State of the Cloud: 2018 Edition with Bessemer Venture Partners (Video + Transcript)
Having invested in public cloud unicorns such as Shopify, Twilio, SendGrid, and Box (just to name a few), we think it’s safe to say that Bessemer Venture Partners has its finger on the pulse when it comes to predicting the next big thing. What up-and-coming trends do Bessemer Partners Byron Deeter and Kristina Shen think today’s entrepreneurs should be keeping top of mind this year (hint: think blockchain)? Find out about the State of the Cloud in this session from SaaStr Annual 2018.
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Announcer: Please welcome Byron Deeter, partner at Bessemer Venture Partners, and Kristina Shen, partner at Bessemer Venture Partners.
Byron Deeter: Hello, SaaStr peeps. I’m Byron Deeter, and it’s great to be back here at SaaStr.
Kristina Shen: Hi, I am Kristina Shen. Great to see you all again, as well.
Byron: A special shout‑out to our colleague Anna Khan, who is with us today, as well, who helped with this. We’re thrilled to be unveiling our annual “State of the Cloud” report, the 2018 edition, which is for the first time going to be shared with you today and concurrently online after the session.
Kristina: Later in this presentation, I’m going to be talking through some of the valuation metrics that we looked at and why we think it’s changed in the last couple years. Byron will then talk about some of the 2018 market predictions we have.
First, Byron is going to kick it off and talk about what we’ve seen in the last 12 months of 2017.
Byron: Thank you, Kristina. To lay the groundwork, let’s talk about 2017, and specifically, what we saw in tech, the cloud industry and the macro economy more generally.
Let’s start off with a tech industry, which is one of the trends that captivated a lot of attention this whole notion of Bitcoin, Ethereum, and Ripple the blockchain world and what’s happening there.
Now, very smart people can disagree and debate actively whether the price of Bitcoin should be $100 or $100,000, but what we can all agree is that, the distributed ledger and this notion of blockchain is going to have lasting impact on tech. We’ll talk about that later.
Our Instagram feeds have been filled with high school kids driving Lamborghinis, and you can debate the merits, but the lasting impact is quite exciting to us. Similarly, there was discussion about bots, and botws taking over the world. There were Slack bots and messaging bots.
Although we haven’t seen that, and many of those companies are Accu hires today, the impact of the early instantiation of machine learning in AI is having lasting impact in software and that will be impactful as we talk about the macro trends.
On the broader scale, if you think about GDP ‑‑ and GDP globally ‑‑ and how tech impacts that, let’s look about at the last 10 years, because some very critical milestones occurred that will impact everyone in this room.
Let’s start with the view from 2006. This was the world view of gas and oil companies, physical product manufacturers, and fin serve businesses dominated the world economy.
Microsoft started to make their way in there as a tech company, and if you rolled forward five years later, you saw the emergence of Apple as one the iconic brands and businesses, but really still, it was an oil baron’s world, until a seminal event early in 2016, and for the first time consistently in 2017. All five of the most highly valued companies on the planet were venture backed technology businesses.
If you look a little deeper, in the next three you have Berkshire Hathaway, but you also had Tencent and Alibaba, venture backed tech companies in China.
For folks in this room that want to transform industries and want to have lasting impact on a global scale, you’ve come to the right place and you’ve jumped into the industry at the right time. You’re not all doing this for money. In fact, I love the passion and enthusiasm that’s sincere for founders.
There’s also some good news in this, which is October of last year our friend Jeff Bezos became the world’s richest man. A tech venture backed entrepreneur, increasingly a cloud entrepreneur, became the world’s richest man.
Some exciting moments that lay the groundwork for the path of a founder and as a public CEO. However, the interesting thing is not many people are going public anymore. If you look at the trends, 2017 felt like a bit of an up year, but it was only because 2016 was a historical low. You have to go back to 2008 for an equivalent period that low, in fact, for tech IPOs in the industry.
We’re at historically low number for a couple of reasons, but the interesting thing is those that do go public are doing extremely well. The Bessemer Cloud Index, which tracks the 54 pure play public cloud companies, is up over 450 percent in the seven years we’ve been tracking this.
$20,000 invested in 2011 would be over $100,000 just by buying a passive basket of cloud stocks. The private companies in this room have likely outperformed that meaningfully.
The prize is big. I’m also proud to say that shortly we’ll be adding two new companies to that list. One is a fresh, new IPO, SendGrid, which we are pleased to be investors in.
