The State of the Cloud Industry in 2018

It’s here! Our State of the Cloud 2018 report is hot off the press. This marks our fourth annual in-depth look at the cloud computing industry, and this past year was certainly one to remember. While the report includes all the megatrends in this space and our crystal-ball predictions for 2018 and beyond, here’s a snapshot of the year in review and where we believe this year will take us.

A Look Back at 2017

• Revenge of the nerds. Apple, Alphabet, Microsoft, Amazon and Facebook dominated 2017 as the five most valuable publicly traded companies in the world. Why is this significant? They were all venture-backed tech companies! This was a watershed moment for the tech industry and signaled a global shift in power from oil barons to Silicon Valley whiz kids.
• IPOs on the comeback trail. Anyone following the tech industry has noticed that companies want to stay private longer. But now we know just how pronounced this shift is: The average age of companies to IPO has doubled in the last decade, from five years to 10 years. With more mature companies going public, the average market cap has increased from $573 million in 2009 to $1.4 billion today. The IPO market is opening back up following a lull in 2016, but it’s still well below historical averages. The buy side is enthusiastic and eagerly waiting for more opportunities to invest.
• The unicorn stampede. Enabled by huge growth in the amount of private capital available, the number of “unicorn” billion dollar startups has skyrocketed to more than 200. For context, there were zero unicorns a decade ago! Now there are almost the same number of private cloud unicorns (37) as public cloud unicorns (44), highlighting the massive backlog of awesome cloud companies.

A New Valuation Framework

The cloud computing revolution has changed the way we value companies and approach investment opportunities. A decade ago, private and public companies were valued at the same multiple, regardless of how fast the company was growing. For example, a public company growing 30% year-over-year and a private company growing 100% year-over-year would both typically fetch about a 5x revenue multiple. Today, early stage companies are growing 100–300% percent and trade at much higher revenue multiples. So are the private markets overvalued? We believe these higher valuations are justifiable, and there is a better way to value private cloud companies.

So first, what has changed in the last decade to enable this more rapid growth? Of course, SaaS penetration has exploded versus on-prem.The growth of APIs and rise of developers make it easier to launch software companies by providing many of the nuts and bolts they need. Alongside this growth, software has expanded its position as the single largest sector of tech investing, with 48% of total invested capital.

Taking into consideration how fast cloud companies can grow today, the BVP growth benchmark has evolved accordingly. We believe good companies grow from $1 million to $10 million in annual recurring revenue (ARR) in four years, but the best companies can do it in just two years.

Additionally, private revenue multiples for cloud companies have outpaced public multiples in the last six years, but that’s for good reason — they are growing faster than public cloud companies! In this new landscape, we value cloud companies with the BVP ARRG metric (Annual Recurring Revenue to Growth). To calculate the ARRG multiple, divide the ARR multiple by year-over-year growth. Despite private ARR multiples steadily increasing to 15.9x ARR in 2017 (that is 2.5x higher than public company multiples), ARRG multiples have stayed roughy flat 7.6x ARRG. Thus, despite seemingly high private company valuations, the multiples can be justifiable given the higher growth. With this lens, private company valuations look much more reasonable.

Bessemer Cloud Predictions for 2018

As a roadmap-driven firm, our investments are driven by research and market mapping, and a never-ending belief that great ideas coupled with an all-star team can result in remarkable companies. In 2013, we identified eight cloud roadmaps, and you can see a sample of our investments over time in these areas below — we actually put our money where our mouth is!

We forecast the following for 2018 based on the different layers of the cloud stack (FaaS, SaaS, PaaS and IaaS):

1. Rise of serverless computing — This emerging type of computing brings more agility, but also more complexity. Docker opened the doors for a new way to build and now lots of startups are now focusing on how containers can work together and how these containers can be secured. But the future will be about how to manage containers at scale. That’s the opportunity for BVP.
2. APIs drive innovation — APIs are driving innovation everywhere (we know first-hand from our robust API portfolio), and we anticipate this burgeoning economy crosses into the mainstream this year.
3. Blockchain finds a home in the enterprise — Compelling applications will emerge in enterprise industries including food, retail and aviation for this groundbreaking technology.
4. Payments-as-a-Service — Software and payments used to live apart. Now companies like MINDBODY, ServiceTitan and Shopify are taking a share of payment processing from software vendors and merchant acquirers.
5. System of record moves to system of results — Companies will place greater emphasis on what data can provide to their organization and how they can make it actionable.
6. Growth of the screenless software moment — Voice is the future! Imagine Alexa in every home. Other large tech companies will continue to follow Amazon’s lead and invest in expanding their voice capabilities.
7. Values create value — 2017 served as a stark reminder that company values and the voice of the employee matter now more than ever. Founders will place greater emphasis on establishing the cultural heart of their companies earlier rather than later.
8. The cloud is flat — Silicon Valley is still the center of innovation, but other cities have taken note. We are proud backers of several incredible cloud companies outside the Bay Area, including Criteo (Paris), ServiceTitan (Glendale, California) and Shopify (Canada).

If there’s one thing we’ve learned from putting four of these reports together over the years, it’s that the cloud industry is always changing. We can’t wait to see what 2018 has in store. We’ll be watching closely to see if our expectations match reality and eagerly awaiting the inevitable surprises that happen along the way.

-Byron Deeter, Kristina Shen, and Anna Khan