The 2023 State of the Cloud report details significant challenges in the cloud sector, including a -41.9% decline in software IPOs and a slowdown in merger and acquisition activity influenced by rising interest rates. While venture capital remains at an all-time high, the document indicates a rebalancing of focus toward profitability over growth among cloud CEOs. Additionally, it highlights transformative trends in AI technology, predicting substantial shifts in the SaaS landscape and emphasizing the importance of strategic fundraising for cloud companies.

1. State of the
Cloud 2023
Kent Bennett
PARTNER
@Kentbennett
Mike Droesch
PARTNER
@MikeDroesch
Ariel Sterman
VICE PRESIDENT
@ArielSterman
Talia Goldberg
PARTNER
@TaliaGold
Caty Rea
SENIOR ASSOCIATE
@Caty_Rea
Janelle Teng
VICE PRESIDENT
@NextBigTeng

3. We’re living in
the multiverse

4. -60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
Jan 03, 2022 Apr 29, 2022 Sep 20, 2022 Feb 02, 2023
Net Change
The SaaSacre of 2022
-41.9%
EMCLOUD
-22.8%
NASDAQ
-14.3%
S&P 500
-9.0%
Dow Jones
Source: BVP Cloud Index (as of 3.31.23)
Jan-2022 June-2022 Jan-2023

5. 0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0x
5x
10x
15x
20x
25x
30x
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2020
2019
2017
2013 2014 2015 2016 2018 2021 2022
10-Yr US Treasury yield
Avg EMCLOUD EV/NTM Rev multiple
10.21x
(10yr avg,
trailing)
12.99x
(5yr avg,
trailing)
7.43x
(5yr avg,
2013-2018)
Source: CIQ, FRED
3.5%
6.4x
Major headline of the year: hiking interest rates
leading to cloud multiple compression

6. Taking a longer-term view, cloud markets have
consistently outperformed broader market indices
+523.9%
EMCLOUD
+233.5%
NASDAQ
+144.6%
S&P 500
+117.9%
Dow Jones
-200%
0%
200%
400%
600%
800%
1000%
1200%
1400%
Aug
16,
2013
Jan
09,
2014
Jun
04,
2014
Oct
24,
2014
Mar
20,
2015
Aug
12,
2015
Jan
05,
2016
May
27,
2016
Oct
19,
2016
Mar
15,
2017
Aug
07,
2017
Dec
28,
2017
May
23,
2018
Oct
15,
2018
Mar
12,
2019
Aug
02,
2019
Dec
24,
2019
May
19,
2020
Oct
09,
2020
Mar
05,
2021
Jul
30,
2021
Dec
21,
2021
Apr
20,
2022
Sep
16,
2022
Jan
24,
2023
Index Performance
Net Change
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source:
BVP Cloud Index
(as of 3.31.23)

7. Software IPOs came to a halt,
and M&As have slowed
Source: J.P. Morgan, Morgan Stanley
$0B
$50B
$100B
$150B
$200B
$250B
$300B
$350B
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
AGGREGATE VALUE OF SOFTWARE M&AS
$0B
$4B
$8B
$12B
$16B
$20B
$24B
$28B
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
AGGREGATE VALUE OF SOFTWARE IPOS

8. Mirroring the public market,
VC funding activity pulled back
TOTAL ROUNDS (BARS) AND TOTAL CASH RAISED (LINE) BY QUARTER
0
500
1000
1500
2000
2500
3000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deal
Value
($Billions)
$60B
$50B
$40B
$30B
$20B
$10B
$0B
Total
cash
raised
2016 2017 2018 2019 2020 2021 2022
Source: Carta State of Private Markets Report (Q4 2022)

9. 74 80
93
114
117
142
162
198
234
290
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10
Capital raised by VCs is at an all-time high,
but this might be more “damp” than “dry” powder
Overhang
by vintage
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: PitchBook NVCA Venture Monitor 2022, Picus Capital Analysis
US VC CAPITAL CUMULATIVE OVERHANG (B USD) (FUNDS RAISED, BUT NOT YET INVESTED)