And then Adobe, notably, as one of the largest public software companies that’s successfully undergone the transition where a majority of their business model economics are now Cloud, and also the delivery model cloud hosting is now crossing over the 50 percent mark, which is a seminal moment in terms of the cloud ecosystem.
If you think about what it means to be public, the hurdle’s now higher. The average company is taking twice as long. It’s a similar trend to what we’re seeing in the consumer side. As a result, the average company is now almost twice as big.
Part of this is driven by a flood of capital. Private investors, like ourselves, are supporting these companies longer and paying healthy valuations. The, “Why bother?” question comes up a lot, of, “Why would I want to go public?”
If you think, a decade ago, there were zero private venture-backed unicorns, these billion dollar companies. Now, today, there are over 200 ranging from consumer to enterprise, literally globally now. The exits aren’t happening, as we saw on the public side, but also when you add in the M&A side. The venture-backed unicorns are actually going down, which has created this interesting backlog effect.
We talked about the public cloud companies, 54 in total, 44 of which are public cloud unicorns, over a billion in valuation. The interesting thing is there are almost as many private cloud billion dollar plus businesses today. Annually, we do a list we call the Cloud 100 together with Forbes Magazine. That will be the September issue this year.
As we go down that list, just to get onto that list, the threshold’s over $400 million. The mean is over a billion. There are 37 companies over a billion dollars market cap on that list today. It’s a staggeringly high quality, and frankly awesome, list of companies that are your private peers and are setting the benchmarks for the private industry.
What we’re going to do is break down that list. The benefits of being the largest cloud investor and having worked with many of these and many of the public companies is that we’re able to see a lot of the raw data and understand a lot of the trends.
Kristina is going to walk you through the valuation frameworks and some of the benchmarks for these peers to understand what awesome looks like as a private entrepreneur in today’s environment.
Kristina: Thanks, Byron.
As Byron mentioned, we’ve been investing in cloud as a firm for over 15 years, which means we have seen not only thousands, probably tens of thousands, of cloud companies. That is a lot of data to look through.
What we’ve tried to do today is take a look at how valuations have changed over time. We’re going to suggest a different valuation framework today.
Let’s take a look back first at what was it like to raise private capital 10 years ago. Whether you were a public company growing 30 percent year over year, or a private company growing 100 percent year over year, regardless of your growth rate, you probably got about the same valuation multiple. Back then, it was about five times revenue.
Today, private companies are growing faster, let’s say 100 to 300 percent. They’re also gaining a higher valuation multiple, as well. Clearly, there’s association of growth, but what’s the right way to value that company?
Let’s take a look back at what’s happened over the last 10 years. A lot of things have happened. First of all, everyone, I think, now, in this room particularly recognizes that cloud fast adoption is real. All your customers and buyers recognize it, as well.
The second thing is through the proliferation of APIs and AWS services it is now much easier, faster, and cheaper to start a cloud business. In addition to that, we’ve been investing in cloud for 15 years, but our venture capital peers have also joined in, as well.
If you look at what’s been invested in cloud software, it has literally quadrupled in a six year time period and represents about 50 percent of total venture capital funding, which is great news for everybody here in the room.
What does all this mean? Given all this that’s happened, private companies today, these people in the room, you’re fundamentally growing faster than your counterparts, your predecessors years before.
Let’s take a look at how fast do the top cloud businesses grow. We’re going to take a simple example. Four companies, Twilio, Box, Shopify, SenGrid. All public companies, all happen to be Bessemer companies, partially because we have the data.
We’re looking at how long does it take these companies to grow from 1 to 10 million in ARR. Twilio got there rather quickly. They got there at a little over a year. SenGrid took a little bit longer. It took three and a half years, but these are all, first of all, public billion dollar companies. All have their own paths to success.
Looking through all the data, this is what the BDP growth benchmarks say. To be clear, these are all phenomenal companies. Timely, it’s like of like the Olympics. These are the gold, silver, bronze categories. To make it on the podium is phenomenal.
To give you some sense of what the different categories of growth look like, good companies get from 1 to 10 million ARR in about four years. Better companies get there in about three years. That means you’re doing about a triple, then a double double. The best companies get there in less than two years, which means you’re tripling every single year.
Hopefully, that gives you some framework to think through, “What is my growth rate? How does that compare to some of the benchmarks out there?”
Now that we have a sense of how fast private companies are growing today, let’s think about how to value them. Let’s take a look at valuation multiples over time.
What this graph is basically showing is, it’s showing on the yellow line, it is the average ARR, annual recurring revenue multiple paid average for that year for private companies that are between 1 and 20 billion ARR.
