State of the Cloud 2019 from Bessemer Venture Partners

Please welcome bessemer venture partners, christina shen and byron dieter. Hello, Saster founders and executives.

Hi, everyone. It's amazing to be here today and while. Look at all these people. This is our fourth time being on the Saster stage annual again. We're so excited to be here.

That's right. We've been honored to speak at every one of the Sasters 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 Saster, before the annual and even before Saster itself. And this goes back to 10 years ago, which was 2008, and we released the 10 laws of 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, you know, above this billion dollar mark for private company CEOs? 0. 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 and I'm going to tell you, we'll make it easy. We'll put it in five buckets here, kind of numbers of five increments. So think in your mind and I want to see a show of hands. So for the first bucket, can you think of five private companies worth at least a billion dollars? And I'm going to spot you one. We'll give you slack. Raise your hand. One to five. Private cloud unicorns. Okay, second choice B, six to ten. So if you can think of a handful of additional companies, again, 10 years ago, we were at 01 a year. Six to 10, raise your hand. Okay, a few more of you. Here's a safe middle of the road. 11 to 15. Raise your hand if you think there's somewhere between 11 to 15. Put a stripe in there, maybe a zoom. 11 to 15. Okay, 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, few of you haven't voted. Okay, anyone want to go out on a limb? Be aggressive 20 plus, we've got some informed audience members here. Thank you for the pandering. We'll get you everywhere. Let me read the report. For those of you who said one to five, you're right, absolutely there are five great private cloud companies. However, you forgot a few. For those of you who kind of eased into it, there are some infrastructure types here, there's some great names that have quietly been building value. If you think back about the developer world, the pager duties 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, well, actually there's a lot more. Every one of these companies up here is still private, but valued at over a billion dollars 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. And it's 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 a billion dollars 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 non stop about the power of Amazon Web Services, Microsoft's recent appointment of Satya CEO. He was the head of the 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 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 and 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. Qualtrics8 billion GitHub 7.5 SendGrid 2.9 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 three 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. We think back. Many of you were probably here for saster 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 three 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. We what that required was a sustained.

Compound annual growth rate of 25%. And we said 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 businesses as well.

Now, in the era of intellectual honesty.

I'll admit that we were wrong, but.

Wrong in a very good way.

We were two 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 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, 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 Saster 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. 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 for 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 nine and a half 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 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 and the small entrepreneurs are doing is preparing their companies for any market scenario. So today we're going to talk about the four 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 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 three 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 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 seven years. The top quartile companies got there in about five 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 AR in about four 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 a cornerstone on demand. Now, better companies will get there from 1 to 10 million AR in about three years, and that means you're tripling and then double doubling, which means you'll be on the same path as companies like Koopa Software and the best companies will get there in two 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 perform to the early stages so you can get a sense of how you're tracking. Now that we've talked about growth, the second major tactic to building a resilient company is actually retention And I'm going to 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 12 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 as 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 six 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 truly 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 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 two 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, 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. Hire smartly. But also remember that if someone isn't working out to move on them quick 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 eight years. Now what's really interesting is the peak of the market was actually March 2014 where companies are trading a 10 times ARR multiple. Now let's assume that you did a fundraise in March 2014. Guess what? If it took you two 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 two 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 in a nice step up 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, 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 bear market, 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 one and grew to 24 million ARR in year two. 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 BBP efficiency score, which really put them very much in that best category. And so in summary, there are four 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 going to call this grit. Going from grit to grit. 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 the 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, two 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. The second example would be service time when they were a series A company and they were a fantastic example, 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, 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 going to pass it back to Byron now that you've heard about the grittiness tools you can use and Byron's going to share about 2019 predictions.

Thank you, Christina.

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

And the last section here for a.

Few minutes is the predictions and we're.

Going to 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 as founders and executives, 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 data sets, fraud and financial sectors 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 scale factor or customer support with.

ADA or cif, science and fraud, where.

These machines can do it much better.

Than human ever could. And yet you make these humans 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, software and hardware, are talking about how they're great product led businesses and how they innovate on products and how they are revolutionizing different 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 is opening.

Up much as customer success did a.

Few years ago in some adjacent categories where net new vertical functions for software areas that are touching the other business lines are now more and more impactful. Okay, number three, finally selling free software is leading to great businesses. There's been 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 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 an adjacent category to that is this notion of cloud powering mobile and that relationship between 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, you know, Procore and construction service titan and field services retail and that interaction for toast fleet transportation with, with keep trucking or 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 going to see a lot more of this and really enterprise mobile is going to take root through these vertical use cases. Now our fifth and final core prediction ties into the developer themes that we've said many times through the years. But with an emerging trend around this notion of low code and no code. And what this is is the intersection of several mega trends as we talk about the API economy in the developer world and companies like 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, and the SaaS businesses 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 in the RPA space with a number of the companies, the UiPaths and the automation anywheres of the world that have just had fantastic revenue growth powered by this companies like Zapier where you can as a business user, you can merge business function with technical capabilities, integrate apps with a few clicks and get the power of 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 five areas that we think are going to drive innovation. And these are the five areas that if I'm a founder again in your shoes, sitting here in the room today, these are the tailwinds that I'm looking to ride. Because if you get these trends right and you're in the right categories, then out performance as a team and as a product will amplify the results. But there is one more thing, a half prediction here. The trillion dollar mark. We alluded to it before and 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 rain 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.