State of the Cloud 2022: The Centaur Report with @BessemerVenturePartners

We kind of do this cloud thing a lot. Over the last 20 years, we've had the privilege to work alongside some of the greatest cloud founders to ever do it.

We are never done.

At Bessemer, there are over a thousand unicorns. So we created the Centaur.

For cloud businesses that reach $100 million in annual recurring revenue.

What is a true measure of an enduring business?

We at Bessemer like to pride ourselves being the first call partner.

How do I help this company fulfill its potential?

There isn't one single way of building a hundred million dollar ARR business.

You're act two. Think about act two sooner than you think.

How big of a vision do you have?

Please welcome bessemer venture partners, samir dalakia, mary d' onofrio and elliot robinson. Oh, go ahead.

Good morning.

Look at this.

Thank you, gentlemen. Wow, it is really exciting to be back with you all here live on stage at Saster. For the last decade, the Bessemar say the Cloud Report has kind of served as the industry's definitive document when it comes to telling you where the cloud economy is going. And for the founders and your startups and teams in the room, giving the insights and best practices to help you scale your business and become a cloud giant. Now we're all wailing through some really kind of dynamic times and things are still changing day to day. It almost seems like hour to hour. So before we jump into the report, I'm really excited to share a big change on the Bessemer end and that's that our dear friend Samir Delakia has decided to join us on the investment team. After years of leadership as a CEO, operator and board advisor at some of the best cloud companies out there. Syngrid, Twilio, Pagerduty and more.

Thanks so much, Elliot. Thank you guys. I'm so excited to be here for the State of the Cloud Report because I have always been out there with you all every year, literally for the last seven years here at Saster, and I always look forward to this. The State of the Cloud Report. It is the industry standard way of understanding where we are in our industry and I always love the insights that were coming. Now, I know this year's report's a little bit different than other years, and I think we're moving a conversation from one mythical creature to another.

That's very true, Samir. Last year when we came to Saster for our State of the Cloud report, we talked to you about how to build a cloud unicorn. This year, however, we're talking to you about how to build a Cloud Centaur $100 million ARR business, which we think is the sign of an enduring business. And on our pathway to share how to build a cloud Centaur. I'm going to start with the first section going over the macro. Samir is going to take us through cloud fundamentals and how cloud has continuously penetrated the broader economy. And Elliot's going to go to one of our highlights every year, which is our yearly predictions. So let's go ahead and dig in. I know what you must be feeling out there as cloud executives, cloud founders, and that's pressure. Inflation's on the rise, interest rates are on the rise, and meanwhile there's a backdrop of a compressing public market. The BVP NASDAQ Emerging Cloud Index, which is the public benchmark of cloud software performance, has actually contracted by more than 40% year to date. And with that backdrop of a compressing public market, what we've seen is that there's been increased conservatism in the private funding markets. VCs like us are funding businesses and cloud businesses at reduced rates. As a matter of fact, VC funding dropped by 23% quarter over quarter in the second quarter of 2022. Combining this macro pullback with conservatism in the private funding markets has led to a pullback in private valuations as well. Every year Bessemer is very proud to put together the Cloud 100 with Forbes and Salesforce Ventures and it represents the hundred best cloud companies in the world every year. Even for this really elite cohort, the best and brightest multiples have started to decline. From 2016 to 2021 we saw a huge run up from 9x to 34x ARR in their last private funding round. However, in 2022 we saw a contraction by 11% to an average of a 30 times multiple. Though even that might be anchored by transactions that took place in 2020 and 2021. And turning to the public markets again, the compression that we've seen in public multiples is actually starker with greater amplitude. At times in 2020 and 2021, the average BVP NASDAQ Emerging Cloud Index company was actually trading for 25 times. Pretty incredible. Now we're all the way back to eight times. And in that period of compression, what the market has begun to value has changed. First it was a premium on growth above almost all else, and now it's a premium on profitability. Investors like us look at efficiency score and at Bessemer we love to look at the BVP efficiency score, which is ARR growth plus free cash flow margin. And for public companies, where that sum adds to more than 40%, they're earning a 1.5 times higher average trading multiple in the public markets. Now, I know there's a lot more that we can say about the public markets and about the macro backdrop, but there are two things we really want to leave you with. First, in the context of all this compression, you can really see just how hard it is to build a billion dollar, let alone $10 billion business in the public markets. There are only 25 and they include at least cloud household bins like Adobe, which had obviously a huge transaction today, Zoom and Datadog. And the other thing we want to highlight, which Samir is now going to expound on, is that the underlying fundamentals of cloud businesses remain relatively strong compared to previous pullbacks. As a matter of fact, in the public markets, the average cloud company growth rate is still 35% year over year. I'll go ahead and turn it to Samir for our next section.

