BESSEMER CLOUD COMPUTING LAW #10:
Cloudonomics requires that you plan your fuel stops very carefully.
There is no denying that the cash flow characteristics of a Cloud business are wonderful in the long term, but can be lousy in the short term. Cloud companies require you to fund research, development, sales and marketing upfront in return for a multi-year stream of revenue. This typically demands enough investment capital (over stages) to fund 4+ years of runway before a company can achieve positive cash flow (GAAP profit is even longer). Imagine you are flying a private plane from Silicon Valley to Wall Street (which sometimes is the figurative or literal goal), and you need to stop a couple of times for fuel (investment capital) for the trip. It is critically important that you plan your equity and debt financing events in advance to maximize value and minimize dilution.
There have been many promising Cloud startups that stepped on the gas too early and were wiped out as a result. Always model the business with a comfortable cash cushion and recognize that most Cloud businesses paradoxically consume more short-term cash as growth accelerates. As a business, it is critical to weigh forward investments carefully. Cloud businesses typically require multiple rounds of investment and a good amount of capital. For example, it took $126m to NetSuite to go public, $66m for DemandTec, $61m for Salesforce and $45m for SuccessFactors.
We believe that the best second generation Cloud businesses may be more efficient than many of their predecessors as they leverage Cloud services and shift many of their costs to variable models, but in almost all cases, significant capital will still be required to build a dominant Cloud business. If you plan these stages thoughtfully, you will be able to minimize dilution by progressively decreasing your cost of capital and mixing seed capital with venture capital and, eventually, debt before attracting public market investors. As private investors and public acquirers become more Cloud savvy, multiples of CMRR will likely become the primary valuation metric.
Finally, don’t let the volatile economy “cloud” your judgment (sorry, couldn’t resist). Trust your metrics and your dashboard. You can’t drive by the rear view mirror (GAAP Revenue), but if the 6 C’s show strength, then it would actually be irresponsible not to invest aggressively in growth. Great businesses are built in all market conditions, and tough markets are often the best opportunities to gain market share. And please call us at Bessemer as we’d love to be your partner and join you for the path ahead!