The blue line is the average multiple paid for public companies. You can see that that gap between private and public has grown pretty dramatically over time. To be exact, in 2011, private multiples were about 1.5x that of public companies. Today, they’re about 2.5x.
What’s contributing to that increasing gap? We’ve been talking about it. Private companies are not only growing faster than public companies, in fact, private companies have been growing faster and faster every single year. In 2011, they were growing, on average, 170 percent. These are companies that are between 1 and 20 million ARR. Today, they’re growing about 250 percent.
We’ve established two things. One is that private companies are growing faster and faster each year. Two, the valuations have been rising for private companies each year.
What’s the right way to compare these two numbers and come up with a valuation framework? We’re going to introduce what we call the BDPARRG metric. This is going to be our pirate metric. ARR to growth multiple.
What that basically means is you’re going to take your ARR multiples, your annual recurring revenue multiple divided by your year over year growth. A simple example of this would be…Oh, sorry. We’re going a little backwards here.
A simple example would be if you had a 10 times ARR divided by 150. That would be a 6.7x. Let’s look at how this would actually compare.
You saw all that, while ARR multiples look very high if you plot your ARRG multiples over time, it’s actually relatively flat. You can see that green line plotting in the center. The yellow, which is your ARR multiples, is roughly a 2.5x multiple to your public. Your ARRG multiple is only 1.3x on top of your public.
That implies two things. One is that on a growth adjusted basis private valuations today are actually fairly close to public companies. Two, it’s been pretty consistent over time.
There’s been a couple bumps along the way. In 2013, the public markets were a little overvalued. You can see that blue line bumped above the green. The flip was true in 2015, where the private multiples were a little bit overvalued.
What does that mean? That means in the last two years, despite seemingly high private company valuations it actually shows, on a growth adjusted basis, private valuation has actually been fairly reasonable. When you do the comparison, we’re actually paying relatively close valuations for public companies as we are for private companies.
What does that mean for all of you in the room? By far, the most important thing of valuation is always going to be, “What is the market opportunity? The team, competitive dynamics.” These are always going to be the most important components but growth will always be the most important metric in terms of numbers that does help indicate your valuation.
We believe that looking at an ARRG multiple will be one of the great valuation frameworks that you can leverage as you go forward.
What are some of the other valuation frameworks we can look at? Growth is always going to be the one we look at the most, but some of the others we look at, as well, your cap payback, looking at your sales efficiency. Your churn, looking at what percentage of your customers are retaining on an annual basis. Your cash flow efficiency, which we define as your net new ARR divided by your net churn.
Hopefully, this gives you some benchmarks and valuation frameworks for you to help think through how do you compare to some of the benchmarks out there.
Next, what we want to talk about is some of our market predictions for 2018. As a firm, what we’ve tried to do over the last couple years is put our predictions or our road maps out there for all of you to see. Actually, internally, we’ve been doing this process for quite a while. We call them road maps.
I’m going to share with you…This is actually an internal slide. These were our cloud road maps that we did internally in 2013. You can see we’re excited about things like IT data management, CFO software, the B to D developer API road map. Let’s see how we actually did against this roadmap.
We’ve actually made a lot of investments, dozens of investments, in the last five years across these road maps. We put our dollars where our mouth is. When we put out predictions to showcase that we’re excited about something, we do love to invest behind them. You can see here that Twilio and SenGrid are the first two companies on here to go public.
We’ve got another several unicorns on here, as well. We’ve invested in about 13 of the Cloud 100 companies to date.
Next, I’m going to hand it over to Byron who’s going to actually talk through some of our 2018 predictions.
Byron: Thank you, Kristina.
As she said, a lot of what we try to do is comment not only on where we see the industry going, but also to invest behind it. Part of our predictions that used to be internal road maps we now expose to the world. One, to plant a flag saying, “We’re open for business and we’d love to talk to you if you’re in these areas.” But two, to share it with the industry.
There’s a chart that we’ve used for over 10 years now, certainly going back to May of 2008 when we first unveiled Bessemer’s 10 Laws of Cloud Computing, but even before that, which was a three layer stack chart for cloud, SaaS, PaaS, and Infrastructure as a Service, IaaS.
We’re adding a fourth bucket today for the first time, and I suspect many of you in the room can’t even guess what the acronym stands for. The hardcore technical folks I bet do immediately. It’s Function as a Service.
There’s the emergence of a world around serverless computing, the AWS Lambda environment. If you think of it in terms of the impact for tech, we believe it’s on parity with these other layers in the stack, which is why we’re calling it out as such.