Awesome.

Thanks, Mary. Thanks. So, you know, as Mary just said, we got a great grounding on where we are in the state of the cloud market today. I'm going to try to zoom us out, give us a big picture view. And the thing I want to remind everyone of is just how incredible our SaaS model is. Fundamentally, the recurring revenue nature of the model, our ability to efficiently go and build software and have it delivered out to customers and create value, is still an extraordinary business model. In fact, at Bessemer we would say it's the greatest model in the history of the world. There's a reason that our businesses grow as quickly as they do and are valued as much as they are. And so despite the contractions that we've seen in the public markets to valuation multiples that some might argue, and I would probably agree, more normalized levels over a longer period of time, if you were to look at them. We just want to remind everybody, entrepreneurs and investors alike, this is an extraordinary business model. Our cloud industry is as strong as it has ever been. And if you look at the performance of cloud companies, even now, despite all the turbulence in the public markets, you'll see extraordinary performance. So let me see if I can click there. The Cloud 100 cohort that Mary described for this year, the Cloud 2022, the average growth rate, this is the average Cloud 100. The average growth rate is 100% year over year. The top quartile is 120% year over year. That's Extraordinary. I would have guessed more like 50, 60, maybe 100 to 120%. Contextualize that by realizing that of the Cloud 100, over 70% of these folks are already at 100 million of ARR scale. So you combine the growth with that kind of scale, on that growth and it just is an amazing proof point for everyone of just how strong cloud fundamentals are, how strong these cloud businesses are. So to any of you out there working at one of these Cloud 100 companies, congratulations. You are building an extraordinary business in a very challenging time. And you know, we should all, we should all be so lucky. Those are incredible growth rates. Now let me, let me zoom back out of there and give you a bigger picture still on where we are in the long journey of cloud and SaaS adoption in the enterprise. Now, for those of you who've been around this industry a long time, like me, I've been doing this for 25 years now, Cloud for the last decade plus. There's a time when we really wondered what would be the penetration rate of cloud and SaaS into enterprise IT spend. And we were in single digit percentages for a long time. And here we are now 20 years into this journey and what you'll see is that we are now at nearly half, nearly half of software revenue now is cloud first. That's a pretty extraordinary shift over this period of time. So what I would say to you is, look, this, what we all do here in this room, our industry collectively is critically important and we would argue at Bessemer, we actually sat on stage here at Saster a couple years ago. This is as important as the electric grid to the functioning of our global economy. Let me unpack that. That's a pretty big statement. So if you take the size and importance and scope of our industry now, it's nearly half a trillion dollars, half a trillion dollars in the cloud. And of course we are absolutely disrupting and have been well underway disrupting the software market, legacy on premise software, that's been happening for some time. But I would assert that the bigger impact it's to the $4.4 trillion that is spent in technology broadly at every layer of the stack, literally down to the chips and the hardware that is being built to run the cloud infrastructure on which everything runs, the networking, the security, you name it, it's all being rebuilt and redesigned for the cloud and we're just getting started. If you, if you take that further, we would argue that the cloud is literally going to be impacting every single aspect of the global economy. $96 trillion worldwide in the years ahead. And some of you in the audience might say, actually, and I probably agree with you, we're already there. Just think about the last two years of our pandemic and what we all just went through and imagine how hard it would have been to manage through the shutdowns, the work from homes, remote work, hybrid work. If we didn't have the cloud, if we didn't have amazing apps like Zoom and Slack and so many of these other things, they allowed us as a global economy to continue to move and function. And we see this, by the way, as individuals, consumers. You show up at a restaurant, it's going to be powered by SaaS software. You call your plumber, they're going to have an iPad running some SaaS software on it. You go to the local salon to get a haircut, they're running their business with SaaS software. You want to call for a mental health check in with your therapist, it's going to be online, powered by some SaaS software. The cloud is showing up everywhere. And it doesn't matter, consumer or business, regardless of industry, regardless of function, the cloud is impacting and touching every bit of our global economy. And so I would say to you, as a room, again, collectively, the impact that we are having in the world is profound. And you should be really proud that what we do every day, day in, day out, allows our world to be a safer, more resilient and more stable place. So that's what we love about where we've come on this cloud journey over the last 20 years. When you zoom out from our, what we're feeling in this day, this quarter, this month, we're just getting started. We have so much more to go. And Bessemer loves cloud. We have for a long time. We will for a long time. And there are some really exciting trends coming up that we see that drive our love of the cloud. And my partner and friend, Elliot Robinson is going to tell us more about those. Elliot?

