Cloud Days Ahead: The State of the Cloud Industry 2016. Download Full Report
As we head into the final stretch of 2016, Bessemer Venture Partners (BVP) took an in-depth look at the cloud industry in our second annual of the State of the Cloud report. It has been a banner year, with several of our predictions from last year coming to fruition while others remain in the early days. This report details the hottest trends to keep an eye on and our thoughts on the most important predictions for 2017 and beyond.
Trends to Watch
• Volatility slows: In early 2016 the public cloud market experienced almost a 50% pullback over the course of a month, and then a full recovery over the subsequent months. Bessemer’s Cloud Index (an index of 42 public cloud companies) hit its lowest market capitalization point in February 2016 at 3.1x revenue, after coming down from a high of 9.5x revenue in January 2014, and has since settled into levels slightly below historical averages at 4.9x revenue.
• Legacy software vendors and send M&A levels to all-time highs: Cheap public cloud multiples resulted in $50.4 billion of public company mergers and acquisitions (M&A) in just twelve months, 60% above the prior annual record of $30 billion in 2014. Microsoft MSFT -0.07%’s acquisition of LinkedIn LNKD +0.01% ($26.2) and billion Oracle ORCL -0.15% acquisition ofNetSuite N +0.36% ($9.3 billion) headline the list as the #1 and #2 M&A transactions in the history of the sector. Almost a quarter of the total public cloud market cap was acquired by legacy software vendors who are finally admitting cloud is here to stay and are buying their way in to catch up.
• Private multiples still 2x their public comps but converging: Private cloud multiples for growth stage companies are currently trading at about 11.2x revenue, which is over a 2x premium to their public peers. However, this is down from over a 3x premium at the peak.
• Business model efficiency is now the primary valuation driver: BVP unveils the new 70-50-30 “Bessemer Efficiency Rule” to quantify the growth efficiency of a given cloud business. This reflects the change in public investor sentiment from “growth at all costs” to “efficient growth”. BVP’s power rule measures efficiency by taking the sum total of a company’s percent of annual recurring revenue (ARR) growth + percent free cash flow (FCF) margin.
A Look Back
As far as the state of our predictions from last year, we trumpeted the rise of industry cloud or “vertical SaaS.” This forecast was strongly validated by legacy software vendors who understood the value of investing in vertical market leaders. Twenty percent of this year’s public cloud acquisitions have been industry cloud leaders – the most notable of which include DealerTrack and Fleetmatics. We also predicted the growth of developer-centric businesses, which allow small and growing cloud businesses to accelerate their customer experience and product functionality. The two largest IPOs in the cloud market (Twilio and Atlassian) over the last year reflect this, and further validate that developers are here to stay and will become more central to the software purchasing process.
In this year’s report, we’ve unveiled our predictions for 2017 – the most important of which includes the increase momentum around enterprise mobile and the next wave of SaaS 2.0 applications disrupting SaaS 1.0. While cloud computing has only penetrated five percent of IT spend, SaaS applications in particular verticals are already disrupting their first wave counterparts. We have seen this most prominently in the human capital management (HCM) space with players like Taleo and SuccessFactors being replaced with next generation players.
We also anticipate incredible growth of Artificial Intelligence (AI) and Deep Learning within the enterprise. Consumer companies are blazing ahead to incorporate AI and deep learning into their products due to advantages in breadth and depth of data. We believe the enterprise use case is gaining momentum and will start integrating an AI layer to help humans interact with software more efficiently.
Just as we’ve seen in years past, the coming 12 months are sure to bring growth, change and undoubtedly a few surprises. We look forward to following the industry and seeing what new and interesting trends emerge, what predictions come true and where we’ll be this time next year.
Bessemer Venture Partners (BVP), has been investing in cloud computing for over a decade with over 100 cloud investments representing more than one third of the public cloud market capitalization with leaders including LinkedIn (LNKD), Twilio (TWLO), Shopify (SHOP), Box (BOX), Cornerstone (CSOD), DocuSign, Eloqua (ELOQ), LifeLock (LOCK), MindBody (MIND), and Wix (WIX).