State of the Cloud 2019 from Bessemer Venture Partners

Please welcome Bessemer Venture Partners Christina Shen and Byron Dieter. Hello, SaaStr founders and executives.

Hi everyone, it's amazing to be here today. And wow, look at all these people. This is our fourth time being on the SaaStr Stage Annual again. We're so excited to be here.

That's right. We've been honored to speak at every one of the SASTRs to date. And it's really become a highlight for us to release the State of the Cloud report here. And so you're seeing for the first time something that we've been working on for months, and really a look back on 2018, and a little bit of predictions in terms of what's ahead. But before going there, I want to take you back a little bit. And it's to a time before SASTR. Before the annual, and even before SASTR itself. And this goes back to 10 years ago, which was 2008, and we released the Ted Waza Cloud Computing at a CEO conference that we had that was meaningfully smaller than this. It had about 100 people in the room. And at the time, it was most of the leading public and private cloud CEOs. And guess how many of them were private cloud unicorns, above this billion-dollar mark for private company CEOs? Zero. Which probably shouldn't be a surprise, because in the entire cloud industry, there were exactly zero private cloud unicorns. In fact, in the history of the entire cloud industry, there had been exactly zero, just 10 years ago. So a question to get you started after lunch for today. How many $1 billion-plus private cloud companies are there today in the industry? And I'll give you a minute to think about it. I'm gonna tell you, we'll make it easy. We'll put it in 5 buckets here, kind of numbers of 5 increments. So think in your mind, and I want to see a show of hands. So for the first bucket, can you think of 5 private companies worth at least $1 billion? And I'm gonna spot you one, we'll give you slack. Raise your hand if you could, 1 to 5 private cloud unicorns. Okay. Second choice, B, 6 to 10. So if you can think of a handful of additional companies, again, 10 years ago we were at zero, 1 a year, 6 to 10, raise your hand. OK, a few more of you. Here's a safe middle of the road, 11 to 15. Raise your hand if you think they're somewhere between 11 to 15. Put a stripe in there, maybe a zoom. 11 to 15. OK, I see a little more caution. We're getting fairly high, but anyone want to be aggressive here? 16 to 20. A few of you, a few of you haven't voted. Okay, anyone wanna go out on a limb and be aggressive? 20 plus? Ah, we've got some informed audience members here. Thank you for the pandering, we'll get you there everywhere. They read the report. For those of you who said 1 to 5, you're right, absolutely. There are 5 great private cloud companies. However, you forgot a few, for those of you who kind of eased into it. There's some infrastructure-y types here. There's some, you know, great names that have quietly been building value. If you think back about the developer world, the PagerDuties and Datadogs and Snowflakes that are just building this awesome value under the covers. And maybe if you're more SaaS-centric, you don't think of them top of mind in the same way, but just fantastic businesses being built. But there are a few more that you still forgot. And, uh, well, actually there's a lot more. Uh, every one of these companies up here is still private, but valued at over $1 billion today from a point 10 years ago where there was zero. In total, in fact, 55 private cloud unicorns exist today, the highest in history. Um, And it's a pretty staggering stat when you think about the power that's building in the market. When I was a founder years ago of a cloud business, I dreamt of the day of someday going public at $1 billion, and how fantastic it would be to have that outcome. And today, that's a healthy Series B along the way. And so if you think back, to be fair, that was when Amazon was still a retail business, for instance. And it's very clear today, this company is not your grandfather's tech business. When you read their analyst reports, they're talking nonstop about the power of Amazon Web Services. Microsoft's recent appointment of Satya as CEO, he was the head of cloud business, and he's driving the cloud agenda there, which is what's led to their massive market cap appreciation. In fact, these two companies right now are dueling for that trillion-dollar milestone, and it's driven by their cloud businesses internally. Now, over the weekend, as some of us were watching a kind of a snooze-fest football game, maybe drinking a beer, which apparently has corn syrup in it— who knew? My friend at CNBC, Ari, was counting words in press releases. And found some interesting stats. 78 times in the AWS— AWS was referenced in the Amazon press release and earnings announcement. Twice for retail. This Amazon giant is telling the market what's driving their growth and their future very directly by their actions and by their words. And so what used to be this e-commerce trend or this consumer trend where the cool kids were very much the consumer-only businesses. Suddenly that's changing, and you get folks like Toby at Shopify, and us in this room, I'd like to think, are now part of this club that's driving tech innovation and tech value creation and job creation on a massive, massive scale. And so in aggregate, the other thing that's kind of cool is the numbers that reflect this. If we think back on 2018 alone, over $90 billion of acquisition activity as the legacy vendors tried to buy their way into this space to catch up with the wave that the innovators have been leading. $33 billion for Red Hat. Because IBM was jammed, they were late to the cloud party, and hybrid cloud is their attempt to to be relevant again in the cloud universe. Qualtrics, $8 billion. GitHub, $7.5 billion. SendGrid, $2.9 billion. The list goes on and on. You get the theme here in terms of total value creation that we saw again just in the last year. And this doesn't include companies like Ultimate, which are starting 2019 off strong as well. Same story on the IPO side. $44 billion. Carbon Black, DocuSign, SurveyMonkey, Tenable, Smartsheet, Dropbox. Fantastic names that in aggregate, when you put together the 3 ways to buy stocks, public IPOs, private venture capital dollars, and then outright acquisitions, last year was a record in terms of total combined capital by a large multiple. In fact, 2015 was the prior record. 2018 was over twice that. And 2015 was a pretty good year. Uh, we think back, many of you were probably here for SASTR Annual in 2015. We were on this very stage where we talked about the BVP Cloud Index and what had happened over the prior several years in terms of building value in the industry more broadly. And this is what we showed, 65% annual growth rate for the public companies in the cloud industry at that point. $200 billion of market cap created. And we think about the power of compounding returns here. That means every 3 years these businesses grew on average for an industry 4.5x. And so we stood up here and we gave a prediction at the time. We said that we had line of sight to the half trillion dollar milestone.