Thank you, Samir. Thank you. If you can't tell by now, as a firm, we do love the cloud. And this is my favorite part of every year's report, because this is where we actually leverage the experts, the founders, the teams, the developers and the end users. Then we put our collective heads together and figure out, okay, Mary's walked us through the backdrop. We've talked about how much room we have to go, but what are the trends and the predictions that are going to drive the next decade or two and beyond of the cloud? Let's Dive in. So last year I came here and we talked about the power of the second act and the power of payments in the form of a case study with Shopify. So what we're seeing now is that the new generation and the next generation of SaaS startups Sameer mentioned in the spa industry, a great company called Gloss Genius, which is a SaaS platform for SPAs and salons. If we pick out Rapbook in the entertainment and production space, we're actually seeing them take their second act, pulling it forward as their opening act and actually offering a wide array of fintech solutions, whether it be lending, payments, payroll, banking and card issuance. So another thing that we talked about in our prediction section was how cloud is being purchased. I was at a session yesterday here at Saastr and I think the title was Don't Sell Software like it's 2012. I love that message. You can't do that anymore. And the pandemic has actually furthered that message. And we talked about the power of the cloud marketplace. It's actually becoming one of the most natural places for, for SaaS sellers and SaaS buyers to transact. Last year I predicted in front of this crowd that we were gonna see somewhere between 4 and 5 billion dollars of GMV go through public cloud marketplaces. We've actually surpassed that and powered and partnered with Tackle IO, the leading SaaS company, to help you get your product placed, priced and positioned to transaction the marketplace. We can actually Predict that in 2023 we're going to see north of $10 billion of GMV going through the marketplace. And by 2025, we can predict $50 billion of GMV to go through the marketplace. So the takeaway here is that we're at a point where the cloud is actually helping us sell more cloud, and we're really excited about that prediction. I also mentioned last year something that Satya said, CEO of Microsoft, he was on an earnings call in the heart of the pandemic. And he said, you know, we've seen two years of digital transformation take place in the last two months. If you go back to the earnings call that Microsoft just did, Satya gave us an updated view. He said, look, our customers are certainly tightening their belts in the face of some kind of global macro uncertainty. Some things around marketing, hiring, we're looking at that a little bit closer. But the one area that he noted is not seeing any polls back is in IT spend automation software and the demand for more and more digital transformation projects and tools. So what we're really excited about Particularly in an inflationary environment, we believe, like Satya and the folks at Microsoft do, that software is actually a deflationary force. So whether it's labor shortage, supply chain, remote working collaboration, we believe These are the five biggest areas where SaaS and cloud software is going to help close the productivity gap. If you drill down a little bit further into this, we can look at. Oh, sorry. Somehow I. Yikes. Do we know how to go back?

Sure.

Somehow I've lost a slide here. Okay, we'll just go from here. One of the other trends that we're seeing is that, you know, in 2006 when I started my venture capital career, I would meet global founders, let's say they're based in EMEA or apac and they would say, hey, we're two years into the journey, we've got our customer cohort, we're learning a lot. And I'm here in San Francisco or Silicon Valley to raise capital to bring my product and my go to market to North America, to the US market. But as the global cloud maturity really spawns into these new areas, what we're actually seeing is that companies are staying local longer. Great companies like Mambu in the banking space, they're doing purpose built solutions that take care of everything, compliance, gdpr, forex pricing, seasonality in their own market and they're waiting much longer to come to the North American market. And then in some of the horizontal cases, companies like Canva, I know we talked about Adobe a little bit, we've actually seen them stay in their local market and then take those deep rooted insights having stayed a little bit longer and they go hyper local when they enter into North America, Latam and beyond. Now what does this all mean? This is my second day here at Sassiter. I'm just fascinated by the amount of international LinkedIn emails, notes that I've gotten in my inbox. And what we're seeing is the ability to scale a huge cloud giant in every corner. Every region of the world is growing. Mary mentioned our annual Cloud 100 list. We just debuted it. And what you see here on the slide is these companies are being built and scaled all over the globe. And when we talk about companies and scale companies that are crushing it, I'm gonna bring Mary back up to introduce the newest part of the save the cloud experience, the Centaur Report.

