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Bessemer's 10 Laws of Cloud Computing

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Bessemer Venture Partners has backed over 100 Cloud Computing companies, including over 1/4 of all cloud IPOs and 4 of 7 cloud IPOs last year alone. Byron Deeter leads BVP's cloud computing practice and recently presented an entirely updated version of BVP's famous 10 Laws at the SaaStr 2016 conference. For more BVP presentations, white papers, and content you can visit www.bvp.com/cloud

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Bessemer's 10 Laws of Cloud Computing

  1. 1. BESSEMER’S 10 LAWS OF CLOUD COMPUTING 2016 BYRON DEETER www.bvp.com/cloud @bdeeter
  2. 2. Source: HBO/iStock 2www.bvp.com/cloud
  3. 3. Source: Microsoft 3www.bvp.com/cloud LAW 10: ONDEMAND EVERYTHING
  4. 4. Source: Flickr/AJ LEON 4www.bvp.com/cloud
  5. 5. Source: PCWallart.com 5www.bvp.com/cloud LAW 09: GROW (EFFICIENTLY) …OR DIE
  6. 6. TOP TIER $10M ARR COMPANY SHOULD GROW 300% YOY 0% 20% 40% 60% 80% 100% 120% 140% 160% T-4 T-2 T+0 T+2 T+4 T+6 T+8 T+10 T+12 Pre IPO Post IPO 1 Yr IPO 1 Yr 2 Yrs 3 Yrs Top Quartile 91% 61% 42% 36% 33% Median 72% 47% 35% 34% 24% Bottom Quartile 42% 34% 26% 28% 22% Source: SEC fillings. BVP Cloud Index public companies. T = quarters 6 @ $10mm ARR @ $100mm ARR @ $300mm ARR % YoY Growth 300% 100% 30% (Starting From Four Quarters Prior to IPO) Public Cloud Company YoY Growth Best-In-Class Growth
  7. 7. FASTER GROWTH IS REWARDED – 10% GROWTH = +1.0X IN REVENUE MULTIPLE Appfolio, Inc. Atlassian Corporation Bazaarvoice Benefitfocus BroadSoft Castlight Health Constant Contact Cornerstone OnDemand Cvent Demandware HubSpot Instructure Intralinks Jive Software Lifelock LinkedIn LivePerson LogMein Marin Software Medidata Solutions Mindbody, Inc Mobileiron NetSuite New Relic Proofpoint Qualys RealPage Salesforce ServiceNow Shopify Textura The Ultimate Software Group Veeva Wix Workday Xactly Xero Zendesk -1.0x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 45 Public Cloud Companies +10% growth results in +1.0x Rev Mult 10% 20% 30% 40% 50% 60% y = 10.181x + 1.1297 R2 = 0.36068 ’15-’16 Revenue Growth 2016RevenueMultiple Source: 45 companies in BVP Cloud Index. CapIQ www.bvp.com/cloud 16
  8. 8. Source: iStock 8www.bvp.com/cloud LAW 08: SALES EFFICIENCY IS YOUR OXYGEN
  9. 9. Source: iStock 9www.bvp.com/cloud
  10. 10. www.bvp.com/cloud CAC PAYBACK PERIOD = (Months) TOTAL SALES & MARKETING COSTS OF PRIOR QUARTER NEW CMRR ADDED IN PRIOR QUARTER X GROSS MARGIN % OF THE BUSINESS CUSTOMER ACQUISITION COST - CAC PAYBACK 19
  11. 11. 11 $10 $15 $23 $34 $51 ($16) ($24) ($36) ($54) ($81) ($8) ($12) ($18) ($27) ($41) Year 1 Year 2 Year 3 Year 4 Year 5 EFFICIENT CAC PAYBACK = MORE FOUNDER OWNERSHIP Resulting P&L for 3 companies growing at 50% new bookings with different CAC paybacks Total cash burn: $106M New Bookings S&M Costs Cash Flows (Gross Profit – S&M) 1 Yr CAC Payback 1.5 Yr CAC Payback 2 Yr CAC Payback $10 $15 $23 $34 $51 ($8) ($12) ($18) ($27) ($41) Year 1 Year 2 Year 3 Year 4 Year 5 $10 $15 $23 $34 $51 ($12) ($18) ($27) ($41) ($61) ($4) ($6) ($9) ($14) ($20) Year 1 Year 2 Year 3 Year 4 Year 5 Total cash burn: $0M Total cash burn: $53M Note: Assumed 50% growth in new bookings every year, 80% gross margin, and other expenses equal 80% of prior year’s bookings. 11
  12. 12. Source: iStock 12www.bvp.com/cloud LAW 07: CUSTOMER SUCCESS = COMPANY SUCCESS