What that required was a sustained compound annual growth rate of 25%, and we said that, um, that we would see as an industry a half trillion dollars of value creation among the public cloud companies, excluding the Amazons and Microsofts that have powerful business drivers within their, uh, within their businesses as well.

Now in the era of intellectual honesty, I'll admit that we were wrong. Uh, but wrong in a very good way.

We were 2 years off. We hit this milestone March 2nd last year. 35% annual growth rate by the industry on average to cross the half billion dollar mark. In fact, we sit here today at $690 billion among these 44 pure play public cloud companies. And if you extrapolate this, take 10— take a third off the growth rate, 10 full points of CAGR, we still have a line of sight to crossing that trillion-dollar milestone in the next few years as an industry. And so when you think about the power under the covers of what's happening on the private side to feed into this, that's what gives us tremendous confidence that it's emerging because We see it every day, and we see it in a very tangible way every year. We work with Forbes to put together the Bessemer Forbes Cloud 100 list, which is published in their September issue. And among just the top 100 private cloud companies, there's $175 billion of market cap among the names that you know well. Uh, again, for the first time ever, there's more private cloud unicorns at 55 than public cloud unicorns on our index at 44, which kind of bums me out. When you do the math, you end up at 99. I was really hoping to announce 100 today. I'm kind of tempted to give a term sheet to one of you at a billion just so we can round up. But maybe we'll do it the old-fashioned way, like we'll do a Series A or B and give you something reasonable like 11 months for the next SaaS or annual to hit a billion, and then we can announce it then. But this list keeps building, and that's what's rolling forward in terms of the industry that we together are leading. Now, when you step back and say, as a CEO, a founder, a senior executive sitting here in the room, what are you thinking about? What's top of mind for you today? There's a topic that's come up a lot over the last few months in particular in our board meetings. And it's one centered around volatility, because we went through this just in the last few months, this wild ride where December alone was the single worst December in the entire history of the NASDAQ index. Sky is falling, world is ending, hunker down. And you flip around, January was the single best January in 30 years for the market indices. There's no doubt that the cloud business models are stronger than they've ever been. The quality of companies are the best they've ever been. But the volatility is something that's top of mind for most CEOs and most founders today, and that we engage on a lot. And so we wanted to go deeper on this topic, and I can think of no one better than my partner Christina Shen, our Cloud Guru, to walk you through how you as a CEO should think about building a resilient company.