So for our last and final prediction, it's that 2022 is the year of the Centaur, when the term unicorn was originally coined. Ten years ago, it only referred to 14 total private companies. But especially with the combination of the bull market for 13 years and especially 2020, 2020 and 2021, with vast multiple expansion and quantums of capital being poured into the venture ecosystem, the unicorn herd expanded wildly to over a thousand unicorns. So what we tried to do at Bessemer is coin a new term that's more tied to fundamentals, to business fundamentals to orient ourselves, the market and the ecosystem more broadly towards measures that are very much in control by a business. And that's the Centaur $100 million ARR business, which we think is a signal of an enduring business. And why is that? That's because in order to build to $100 million, you need three things. A scalable go to market, strong product, market fit and a large and growing customer base. The things that drive you to 100 million also make you durable and resilient. And what's important is that in Bessemer's research, we have yet to find a single single Centaur that is not endured in some form. We've also been really, really lucky to have partnered with many of these centers as they've gone through their growth journeys from 1 to 100, including public companies like Hashicorp and Toast and private companies like Zapier and Yotpo. So if I've managed to convince you that becoming a Centaur is important and driving to 100 million is really what you should be looking for, the question on your mind might be, well, how do I do it? Fortunately or unfortunately, there's no single trick, there's no single playbook for how to get to 100 million. That's going to be really particular to your business, your operations, your customers, your go to market strategy. But there are a few strategies that we've seen at Bessemer really work. First of all, expanding TAM through product and geographic expansion. Second, incorporating product led growth strategies, and third, using market evangelism is a core piece of your go to market. With that in mind, Sameer, Elliot and I are going to turn to Centaur case studies and hopefully you can learn from the pathways from these businesses is driving from 1 to 100 and beyond. We're going to go ahead and start with Sameer's overview of Servicetitan.

Awesome.

Thanks, Mary. Yeah, so all of the SaaS, Giants, Vertical SaaS and otherwise, the Bessemer is back, have employed this first strategy of having a second act, and by the way, as you'll hear soon, a third act, a fourth act and a fifth act, and that we call it leapfrogging. From the first to the second to the third and the fourth. So we're going to talk about leapfrogging Servicetitan. I have the privilege of being on the board here at Servicetitan, an Extraordinary company, number seven on the Cloud 100 list this year, founded back in 2013, focused on one particular vertical industry, the plumbing industry, with one particular product solution in their platform. And the two founders, Vahe and Ara, two amazing guys, both of their parents actually worked in these trades. So they had deep, deep customer empathy for the problems that they faced and went and built solutions purpose built for that. And as a result, as you might suspect, amazing product market fit. And from that product market fit they, starting with plumbing, they realize, oh, there are these other two industries, heating and cooling called H Vac and then later to electrical. And they're like, oh, these, these other verticals, they share the exact same problems. So let's go start selling our platform to them. And then as time rolled on, they realized, hey, there are more problems than the first ones that we can solve for our customers in plumbing, H Vac and electrical. So they started to build new solutions. Started with fintech stuff like payments and financing, then they moved to other functions we call them at service side and our pro product, so marketing capabilities, payroll capabilities, and then they just kept growing. Now we have this big broad platform that is serving these three vertical industries. And they realize, well, there are so many other trades in the home and commercial services industry that our platform could be applied to. And so they went into chimney and garage maintenance, residential water, you know, then lawn and greens, landscaping, pest control, and on and on and on. And so they just keep layering on these acts and that's what's allowed the company to continue to scale well, well past the 100 million of ARR mark and become a centaur. So you know, the point of this is if you start with a product in a particular market, think about where could I, how could I solve more problems for that original ICP customer? And then once you've done that, think about how do I go take this platform to more and more verticals. We have found that to be one of many great recipes for success in growing and scaling your business. So with that, let me hand it over to Elle to talk about calendly.