  13. 13. 1% IMPROVEMENT IN CHURN = $100M+ IN VALUATION Note: Assumes monthly new bookings increases by $5k per month. 0% Churn (100% renewal + upsell) 1%Monthly Churn (-1% growth) 1% Monthly Upsell (+1% growth; Net Negative Churn) ~$95M ~$75M ~$115M ARR in Y6 5x 5x 5x Mult $475M $375M $575M Equity Value $95 $75 $115 $0 $20 $40 $60 $80 $100 $120 $140 Y1 Y2 Y3 Y4 Y5 Y6 $ARR ARR of 3 Different Businesses ARR (0% monthly churn) ARR (1% monthly churn) ARR (1% net negative monthly churn) 1% Churn = $20M ARR = $100M in Valuation www.bvp.com/cloud 13
  14. 14. CUSTOMER SUCCESS MANAGEMENT 14www.bvp.com/cloud
  15. 15. Source: iStock 15www.bvp.com/cloud LAW 06: CONTROL YOUR OWN DESTINY… CASH IS KING
  16. 16. (40%) (20%) 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 220% 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 BVP Cloud Index Nasdaq Index S&P Index Dow Jones BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 2/5/2016 12/31/2015 BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 12/31/2015 25
  17. 17. v www.bvp.com/cloud (40%) (20%) 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 220% 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 BVP Cloud Index Nasdaq Index S&P Index Dow Jones BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 2/5/2016 BVP Cloud Index 45 Publically Traded Companies Indexed as of Jan. 2011 | @ 2/5/2016 17
  18. 18. $63BN MARKET CAP LOST IN 5 WEEKS www.bvp.com/cloud 18 12/31/2015, $202 2/4/2016, $167 2/5/2016, $138 $130 $140 $150 $160 $170 $180 $190 $200 $210 12/31/2015 1/1/2016 1/2/2016 1/3/2016 1/4/2016 1/5/2016 1/6/2016 1/7/2016 1/8/2016 1/9/2016 1/10/2016 1/11/2016 1/12/2016 1/13/2016 1/14/2016 1/15/2016 1/16/2016 1/17/2016 1/18/2016 1/19/2016 1/20/2016 1/21/2016 1/22/2016 1/23/2016 1/24/2016 1/25/2016 1/26/2016 1/27/2016 1/28/2016 1/29/2016 1/30/2016 1/31/2016 2/1/2016 2/2/2016 2/3/2016 2/4/2016 2/5/2016 BVP Cloud Index - Market Cap YTD ($ in bn)
  19. 19. PRIVATE CLOUD MULTIPLES ARE TRADING AT A PREMIUM TO PUBLIC CLOUD MULTIPLES… BUT IT CANT LAST Source: 45 companies in BVP Cloud Index as of 2/4/2016. CapIQ. Note: Private cloud transactions based on 69 private transactions. In the last 6 months, the average ARR multiple paid was 14.0x. BVP Cloud Index multiple and Legacy software multiples are both NTM GAAP revenue. The public / private gap will converge Public cloud multiples are cheap 3.8x 2.8x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 NTM Multiples Over Time BVP Cloud Index Legacy Software 14.0x Private Cloud Transactions Average 10-17x 28
  20. 20. Source: iStock 20www.bvp.com/cloud LAW 05: 5 C'S OF CLOUD FINANCE
  21. 21. Gross Burn Rate Net Burn Rate Free Cash Flow Committed Annual Recurring Revenue (CARR) Annual Recurring Revenue (ARR) Customer Acquisition Cost Payback Period Logo Churn MRR Gross Churn MRR Net Churn Customer Lifetime Value (Gross Margin Affected) CARR & ARR CAC PAYBACK CHURN CLTV CASH FLOW 1 2 3 4 5 5 C’s OF CLOUD FINANCE www.bvp.com/cloud 30
  22. 22. BUILD YOUR DASHBOARD TO FLY YOUR ROCKETSHIP…or RIDE YOUR UNICORN www.bvp.com/cloud 22
  23. 23. $10 $10 $10 $10 $0 $8 $16 $24 ($8) Year 1 Year 2 Year 3 Year 4 MULTIPLE WAYS TO BE SUCCESSFUL: KNOW YOUR MODEL AND NAIL IT Revenue S&M Costs Cash Flows (Gross Profit – S&M) 1 Yr CAC Payback, 100% Retention 2 Yr CAC Payback, 115% Retention Note: Assumed 80% gross margin, and no other expenses. $10 $12 $13 $15 ($8) $1 $12 $24 ($16) Year 1 Year 2 Year 3 Year 4 Results in same cash flow after 4 years www.bvp.com/cloud 23
  24. 24. TAKEAWAY: GUARDRAILS FOR VALUATION Representative SaaS Business ($15mm ARR) CARR % Fwd Growth 1 Good Better Best 50-100% 50% 100%+ CAC PAYBACK (Mos) 2 12 - 24 24 <12 CHURN (Monthly) 3 <1% 1-3% Net negative CLTV / CAC 4 3-5x 3x 5x+ CASH FLOW (New ARR/Mo Burn) 5 1x <1x >1x www.bvp.com/cloud 33