Christina.

Thank you, Byron. Uh, so great to be back here again today. I'm so excited to be speaking with all of you. And so I think we can all agree it's been an incredible ride in the cloud markets today. And we all agree that we're still very, very early in our cloud trend today, and we've got a long way to go. But inherently, markets are volatile. And so what I want to talk about today is how to build a resilient company that can sustain any market conditions. Now let's kick it off, and I'd love you to just ponder a question to yourself. Which is, when do you think was the longest bull market in history? Now, when I actually asked myself this question, I thought across my lifetime, and this will probably date me a little bit, but I thought about the '90s. I said, you know, that's when I started buying my first stock. I used my allowance that I got from washing cars and bought my first couple portfolio companies. And I'll say I made a little mini fortune when I was just a young teenager. And so I thought, is that the longest bull run in history? Well, the '90s was actually the second longest bull run in history. It ran about 9.5 years and lasted until about '01. And I will say my little mini allowance portfolio did not do so well once I hit '01. But I thought, is that the longest ever? But in actuality, the longest bull run is actually right now. Starting after '09 until today, it's been roughly 10 years of a bull market, which has just been incredible. If you think about the history of the S&P 500 going back over, uh, 70 years, this is the longest bull run we've ever had. And I won't pretend to try to guess how long this will last. I'm not a market predictor. It could be months, it could be years. But what most people in the small smartest entrepreneurs are doing is preparing their companies for any market scenario. So today we're going to talk about the 4 tactics to building a resilient company, and I'm going to dive into the first one, which is ARR growth. Now, in order to understand what good growth like looks like for a cloud business, it's always best to look at the most successful cloud companies. Now, if you look at the most successful cloud companies out there, and we looked at companies and how long it took for them to grow from $1 million to $100 million in ARR, we learned a couple things. Well, first off, Slack got there actually pretty quickly, and they're not quite a public company yet, but as we all know, they filed for their direct listing quite soon, and they got there in just under 3 years. Well, BlackLine, also a public company, multibillion-dollar company, got there in about 14 years. And so what does that tell us? Well, that tells us that there's many different paths to being a successful cloud company, and it's a wide range of growth expectations. So what does this mean in aggregate? Well, we look at all the public companies, about 55 in total, the median got there in about 7 years. The top quartile companies got there in about 5 years, and the bottom quartile, which are all very successful cloud companies, took about 10 years to grow from $1 to $100 million in ARR. Now the question becomes, what does this mean at the earlier stages, and what does this mean for all of you in the room? Well, our BBP growth benchmark would say in our good, better, best framework that good companies grow from $1 to $10 million ARR in about 4 years. And to give you context, that's about a Double-Double, which is not only a really great burger, which I had for lunch today, by the way, but it's also a great growth rate to have. And it puts you on the same path as companies like Cornerstone On Demand. Now, better companies will get there from $1 to $10 million ARR in about 3 years. And that means you're tripling and then double doubling, which means you'll be on the same path as companies like, uh, Coupa Software. And the best companies will get there in 2 years. So you're tripling each year and you're on the same path as a company like Twilio. Now what does this mean for all of you in the room? Well, it means that if you are aiming and aspiring to be like the most successful cloud companies out there, This will give you some sense as to how those companies performed in the early stages so you can get a sense of how you're tracking. Now, now that we've talked about growth, the second major tactic to building a resilient company is actually retention. And I'm gonna make the argument that retention really should be your best friend, particularly in all markets. Now retention, to differs significantly actually for different customer segments. If you're selling to the mid-market, let's say, you've got average deal sizes that are, let's say, $12K to $50K a year, you're really targeting an 80 to 90% gross retention and a 90 to 120% net retention. But let's say you're also selling to the SMBs. Well, you actually are solving for a different retention rate. And the reason being is that SMBs just sometimes do go out of business a little bit more. And so the benchmarks would say you can have a slightly lower retention rate, but that also means in order to solve for your LTV to CAC, you also can't spend as much on a CAC payback to acquire those customers. On the flip side, if you're selling into the enterprise and you have 6-figure deals or million-dollar deals, you're expected to have a much higher retention rate, and then you're actually enabled to spend significantly more in CAC payback because your LTV is higher, so your CAC can be higher as well. And so remember, solve for the retention rate that's right for your business, particularly in the different customer segments that you're selling into. And next, I want to walk through a quick example to really drive home that retention is a major driver of valuation. And so here, here's a simple example. A company that grew to $200 million in revenue, and during their lifetime they had 110% net retention. So what does that mean? Well, at today's multiples, this would be a $2 billion public company. Now let's imagine that this company over the last few years heavily invested in customer success and really drove up their net retention by 15 points, and let's say they're 125% net retention. That 15 extra points equaled $1.5 billion of additional value to that company. So what does that mean? Retention compounds over time. An additional 1% of net retention can equal $100 million of value for this particular company. And we really take that in, you realize, wow, this can be a strategic advantage for my company. Now on the flip side, churn and low retention can dramatically decrease value. Here the company dropped 10% in value to 100% net retention and actually decreased their value by $630 million. And so what is the lesson learned for us today? Well, one, track your retention and use NPS really as a leading indicator to to understand how your business is performing in terms of retention, and really invest in customer success management because if you can treat upsell