Prediction number one is the rise of serverless computing. I’m going to explain it in a little bit more detail because for the non‑technical folks this is something that I absolutely think will be impactful for your business, either because you should be building your applications using microservices, or potentially your businesses themselves should be going into these areas.
To set the stage, if you think back about what virtualization was all about, it was taking the bare metal tech phenomenon of the prior decades and extracting that away. It was creating multitenancy in a dedicated hardware environment. Companies like VMWare were born.
The emergence of Docker and others have blown open this containerization and taken that to another extreme. What serverless is is the next extension. It enables this world of computing resources and function calls in a dynamic, stateless way that allow applications to be built in much more agile and ni
It also has impact because there will be function sprawl and manageability implications, which we’ll talk about briefly. The net impact is transformative. This idea of being able to focus on capabilities as opposed to infrastructure is finally real.
As one small example, look at Google Trends. Docker here is a proxy, really, for container calls and queries. What used to be a virtualization world or an open stack world is now very much a container and docker world.
As an engineer and as a developer, there are several trends that are underlying this that I’ll feed into the serverless wave. Certainly, the containerization phase, the proliferation of APIs, and the ability to pull these services rapidly.
And then, open source as it’s going mainstream not just in the developer world but in the enterprises, and how open source enterprise companies have emerged to help make this durable, secure, reliable, and predictable so that companies en masse are able to embrace it.
As you think about where we go from here, specifically around the serverless world, the future is about managing these containers at scale. At first, what was about the fundamentals of, “What is a container?” And “How can these work together?” Has very much become the next phase of issues and opportunities, which is, “How do I scale, and monitor, and manage?”
Increasingly, the submanagement layers, where new businesses will be built and within your dev teams new opportunities will be created as they push in this world.
As we think about the new stack chart, we think this is actually the visual that people will start referring to, which will bring us to predictions in the second layer, the PaaS space, the Platform as a Service arena.
The explosion of APIs has been a gift for developers worldwide. If you think about that Uber app that you open and what’s going on with the payments calls behind the scenes, or the email confirmation, the anonymous voice message that’s happening and powered by Twilio, or the text confirmation.
Those composite services are now pulled together through a list of APIs that extends into the hundreds. We know of the first few IPOs in this space with Twilio and SenGrid, companies like Stripe and Adyen will certainly be multibillion dollar successors. We’ve seen the power of AWS and Amazon Web Services’ financials as they broke it out to the world and showed what high margin, high cash flow businesses can look like in this space.
We’re seeing now dozens of critical mass businesses behind them, as I said, hundreds in total. For companies today building an application, it’s crazy to build this capability yourself and to replicate what’s available in an API way. They’re fast. They’re variable cost. They’re secure. You can stand them up and break them down as you need.
Your engineering teams should be thinking about how to pull these resources together and how to push the envelope beyond that. For net new entrepreneurs in the room, and I know there’s a lot of you, this is an entirely new frontier for net new businesses. Venture money and teams will follow quickly into this space to try to create this next wave that will follow the PaaS wave and the SaaS wave around the API economy.
Part of this and a foundational platform building block refers back to the Bitcoin comments of before. It’s the block chain. We can debate the merits of the currencies themselves, but this notion of a distributed ledger and the notion of a block chain fundamentally itself is powerful, real, and lasting.
If you think about industries where so much money is tied up in trying to verify custody and the digital pedigree of high value parts going into aerospace aircraft, and the risk associated with fraudulent parts being introduced. Or with food recalls and trying to understand where, and when, and who touched food at various points, and to understand what that looks like through the custody chain.
Nonetheless, financial services, which is being disrupted from within in very fundamental ways by block chain implications. Savvy entrepreneurs, many of you in this room, will take the insights that have come from this block chain wave and apply them in very real enterprise oriented applications, whether that’s at the app layer or below.[h2]
As an extension of that, on the financial services and payments world, we used to think of payments and software in very different ecosystems, that you would have the hardware device. You would have the embedded software to run it. Then, you’d have a transactional system, and a payments clearinghouse, and vendors to power that.
That is no more.
Trend number four, and prediction number four that goes mainstream, is Payments as a Service. For those of you that looked at the public filings of Shopify, another proud Bessemer alumni portfolio company, they’re trading at $10 billion plus. Over half their revenue today is from this emerging category of payments.
A massive growth driver, and also a massive revenue and profit contributor for them comes from payment processing. Increasingly, we’re seeing companies like MINDBODY, also a Bessemer public company, or ServiceTitan, a hyper growth Cloud 100 private company that launched a payment solution a year ago and is already generating millions of dollars of ARR for payments processing for their customers.
