At High Alpha, we’re focused on investing in and creating B2B SaaS and enterprise cloud companies. As such, we’re always interested in the latest data and research in the space. These are our takeaways and predictions based on Bessemer’s annual State of the Cloud Report.
Cloud companies have come a long way since the turn of the century. In 2000, there were zero private unicorns and only a few cloud companies as a whole — think Netsuite and Salesforce. A decade later, in 2010, there was still only one private unicorn and hundreds of cloud companies. Today there are 86 private unicorn cloud companies and thousands of additional cloud companies. As the number of cloud companies grows, so has their value.
Trends in Cloud
The public SaaS/cloud market hit $1T in March 2020. In Bessemer’s first State of the Cloud report, they predicted that the public cloud industry would reach $500 billion by 2020 — meaning the cloud is growing faster than predicted. In 2008, the top 5 public cloud companies (Salesforce, Netsuite, Concur, Blackbaud, and Dealertrack), were worth $13.9 billion. Just over a decade later, as of the writing of this article, the market cap of the top five public cloud companies (Shopify, Salesforce, Adobe, ServiceNow, and PayPal) is just over $581 billion.
The cloud is eating software. 94 percent of enterprises use cloud solutions today and cloud companies make up roughly 35 percent of the total software market. This figure is expected to grow to 75 percent by 2030.
Laws of the Cloud
The first law of the cloud is that that scale wins. According to Shopify founder and CEO Tobias Lütke, to be a market leader you must own 50 percent of the market. The second and third place leaders may own around 30 percent and 20 percent respectively. Lütke’s theory has played out in various markets.
A company’s second act is what allows them to expand their total addressable market and reach this scale. The second act concept represents a product extension or new product line that can be sold into existing and new customers. If this second act grows revenue, reduces expenses, or replaces existing spend with better functionality, you will find success in performing it.
In order to orchestrate a successful second act, GTM is key. It’s important only to scale GTM after you’ve tested and iterated on the product. In other words, once you’ve discovered your GTM strategy and can confirm that it works, scale the GTM team. Companies that invest in GTM too early burn headcount without an associated top-line growth.
Predictions From the State of the Cloud
The Future of Work is Remote
Given the existential threat of the current pandemic, companies facilitating remote work have seen a surge in demand. This trend has been a long time in the making that is only catalyzed by the current state of the world.
Increasingly, the knowledge economy will rely on a decentralized workforce. Bessemer has identified a few categories of companies that hold untapped opportunities:
- Onboarding & management
- Global HR and Payroll
- Knowledge sharing
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Cloud Proliferates Around the U.S. — and the Globe
Trailblazing cloud-first companies are being built around the globe — outside of what may be considered traditional markets. At High Alpha Capital, we find ourselves investing in SaaS companies located in non-traditional markets, like those based in Atlanta, Chicago, Salt Lake City, and across the Midwest.
B2B Marketplaces Reign
The majority of B2B transactions still take place offline, the reasons for which are driven by two key factors:
- B2B markets are more opaque, tougher to break into and have a complicated structure that involves legacy processes and intermediaries in most situations.
- B2C marketplaces have received more attention from founders and investors, leaving a gap in the B2B space.
The API Universe Will Drive Innovation
A multi-trillion dollar API economy has emerged because of the proliferation of API-driven companies. Formerly, investors had questioned the ability of companies with API-driven business models to generate big outcomes, yet Twilio (~$15 billion market cap) and Plaid (sold to Visa for over $5 billion) are just a few examples of companies that have proven the value of API-driven businesses.
API companies will transform industries and generate high value for investors. Dwolla, a High Alpha portfolio company, is leveraging this trend through the use of their API that makes moving money from one place to another easier and safer.