and retention as a strategic move for your business, you can create massive amounts of value, not only for yourself, but for your investors and employees as well. And two great examples of that, or should I say one great example now, would actually be Twilio and SendGrid, which actually closed their merger last week. combining the value of the two companies at $15 billion. And I can't think of two companies that are better examples of a phenomenal land and expand model, particularly driving really strong net retention. And both these companies have created a massive amount of value, not only driving retention and upsell, which then resulted in growth and increased value for everybody. And so now let's talk about the third tactic within how to build a resilient company, which is in the bank cash. Now, Byron, my great partner here, was on stage 2 years ago talking about how cash is king. But I'm actually going to disagree with him a little bit. I actually think that cash is queen. And I'm going to restate our tactics a little bit here. Because cash is so important for every business, and especially for all the CEOs in the room, fundamentally, if you don't have cash, you cannot run your business. And so it's so important to manage your runway. Remember to always buffer for contingencies. Keep in mind that product launches are always late. Competition can always increase, which may drive price commoditization or might just cost you more sales and marketing to compete. And so remember to always factor in— at least we recommend 12 to 24 months of runway for each financing that you do. And the last thing I'll say is software companies are really made by people, right? Everyone we hire is an integral part of the team. And so use hiring as a big lever. Uh, hire smartly, but also remember that if someone isn't working out, to and move on them quickly as well. Now you can't talk to an entrepreneur about cash without talking about financing. And our recommendation is always to think one financing ahead. So here we're looking at the revenue multiples of public cloud companies and how it trended over the last 8 years. Now what's really interesting is the peak of the market was actually March 2014, where companies were trading at a 10x ARR multiple. Now let's assume that you did a fundraise in March 2014. Guess what? If it took you 2 extra months to fundraise, your value just dropped by 40% because the markets were so volatile. And let's say you wanted to finance again for your next round 2 years later. You could have doubled your revenue in that time period, and you would actually still be valued at the same amount. So what does this mean for all of you in the room? Well, today revenue multiples are quite hot. It's a great time to fundraise, roughly at 10 times revenue multiples in the public markets. Now what that means for all of you in the room is remember to always plan for one financing ahead because you never know where the multiples may be, and so you want to make sure your next finance can be successful and a nice step up in in any environment. And the second thing I would say is try to factor in a little bit more buffer so you're not financing all the way down to the last second and you're almost out of cash because you want to avoid this momentary blips when the market may be down. Now for my last tactic for how to build a resilient company, I want to talk about how do you spend that cash in your bank now and talk about targeted spend or what we say is efficiency. Now, how do we define efficiency? So you may remember us on stage last year talking about defining efficiency for pre-IPO companies, and we looked particularly at your growth rate relative to your free cash flow burn at the earlier stages. So for most of you in the room, when you're less than $30 million ARR, we look at the net new ARR divided by your net burn. So it's the new revenue you bring in each year divided by how much you spend to see how cost-efficiently are you spending your capital. And so why is this important? Well, as Byron mentioned, the markets can be really volatile. And so in growth markets, valuation is correlated to revenue growth. But in all other times, whether it be flat or or bull— bear markets, it's actually efficient businesses that are unfairly rewarded for their efficiency levels. And so we believe it's best to solve for an efficient business so you can be rewarded in all markets. And so the question becomes, what is good efficiency score? Well, if we take a look at another good, better, best framework, what we see across our portfolio and in the industry is you want to be between 0.5 and a 1.5x ratio. Now, what does that mean from an example standpoint? Well, if you take a look at Shopify, they were $12 million ARR in year 1 and grew to $24 million ARR in year 2. And so they had an increase of $12 million in net new ARR, but only burned $2 million to do it. And so they had a 6x BVP efficiency score, which really put them very much in that best category. And so in summary, there are 4 tactics that we've called out, or metrics, to building a resilient company. But I actually want to call this something else. I'm actually gonna call this G-R-I-T, going from grit to great. And this is a fantastic framework to help you understand and measure the resiliency of your business. Each one of these metrics have their own benchmarks to help you determine what is great growth, retention in the bank cash, and targeted spend. But what actually matters the most is how they sum together. So if you look at your GRIT score, we recommend that good, better, best GRIT score should be between 3 and 6, and even higher than 6 for the best GRIT companies. And this is a fantastic measure for you to quickly get a sense of the resiliency of your business across any market. Now let's take a look at a couple examples. Twilio is a great example when they were a Series A company of a retention-driven score. And so they had a 300% growth, 160% net retention, 2 years of cash burn left, and a 1.5x efficiency. So when you sum that all together, they had a phenomenal grit score of 8.1. Uh, the second example, uh, would be ServiceTitan when they were a Series A company, and they were a fantastic example of an efficiency-driven grit score, which you can see when you sum it all together, they got to an 8.3 score. And so hopefully you view this grit score as a great framework to help you measure the resiliency of your business. But actually the real takeaway I want you to have is that there's multiple pathways to have a great grit score. And it's all about you figuring out what suits you as a CEO the best and what suits your company the best as well. And so I'll leave you with one last thought, which is if you are a cloud CEO striving to build a great, fantastic company, have grit and stay strong. All right, so I'm gonna pass it back to Byron. Uh, now that you've heard about the grittiness tools you can use, and Byron's gonna share about 2019 predictions.

