U.S. information-technology spending is poised to hit more than $1.8 trillion this year—and more of that spending is moving to the cloud.
But just how that transition is happening—and who’s benefiting—has changed noticeably this year. Pre-Covid, most enterprises were in what I call “lift and shift” mode: They focused mainly on shifting some existing applications and virtual machines into big public-cloud services like those run by Amazon Web Services, Google and Microsoft Azure. (Those three cloud giants now have a combined $70 billion in revenue, according to figures drawn from recent public company-earnings reports.) Many enterprises did this cloud-dabbling to save money on certain functions and processes.
Post-Covid, the world has (obviously) changed. In the current recessionary environment, most enterprises are even more interested in wringing costs out of their IT budgets—and thus even more focused on shifting apps and services to the cloud, where they don’t have to host the services themselves. Now, however, they’re also interested in broader digital-transformation initiatives that entail fundamentally rethinking their technology footprint and building new, modern, cloud-native apps and services in-house. Every company, no matter what their industry, wants to operate more efficiently and better harness data today—which usually means creating and deploying cutting-edge software. More broadly, organizations also know they need to more rapidly innovate and offer customers what they want, when they want it in today’s tough market, where new sales can be hard to come by.
As Microsoft CEO Satya Nadella famously put it on an earnings conference call early in the pandemic: “We’ve seen two years’ worth of digital transformation in two months.”
The “big three” public cloud providers, which have added billions in revenue since March, according to public reports, aren’t the only ones benefiting from these trends. Over the last several years, other, smaller companies have seen significant growth by building cloud-native businesses that help enterprises better compete. Companies like MongoDB, which sells a popular open-source database, went public three years ago and has seen its stock soar more than six times since then, according to public data. Elastic, a company selling open-source software for search and data analytics, staged a successful IPO in 2018; Okta, which makes a cloud-based identity-management service, also went public three years ago.
Now, another batch of innovative companies are tapping the public markets and seeing an uptick in demand from enterprises’ push to more meaningfully move into the cloud.
In late August, a trio of cloud-native companies—Snowflake, JFrog* and Sumo Logic*—all revealed registrations to go public. JFrog lets software developers secure, distribute and operate code much more efficiently—the company calls this vision “liquid software”, since it’s all about facilitating continuous software improvements, which allows companies to innovate faster and more efficiently. Sumo Logic helps companies build, run and secure their cloud apps by offering a new category of analytics software called “Continuous Intelligence”, while Snowflake is used by thousands of customers to get value from data quickly without getting bogged down in managing complex infrastructure. Battery has been fortunate to be involved in JFrog and Sumo for several years, applying and updating the principles we’ve been discussing this year in our Cloud Native Entrepreneurs’ Playbook.
All three of these companies engage practitioners through cloud marketplaces, allowing the companies’ products to essentially sell themselves and demonstrate quick value. This “bottoms up” sales model, as opposed to a top-down, traditional sales process, lets these companies “land and expand”, growing their business inside new enterprises once they’ve proven their worth. This leads to lower customer-acquisition costs and higher net-dollar retention, both key attributes of potential public company success.
The companies have also innovated around pricing; they generally allow customers to engage with them however they feel is most appropriate, from simple “pay as you go” models to bigger annual, multi-year sales deals. They also have growing billings and “RPO” metrics—short for “remaining performance obligations”, which measures deferred revenue and sales backlog, essentially—both of which can be good indicators of long-term value creation.
It will be exciting to see if, by managing customer-acquisition costs and “landing and expanding” efficiently, this trio of cloud-native innovators each has the ability to grow revenue above 30% annually while staying efficient enough to drive operating margins of 20% to 30% at scale. Typically, these types of cloud companies focused on recurring revenue, and with these types of efficient customer-acquisition and lifetime-value metrics, can reward investors.
We are honored to be along for the ride with JFrog and Sumo Logic, and look forward to continuing to work alongside these cloud companies and glean more best practices from them that we can share with the next generation of cloud-native entrepreneurs.
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*Denotes a Battery portfolio company. For a full list of all Battery investments, please click here.