So as you heard Mary and Samir mention, there's tons of different pathways to reach your hundred million dollar milestone. You know, I was just talking about trends. Obviously in the last few years, round sizes got bigger, funding pace got a little bit bigger, but bootstrapping is one of the best ways to instill operational excellence and efficiency in your company from the very beginning. We found that in Atlanta based Calendly, led by a great dynamic founder, Tope Ohtana, Calendly is a case study of what can happen when 4, 4 key growth strategies play together in concert. So first, if you go to calendly.com today and you go to their pricing section, they still tout their always free product. That product led growth motion is what always keeps the virality of their user base and their product flying. They're very transparent about pricing you can see right there. And they make it really seamless. And there's a bunch of avenues to convert the free tier users into paid users. They were really smart about listening to the market and their end users about how to prioritize and build the product roadmap. They pulled those insights in and by building the roadmap that way it was able to open up new TAM opportunities and powerful new use cases. But they were also smart in realizing that we actually don't need to build everything. There's Some great other SaaS companies that we can partner with and integrate with some. So for example, as the platform expanded, they partnered with Stripe so they could process payments and transactions for their customers in their environment. They leveraged Zapier to make sure that workflows were more and more automated as the platform got more complex. And they partnered with Zoom to make sure once you finally get that really hard to schedule meeting together one on one or with your team, you can seamlessly transition into that Zoom environment and collaborate. And then lastly, PLG is great. It allows you to scale really efficiently. But at Some point, most SaaS companies decide to layer on enterprise sales and Calendly did this exceptionally well. What's really surprising if you just look at the last year alone, their enterprise segment that's defined as customers spending 100 grand or more even into the seven figures, it's grown 10x in the last year alone. Now think about that. They were met with some skepticism when they first debuted because they said, do you really want to go up against Microsoft, the Office Suite and Google and look where they are today? I do want to take one quick second to just really reflect on how powerful of a company and bootstrapping has been for them. It took them seven years, but calendly scaled from 0 million of ARR to 70 million of ARR, having only raised 3, $550,000. So when you think about, you know, their, their journey to Centaur status in the Summer of last year, 2021, they reached Centaur status, but they did it with a really special designation as a high growth Centaur and they were doing it profitably. So with that, I'm going to bring up Mary to talk about our last case study.

And for our last Centaur case study, I'd love to highlight LaunchDarkly, which was number 34 on this year's Cloud 100 and is world's leading feature management platform. They achieved their centaur status, their $100 million ARR milestone, through a thoughtful combination of product excellence and market evangelism. When LaunchDarkly first began in 2014, developers loved and were delighted by a new easy way to deploy and manage feature flags, which was at the time considered an aspirational practice in software development, usually reserved for large enterprises that could spare the development and maintenance resources required. Today, however, feature management is considered a best practice in the de facto in CI, CD and software development, which launchdarkly helped to make so through four different strategies. First, it built a delightful product that developers love to use and shared really actively in their communities. Second, developer word of mouth continued and the company was able to evangelize its product within developer communities, continually hitting them with the values, the productivity and developer ease of use. Next, given that developer acquisition and customer penetration, they deepened it more fulsomely with additional product offerings such as data insights, a connectivity suite and experimentation. And lastly, once already in customers, it was able to deepen the customer, deepen the customer depth and open the customer aperture as they added more and more products onto their platform. Today, the customer segments that they serve are vast and customers are as varied as TrueCar, IBM, Atlassian and Priceline and even Domino's Pizza now that I think about it. I'll go ahead and turn it to Samir to wrap us up. Awesome.

Thank you Mary. So you know these three case studies, hopefully you take away a couple things. Number one, all three of them had a maniacal focus on their end customer and serving their needs and solving their problems. And number two, they all had many acts. They all started in one place and then added more, added more, go to market motions, more products, more verticals that they served. And so as you go back home, reflect on how is my company doing those two things and if not, what could I go do to accomplish that? But we also shared those three case studies because despite all the doom and gloom in the Meta and the markets and the macro, we want you to realize you can go be our next Centaur case study. You can Go build the next hundred million dollar ARR business regardless of the macro. Our friend and partner, Byron Dieter was just reminding us the other day, actually three of our firm's best investments ever were made in the Great Recession in 2008 and 2009. Twilio, Shopify and Pinterest. And so you got this, you can do this. Regardless of the macro, cloud fundamentals are as strong as they have ever been. So to all of you out there that are working on this now, we'd say first off, we want to celebrate the centaurs who have already made it. There are 47 that were announced just this end this year across every category in SaaS that you can imagine. If you're out there working on one of these companies, congratulations, keep at it. Way more to go do and scale. Extraordinary accomplishment. But I would also say for the rest of you, whether you're just getting started in your center building journey or you all are knocking on the door, we want to say we applaud you, we want to say we are inspired by you and we want to say we'd love to help you. So we have a whole set of resources available if you go to bvp.com cloud lots of, lots of benchmarks and data and tools to help you think about your journey and how you're going to get there. But we believe in the cloud. I hope you take away the cloud fundamentals are as strong as they have ever been. You can reference the 100 plus percent year over year growth rates of companies at 100 million at scale. This is a great industry that we all work in. Number two, remember, cloud adoption is everywhere. Regardless of vertical industry, regardless of function of being applied to, regardless of the geography that they are serving, Cloud adoption is everywhere and it is only accelerating. And I would say finally it is a privilege that all of us get to do to work in this industry that is so increasingly important to the global economy.