Uh, thank you, Christina.

And I loved, uh, seeing a lot of you pulling out your camera phones and taking pictures. We will, um, at the end have a link where you can see the download, uh, spot on our website to, uh, get all of the slides.

And the last section here for a few minutes is the predictions. And we're gonna walk you through where we see the cloud market heading.

In the year and years ahead.

Now, at Bessemer, we put our money where our mouth is, and this is literally the top areas where we are looking to invest over the coming years.

And for all of you in the room, uh, as founders and executives, uh, we suspect many of these themes will resonate because you are thinking about starting a business here, you've got a new product line here, or you're already active in these areas.

And so as we jump into it, the first one is around Robots to the rescue. You hear a lot about this idea of worker displacement around automation. We see the other side of this, though.

The AI and machine learning and productivity gains that are coming, in particular from this human and machine pairing, in areas where you've got massive datasets, fraud and financial sectors, and, and categories where it's too hard for a human to actually process the data in a rational way. And yet machine intelligence is now to the point where in sectors like finance with Scalefactor, or customer support with Ada, or Sift Science and fraud, where these machines can do it much better than human ever could, and yet you make these humans, you know, superhuman in terms of the machine pairing and the capabilities. And we're finally seeing this in a very real way in tangible markets and products across many verticals.

And we think we're just getting started there.

Which leads into the second, which is a functional vertical area around the product category.

More and more businesses, uh, software and hardware, are talking about how they're great product-led businesses, and how they innovate on products, and how they, um, are revolutionizing, uh, you know, different, uh, product areas.

