B2B marketplace, to come in and streamline transactions by serving as a trusted intermediary.”

The challenge with investing in the digitization of B2B commerce is understanding what it takes to change user behavior in industries that have historically been slow to adopt new technology. In just a few short years, Mike has become an expert in the nuances that make an industry ripe for disruption, and the frameworks that help ambitious founders build these businesses.

Cargo.one, for example, is the leading digital platform for freight forwarders to search, compare, and book air freight. During the height of the pandemic, Mike helped lead the company’s $42 million Series B to support the company’s rapid global expansion. “Cargo.one is bringing more efficiency and transparency to the air cargo market, which has been particularly crucial in helping freight forwarders manage the logistical challenges that the industry has seen over the past year. The pandemic has certainly highlighted the importance of digital supply chain solutions to make global trade faster, cheaper, and far more resilient,” says Mike.

But the digitization of B2B commerce is not limited to just mature industries. Mike also led Bessemer’s Series A investment in Tackle.io, the leading platform helping B2B software companies accelerate revenue through cloud marketplaces. “We are still in the very early innings of what I expect to be a massive shift in B2B software spend moving through cloud marketplaces, and Tackle is the on-ramp that helps SaaS companies access the billions of dollars in spend already flowing through these channels,” he explains.

The future of software is open

Mike’s other passion for open source software has taken him deep into open source developer tooling and cloud infrastructure projects. Mike led Bessemer’s initial seed and subsequent Series A investments in Cypress.io, the company behind the leading open source front end test automation framework.

As Mike has gone deeper on this thesis he helped develop Bessemer’s Open Source Roadmap and has led the firm’s research in measuring community engagement metrics within OSS. From his perspective, open source communities can supercharge product feedback cycles and fuel organic distribution for emerging software projects. He believes that many of tomorrow’s most promising cloud giants will indeed grow out of projects that have not yet been started.

“The number one thing we look for in early stage open source companies is strong community engagement, as this is the lifeblood of a successful project, driving faster feedback loops and kickstarting organic adoption,” explains Mike. Not long ago, open source software was considered the cheaper version of proprietary software, but those mentalities have shifted and open source is now viewed as the superior alternative, offering higher quality, better support, and more flexibility.

Across the board, Mike is investing in these fundamental shifts. “Whether it’s fostering community in open source business or establishing trust in B2B marketplaces, I am most interested in founding teams that take a novel approach to driving user engagement around a new idea,” he says. Perhaps it’s because Mike’s path into venture was far from typical that he, too, relates to founders on the cusp of spurring industry-wide change through unorthodox solutions. “Revenue and everything else will follow, but it’s rare to find entrepreneurs that can change user behavior and transform an industry through their product.”