  25. 25. 1x 1% 1yr <-1% MONTHLY GROSS CHURN >+1% NET CHURN CAC PAYBACKNET NEW ARR NET BURN POST SERIES A: THE 1-1-1 RULE! www.bvp.com/cloud 25
  26. 26. Source: iStock 26www.bvp.com/cloud LAW 04: THE BEST PRODUCT IS FINALLY STARTING TO WIN
  27. 27. Source: docs.oracle.com
  28. 28. Source: iStock 28www.bvp.com/cloud
  29. 29. Source: Slack 29
  30. 30. Source: New Relic
  31. 31. LAW 03: THE ASCENDANCY OF DEVELOPERS 31
  32. 32. $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 2013 2014 2015 2016 Source: Reuters. Uber Growth Global bookings, in billions Mapping Payments Communication (Messaging/Voice) Email SSO Customer Engagement Storage$0.6 $2.9 $10.8 $26.1 www.bvp.com/cloud APIS TO ACCELERATE YOUR BUSINESS 41
  33. 33. LAW 02: INSPIRE (AND HIRE) WITH VISION Source: iStock 33
  34. 34. Vision - The dream; a team's true north. Primary objective is to inspire and create a shared sense of purpose throughout the company. LinkedIn’s Vision: Create economic opportunity for every member of the global workforce “ ” www.bvp.com/cloud INSPIRE (AND HIRE) WITH VISION 43
  35. 35. Source: iStock 35www.bvp.com/cloud LAW 01: MOBILE IS EATING THE WORLD ....WIDE WEB!
  36. 36. MOBILE IS A GAME CHANGER FOR THE ENTERPRISE 85% Americans between 18-29 >50% Internet usage on mobile vs desktop 80% Workforce are non-desk workers ~EVERYONE IN ENTERPRISE B2B NOW HAS A SMARTPHONE INTERNET USAGE TIPPED TO MOBILE REACHES AN UNTOUCHED WORKFORCE Source: Pew Research Center, April, 2015, “The Smartphone Difference”. Source: eMarketer 9/14 (2008-2010), eMarketer 4/15 (2011-2015). Note: Other connected devices include OTT and game consoles. Mobile includes smartphone and tablet. Usage includes both home and work. Ages 18+; time spent with each medium includes all time spent with that medium, regardless of multitasking. KPCB Internet trends, 2015 Global Mobile Penetration 1995 - 2014 GLOBAL PENETRATION 1 –> 73% 36
  37. 37. kk USE CASES THAT SPEND >50% AWAY FROM A DESKTOP Healthcare Education Retail Construction Field Services Field Sales Events Agriculture SMBs VERTICAL Paper Replacement (Forms/Invoicing) Collaboration HORIZONTAL www.bvp.com/cloud 37
  38. 38. 2010 2015 2020 CONTENT CONSUMPTION CONTENT CREATION The mobile version of the cloud app Paper replacement Collaboration/Communication In the field working ??? WAVE 1 = CONTENT CONSUMPTION WAVE 2 = CONTENT CREATION www.bvp.com/cloud 47
  39. 39. LIMITED REAL ESTATE = CONTEXTUAL AWARENESS IS THE FUTURE DOWNLOAD NOW @ www.speakeasy.co 48
  40. 40. MESSAGING IS THE KILLER MOBILE EXPERIENCE • The average Millennial (18-24) exchanges an average of 67 text messages per day1 • Text messages have a 98% open rate, while email has only a 20% open rate2 • Over 80% of people use text messaging for business, and 15% said that more than half their messages are for business purposes3 • First example of success – Slack4 • 2M DAU • 570M paid users • 800M+ messages sent a month • 4k platform apps Source: (1) Business Insider. (2) Velocify., (3) eWeek. (4) Slack. 40www.bvp.com/cloud
  41. 41. BESSEMER’S 10 LAWS OF CLOUD COMPUTING 10 OnDemand EVERYTHING: 09 GROW (efficiently) or die. 08 Sales efficiency is your oxygen. 07 Customer SUCCESS = company success. 06 Control your own destiny… CASH is king. 05 5 C's of cloud finance. 04 Best PRODUCT is finally starting to win. . 03 The ascendancy of Developers 02 Inspire (and hire) with vision 01 MOBILE is eating the world...wide web www.bvp.com/cloud
  42. 42. 42 51
  43. 43. @bdeeter @kshenster @ bessemervp Available for Download: www.bvp.com/cloud © 2016 Bessemer Venture Partners

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