The consistency and durability of cloud companies, however, have persisted since we first began reporting on the state of the OpenCloud, our term for the convergence of cloud-based infrastructure and open-source software. The present and future prospects of this sector remain incredibly promising, a bright spot that stood out to our team as we assembled this year’s report. In fact, we predict cloud spending will represent about 25% of the $919 billion in overall tech-infrastructure spend in 2022, based on Gartner data.
In short, we’re still long on cloud-infrastructure and open-source software, as we write in the second slide of this year’s report. Cloud companies, public and private, are certainly facing headwinds today. But overall, they remain remarkably resilient despite the market downturn, with the largest cloud-computing providers exhibiting unprecedented growth and profitability. As we’ve previously written, software can serve as a deflationary force by automating core business processes and reducing spending on labor costs, both attractive prospects for companies working through a high-inflation environment.
But market challenges persist, and no company is totally immune. In the past, the easy availability of outside funding in some cases disguised product-market fit — now, companies of all kinds must be more strategic and efficient as they scale. In our 2022 OpenCloud report, we affirm our belief that the road to building a robust cloud company is really no different than it’s ever been: focus on business inputs, like closing customers, revenue growth, and measured operating expenses, and the output (valuation) will follow. Despite the crazy (and, at the time, unexpected) Covid-era boom in corporate tech spending on cloud products, and then the subsequent market swoon, our view is that companies need to plan for 30% growth in annual recurring revenue, 75%+ gross margins and sales-and-marketing spending of just 25% of revenue.
Our key recommendations to cloud founders navigating today’s stormy markets center on making the most out of the demand-generation funnel by optimizing sales, marketing and expansion efforts to drive better results – and increase profitability.
- As the demand-generation funnel changes, becoming increasingly fragmented, the optimal go-to-market strategy must change. We are seeing increasing fragmentation of the demand-generation funnel, and with it, the rise of go-to-market strategies based on buyer preference – meeting the buyer exactly where they are. Companies can no longer rely just one playbook or strategy to find new customers.
- Today, there are complex two-way interactions that can help sales and marketing leaders qualify intent early in the cycle – users playing with open-source products, asking questions in Slack or Discord, connecting their AWS accounts to product and more. Take advantage of these non-traditional demand funnel opportunities to reach new and existing customers.
- Product is playing an outsized role in the buyer’s journey – but the holy grail of “product-led growth” isn’t enough for companies to truly scale. Some companies may find better luck with “product-assisted growth,” which lives between sales-led and product-led growth strategies. Let the product lead by allowing buyers to build faith in a product through a freemium offering – then close or expand the deal through a sales interaction. Ultimately, most cloud companies will also have to leverage a traditional salesforce to land and then expand deals with major enterprise customers. Companies that realize there is a no one-size-fits-all approach to GTM strategy today will have the upper hand.
- Gone are the growth-at-all costs days, where any sale was a good one and few worried about high costs to obtain customers. We recommend that cloud companies focus on customer quality and retention. Highly qualified sales are immensely valuable and can drive considerable expansion over time, which is critical to compounding ARR growth. To drive higher net dollar retention (NDR), sales-pricing models must align with customer-perceived value, which will, in turn, lower barriers to adoption and drive natural expansion. If a cloud company can achieve high NDR while containing the customer acquisition cost (CAC) — the cornerstones of efficiency and profitability — that company will be in a very strong position and the market will be rewarding.
For more insights on the state of cloud markets and the path ahead, please see the full 2022 OpenCloud report here:
Battery Ventures State of the OpenCloud Report 2022 from Battery Ventures
The information contained herein is based solely on the opinions of Dharmesh Thakker, Danel Dayan, Jason Mendel and Patrick Hsu and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes.
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