Subscribe

How to Build a Cloud Unicorn

With record-breaking company valuations on the rise, Bessemer shares market insights and early-stage lessons to help founders build thriving businesses.

By Byron Deeter, Mary D'Onofrio, Elliott Robinson 9.29.21

In 2008, LinkedIn grew into the industry’s very first cloud unicorn, and after a little more than a decade, we’ve seen the unicorn birthrate accelerate beyond our wildest dreams. Of the 800+ private companies in the world that are now valued at more than $1 billion, we hit a new milestone this year: 150 of today’s unicorns are part of the cloud economy.

At SaaStr Annual 2021, Byron Deeter, Mary D’Onofrio, and Elliott Robinson share a state of the cloud economy, tactical lessons and case studies for early-stage founders, private market analysis, alongside key predictions and trends driving innovation around the globe.

Key takeaways from How to Build a Cloud Unicorn

Public market insights

  • As of September 2021, the total public cloud market reached $2.9 trillion in market capitalization.
  • Bessemer’s Cloud Index is up 12x in the eight years since its launch.
  • Cloud has outperformed both Internet and Mobile public baskets in the past half-decade as evidenced by MT SaaS vs. FAANG stocks.
  • As of September 2021, MT SAAS Performance is approx. 140% whereas FAANG hit 110%. Simply put, cloud computing is increasingly consuming software, hardware, and services and is, therefore, the most exciting mega-trend in technology, making it one of the most compelling themes impacting global GDP over the coming years.
  • At Cloud 100 this year we hit a new milestone — this was the first year where every company on the list was valued at $1 billion or more. In fact, we had so many unicorns on the list that the top 150 companies met or exceeded that bar.
  • 2021 will likely be a record year for the technology industry on many levels. For example, the number of initial public offerings has surged and has come roaring back after a relatively quiet IPO season in 2020. Proceeds from US IPOs have surpassed $100 billion in 2021. Venture capitalists invested $288 billion in the first half of 2021, an all-time record. And realizations are for the record books: Venture capitalists sold $232 billion worth of tech startups in the first half of 2021. Over four hundred companies went public on the Nasdaq in the first half of 2021, an all-time record, partially driven by an all-time record number of SPAC listings. And Global M&A topped to a new high at $2.8 trillion in the first half of the year.

Founder lessons

  • At Bessemer, we have a long history of backing category cloud leaders that grow from $1M to $100M+ in ARR. And the pace is accelerating—for example, Cornerstone on Demand took 12 years to grow to $100M in ARR, and now we are seeing HashiCorp do this in less than four years’ time.
  • We’re also seeing cloud decacorns create a new benchmark— many like Canva, Twilio, Shopify, Okta, and more strive to grow to $1 billion in ARR.
  • The 10 Laws of Cloud offer early-stage founders the lessons and case studies to learn and grow from previous success stories.
  • Law 1: In the cloud economy, scale wins. The best cloud companies build products that set the pace of innovation. To be a market leader, you have to own at least 50% of the market, while second and third place often own 30 and 20%, respectively.
  • As part of achieving scale in the cloud economy, a company’s ability to grow revenue and expand its total addressable market is connected to what we call the “Second Act.” For example, Shopify, ServiceTitan, and Toast all exemplify the power of payments to drive revenue and gain market share.
  • Law 3: Invest behind the sales and marketing learning curve. The first rule of running a sales organization is to ramp only what works. “Be cautious with investments as you test and iterate. Fail fast and be aggressive and scale your go-to-market when something is really working,” Tooey Courtemanche, Procore’s CEO and co-founder shared with Bessemer.
  • In the past 18 months since the pandemic, it’s abundantly clear that GTM strategies have had to find alternative ways to sell in the remote and digital world. The strategies that founders have leveraged in this new normal include, product-led growth, usage-based pricing, and cloud marketplaces.
  • When cloud businesses focus on cycles rather than funnels, they can build a customer-centric organization that benefits product innovation, marketing, and growing recurring revenue. With Bessemer’s Champion Creation Flywheel, we see four necessary phases — captivate, catalyze, cultivate, and champion.
  • Law 5: The 5 (now 6) C’s of Cloud Finance: After surveying hundreds of leading public and private cloud companies, we’ve found the key metrics to track when running and building a cloud business: Committed annual recurring revenue (CARR), Customer acquisition cost payback period (CAC), Customer lifetime value (CLTV), Churn, Cash flow, and Cash Conversion Score.
  • As the ratio of the ARR to total capital invested into a company, the Cash Conversion Score is effectively the return-on-investment of one dollar ever invested into a company.

Private market analysis

  • Cloud 100 2021 benchmarks demonstrated we’re building in the age of the cloud decacorn: The average valuation of the top-10 company is $19.9 billion.
  • The average 2021 Cloud 100 company is worth $5.2 billion, up more than $2.5 billion year-over-year.
  • Cloud multiples continue to rise: ARR multiples increased 270% since 2016 to 34x, up from 23x just a year ago.
  • Cloud growth rates continue to accelerate: The average Cloud 100 company grew +90% year-over-year in 2021, and the top quartile companies grew 110% year-over-year, faster than ever before.
  • Growth-adjusted multiples increase as well: Growth-adjusted multiples have increased 180% in the last 5 years, indicating investor demand for cloud assets
  • The rise of cloud is a global phenomenon; this year at Cloud 100, we saw massive total valuation growth year-over-year in data infrastructure (70%) and fintech (461%) subsectors.

2021 cloud predictions

  1. Unbundling of the Office
  2. We’re bringing S-M-B back with SaaS
  3. Diversity, equity, and inclusion software take their rightful place
  4. Data and machine learning infrastructure accelerates to new heights
  5. The rise of the “citizen” developer and creator
  6. Fintech and crypto players are changing financial services forever
  7. The vertical SaaS wave becomes a tsunami

Further cloud resources

More from Atlas