If you’ve delivered awesome software, if you have that user interface or that mobile application and your customer has trusted you to be the provider, you’ve earned the right to provide other services. The pleasant surprise starting in vertical software, and we believe moving horizontal, is that payments is one of those where everyone wins.
Your customers would love it if you could bundle that complexity, take away another step and another layer in many cases. You’ve earned the right, if you can charge equivalent rates and take out some friction, you are the more logical provider of that service.
We absolutely believe that applications, more and more, are going to layer in payment capabilities and find that as an upsell driver that’s a hidden gem and massively expand your market size as a result.
As we go into the app space directly, as we think about the SaaS layer, a couple of specific predictions here. The first one is around this notion of battleground areas. Back in enterprise software, people used to fight about the database and the system of record. There used to be this notion of create customer lock in. If you could have their data set, then they were yours for life.
Quickly, people realized that you moved much more to a system of engagement where owning the UI and owning the user and adding to their work flow capabilities or decision processing was the way to derive value and therefore capture ROI and high ARR.
We believe now we’re transitioning to results. What that means is that engagement is important, but you should actually be thinking about how you can take time in your app away from the user rather than increase it in the sense that getting to the end result oftentimes means AI and machine learning behind the scenes and moving to the answer.
Increasingly, it means take away that application or take away those application clicks or application minutes to get to awesome. We’ll take that so far as to reintroduce one of our trends from last year in a much more material way, which is the explosion of screenless software.
The big wave in cloud at first was moving from green screens and heavy client server architectures to a lightweight browser interface. That was transformative. Mobile is starting to be more responsive and nimble in terms of applications. Now, we’re seeing smart watches and increasingly voice.
If you think about the tens of millions of voice enabled devices that are making their way into homes, and soon to follow, businesses, you’re seeing that great software actually means the interface may disappear.
That can be in the form of voice. It can be in the form of texting. It can be in the form of lightweight mobile apps or wearables, but in enterprise applications, we absolutely believe that screenless will increasingly lead to success and that businesses, as you think about disrupting the incumbents, or for those of you who are leaders in your industry think about how you can disrupt by way of screenless as your leading interface or increasingly a way to drive value.
If we think of holistic company building initiatives, there’s two observations we want to make which are tied to predictions. The first of which was a statement that Sameer Dholakia made in a board meeting two weeks ago, the SenGrid CEO. In a very matter of fact way as a passing comment where we were commending him on a great IPO and some different things.
He said, “Values create value.” It wasn’t showy at all. It was just very matter of fact. Rather than concentrating on all of the negativity that’s been in our industry around corrosive cultures and some of the negatives, I want to emphasize the positive here, which is to say that culture and values set by you, as the founders and CEOs of your businesses, are an opportunity to differentiate.
In SenGrid’s case, Sameer and Patty have what they call the four Hs, which…It’s not rendering here on the chart, but it’s happy, humble, honest, and hungry. Those are the four values that they live by in terms of openness, transparency, enthusiasm, aggression. For them, it’s the pillars of their company.
Every company will have some different combination of, “What are your four or eight?” But setting that culture leads to almost perfect Glassdoor ratings for the CEO, for the company. Cultures that people want to join, teams that they want to be a part of.
Economically, values create value. You will be paid back for that in spades.
The last prediction I want to share is an exciting one as a global venture capital firm, and knowing that the SaaStr audience is over half international. Truly, the cloud is going global now. We have waited a decade for this, as we’ve been looking for investments far and wide. As a board member who sat on the board of Cornerstone On Demand in Santa Monica, and Criteo in Paris, and Eloqua in Toronto, and Instructure in Salt Lake City, and SenGrid in Boulder the fact that innovation is happening all over the country and all over the world, to me, is awesome.
The amount of exciting opportunities we’re seeing globally means that for Bay Area based entrepreneurs, these are your customers and your employees, increasingly spread out around the world. For these remote businesses, you know have a peer group and a support group not just through online communities like SaaStr but through a peer CEO set that is absolutely world class.
That is driving the wave of innovation that we’re all enjoying and benefiting from. That tipping point has happened meaningfully in the last years. We think 2018 will blow wide open.
As you step back and look at the trends and look at the stack holistically, we’re proud to share with you the eight and the predictions ahead. This will go online at the BBP website, bbp.com today in parallel. We look forward to watching the journeys and hopefully watching you, over time, transform the market caps and the leader boards across our entire industry.
Keep on with cloud. Thank you.
Kristina: Thank you.