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Infrastructure Software
Dharmesh Thakker  |  November 3, 2021
OpenCloud 2021: The “Rule of 20s” and Other Tips for Founders Building Enduring Cloud-Native Companies

Last year, when we moved our annual OpenCloud conference online in light of Covid-19, none of us thought we’d be back in the same position now, in late 2021. But here we are—coming to you again virtually with (of course!) a great lineup of speakers.

Similarly, I’m not sure many of us anticipated the way the pandemic—which has of course been devastating to so many—would positively affect the businesses of many cloud-native companies over the last year. Specifically, we’ve seen many Covid-related trends, from hybrid work to the push toward digital transformation inside enterprises, accelerate the adoption of cloud and open-source technology—and create a new group of “decacorn” companies hitting the public markets, with many more waiting in the wings. Indeed, since Covid started, there have been 11 IPOs of large infrastructure-software companies, which collectively represent $236 billion in value, per Capital IQ.

What’s more, per Pitchbook, software companies have raised around $300 billion so far this year, almost double the $164 billion raised in all of pre-pandemic 2019. Meanwhile, the large public-cloud players—Amazon, Microsoft and Google—continue to achieve massive scale. Their businesses have collectively surpassed an annualized revenue run rate of $100 billion, according to public earnings reports.

Battery Ventures OpenCloud … by Battery Ventures

 

We outline many of these trends in our new OpenCloud 2021 report, which also contains detailed advice for entrepreneurs trying to leverage these trends and build large, enduring enterprises. This report was a team effort with contributions from Chiraag Deora, Danel Dayan, Jason Mendel and Jack Mattei. Some highlights:

  • Enduring cloud companies are leveraging bottoms-up, product-led growth AND enterprise sales to build lasting businesses—you have to have both to win. Good examples here include MongoDB, Elastic and Twilio, all of which started with a bottoms-up sales motion but are now scaling through the use of more-traditional enterprise sales forces. A great product is essential but combining strong product engagement with enterprise sales really helps optimize value across a broad spectrum of customers.
  • You’ve heard of the Rule of 40 to gauge the financial health of software companies: It decrees that a software company’s combined growth rate and profit margin should be greater than 40%, meaning that large losses need to be offset by very high growth. We would like to introduce “The Rule of 20s” for open-source companies trying to drive engagement and monetize their products. This rule spells out the best practice of trying to get 20% of your open source/community users to sign up for your product. Then, you should aim to turn 20% of those sign-ups into active users, and then convert 20% of THOSE active users to paid users. Once converted to paid usage, best-in-class companies benefit from 80%+ user retention, 130%+ net-dollar retention and 40%+ user engagement to fuel long-term sustainable growth at scale.
  • Companies are increasingly relying on product-qualified leads, or PQLs, vs. traditional marketing-qualified leads (MQLs) to acquire high-quality customers with a low-friction mechanism. PQLs offer a low-touch path to qualifying a customer’s potential buying intent while also preserving the option to engage directly with the sales team to navigate more complex six- or seven-figure deals with enterprise customers. This also requires a deeper understanding of your product, what features are resonating with users, and how users are engaging with it. These improved and tailored product insights create a frictionless, product-led experience, and this level of personalization can really only be done with a cloud-native product.
  • Consumption-based (or pay-as-you-go) pricing, the next evolution of subscription pricing, can help many businesses acquire new customers efficiently and unlock a natural “land and expand” sales motion through which you can sell more services to existing customers over time. This helps fuel long-term growth at scale.
  • Cloud-native is no longer an option, it’s a necessity. In the post-Covid era, cloud-native has become the primary mode for customer engagement, helping to shorten the feedback loop across customers, product, sales and marketing, ultimately leading to better products, higher customer satisfaction and faster growth.
  • A note on IPO preparations: If cloud is a trillion-dollar opportunity, then companies that can grow quickly to $500 million to $1 billion in revenue will have the best chance to build an iconic company. Our advice is to acquire customers while the market is in “land-grab” mode and the cost of capital is low, and then drive efficiency once you get to $1 billion in sales.

Battery Ventures provides investment advisory services solely to privately offered funds. Battery Ventures neither solicits nor makes its services available to the public or other advisory clients. For more information about Battery Ventures’ potential financing capabilities for prospective portfolio companies, please refer to our website.

*Denotes a past or present Battery portfolio company. For a full list of all Battery investments, please click here. No assumptions should be made that any investments identified above were or will be profitable. It should not be assumed that recommendations in the future will be profitable or equal the performance of the companies identified above.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

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