And yet historically, their product teams internally have had strong, very talented resources, but very little technology to accomplish their goals, and very little product for the product teams, ironically. We've seen an explosion of tools and technologies here over the coming years, and we think that category's opening up. Much as, uh, customer success did a few years ago, and some adjacent categories were net new vertical functions for software areas that are touching the other business lines are now more and more impactful. Okay? Number 3: Finally, selling free software is leading to great businesses. There's been this, uh, this conundrum in the open source community where you've had fantastically talented teams, you've had great projects that have benefited the community, and yet trying to monetize these models has really been tough historically. 2018 was a sea change for these businesses and for these models. On the IPO side, we had Pivotal, which was the largest open source IPO in history, and then they were trumped a few months later by Elastic, which became the largest. So the two records set in the public landscape in the same year. On the acquisition side, we already talked about Red Hat, where the driver was very much this intersection of open source and hybrid cloud. MuleSoft was a massive acquisition, and even GitHub was fundamentally driven by some of the open source characteristics in that developer community. And then on the private side, more and more of these massive companies are building with strong financings and, and unicorn-like characteristics as they're starting to emerge. And we're seeing that as viable enterprise class and mass market consumer businesses where this intersection of monetization and great technology is finally taking hold in a very tangible way. Now, in an adjacent category to that is this notion of cloud powering mobile and that relationship between, uh, server-side capabilities and this intersection of SaaS and mobile workers. And frankly, this is one that has taken a while to develop. And we've all waited for this wonderful horizontal wave of enterprise apps to rival the consumer apps that we all have in our pockets and that we use frequently. And it hasn't happened until recently. And where it's happened isn't the horizontals, or necessarily the functional verticals, but it's in the industry verticals where you've got these field workers primarily, and power workers, where the mobile app becomes their power app, and their way of interfacing with customers, and home office, and remote employees. Procore in construction, ServiceTitan in field services, retail. And that interaction for Toast, uh, fleet transportation with, uh, with KeepTrucking, or, uh, workforce management, et cetera. Major categories within GDP where you see extremely high app adoption, daily utilization, and upsell characteristics. All powerful signals that it's working and having massive transformational effects in large, yet often sleepy industries. We think we're gonna see a lot more of this, and really enterprise mobile is gonna take root through these vertical use cases. Now, our 5th and final core prediction ties into the developer themes that we've said many times through the years, but with a, a, uh, an emerging trend around this notion of low-code and no-code. And what this is, is the intersection of several megatrends. Uh, as we talk about the API economy in the developer world and companies like, uh, Twilio and Auth0 and SendGrid and Amazon Web Services themselves, these API-based businesses. And then on the other side, really wave one of these great cloud businesses were all around applications. And the SaaS businesses for, you know, from Salesforce and ServiceNow to the Workdays of the world, these fantastically powerful and transformational SaaS apps that were heavy packaged apps for business users. And you've got this space emerging in the middle where you're able to have developer-like flexibility, but you don't need to be a coder to leverage the power of the product. And increasingly we're seeing it, um, in the RPA space with, uh, a number of the companies, the UiPaths and the Automation Anywheres of the world, um, that have just had fantastic revenue growth powered by this. Um, companies like Zapier, uh, where you can, as a business user, you can merge business function with technical capabilities, integrate apps, uh, with a few clicks and get the power of data extraction, reaching a business objective without ever needing to hit a command line. That's tremendously powerful, and we expect to see many, many more businesses in this area. And so when you pull it together, these are the 5 areas that we think are gonna drive innovation, and these are the 5 areas that if I'm a founder again in your shoes sitting here in the room today, these are the, the tailwinds that I'm looking to ride. Because if you get these trends right, um, and you're in the right categories, then outperformance, um, as a team and as a product will amplify the, the results.

But there is one more thing, a half prediction here, the trillion-dollar mark.

We alluded to it before, and, uh, we've got line of sight now as a community to achieve this. And I think absolutely folks in this room are going to help drive this, and that's what excites us about being here today. And I could have done some fun little pun with the, uh, R-A-I-N and made an animated GIF or something of it raining or what have you, but I think this crowd, the image I think of much more is making it rain like this.

And so cheers to all of you.

We're excited to be part of your next adventures, and thank you for having us here today.