10. Bessemer POV:
When should
founders fundraise?

11. 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Right now
2H of 2023
1H of 2024
2H of 2024
BESSEMER POV: WHEN IS THE BEST TIME IN THE
NEXT TWO YEARS TO RAISE MONEY?
Raise way
before your
runway
requires it!
Don’t wait for the next
bubble to fundraise

12. The goal is fundability
— show you’re in control of your business
CAC PAYBACK 12-18 Months 6-12 Months 0-6 Months
OPERATIONAL EFFICIENCY < .5X .5 - 1.5X 1.5X+
NET RETENTION 100% 110% 120%+
TIME TO CASH OUT 12 Months 18 Months 24 Months+
REVENUE GROWTH 75%+ 100%+ 125%+
LOGO RETENTION >85% >90% 95%+
BETTER BEST
GOOD

13. NEW CENTAURS
We initially projected
~70 Centaur births,
but ‘22 saw ~50 new
SaaS businesses
hitting $100M ARR,
including:
~50
NEW CENTAURS
Centaur birthrate slows,
reflecting SaaS market
~35
~40
~60
~50
2019 2020 2021 2022

14. Source: BVP Cloud Index (11.30.21)
-20% 0% 20% 40% 60% 80% 100% 120% 140% 160%
40.0x
60.0x
10.0x
0.0x
20.0x
30.0x
50.0x
70.0x
EV/NTM Rev Multiple
1-Factor
R² = 0.34
2-FACTOR REGRESSION
Revenue Growth Co-efficient 39.8
FCF Margin Co-efficient 6.3
Growth vs. profitability
trade-off is top of mind
for cloud CEOs,
especially after the
market paradigm shift
IN NOV ’21, AT PEAK MARKET EXUBERANCE…
Efficiency
Score
NOV ’21
the ratio was 6:1 in favor of growth
RELATIVE IMPORTANCE OF GROWTH TO PROFITABILITY: 6:1

15. BUT THEN THE MARKET SHIFTED…
LESS THAN A YEAR LATER IN OCT’22…
the ratio was closer to ~1:1 and
actually slightly in favor of profitability
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
0% 50% 100% 150%
1-Factor
R² = 0.55
Source: BVP Cloud Index (10.20.22)
Efficiency
Score
EV/NTM Rev Multiple
2-FACTOR REGRESSION
Revenue Growth Co-efficient 9.1
FCF Margin Co-efficient 11.0
Growth vs. profitability
trade-off is top of mind
for cloud CEOs,
especially after the
market paradigm shift
OCT ’22
RELATIVE IMPORTANCE OF GROWTH TO PROFITABILITY: 0.8:1

16. TODAY
RELATIVE IMPORTANCE OF GROWTH TO PROFITABILITY: 2:1
The ratio is closer to 2:1 in favor
of growth
TODAY,
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
0% 20% 40% 60% 80% 100%
2-FACTOR REGRESSION
Revenue Growth Co-efficient 7.4
FCF Margin Co-efficient 3.7
Source: BVP Cloud Index (3.31.23)
EV/NTM Rev Multiple
Growth vs. profitability
trade-off is top of mind
for cloud CEOs,
especially after the
market paradigm shift
1-Factor
R² =0.45
Efficiency
Score

17. 0% 10% 20% 30% 40% 50% 60%
200% ARR Growth / 3.0 Burn Multiple / 0% Rule of 40
150% ARR Growth / 2.1 Burn Multiple / 25% Rule of 40
125% ARR Growth / 1.6 Burn Multiple / 35% Rule of 40
100% ARR Growth / 1.2 Burn Multiple / 40% Rule of 40
80% ARR Growth / 0.8 Burn Multiple / 43% Rule of 40
60% ARR Growth/ 0.4 Burn Multiple / 45% Rule of 40
BESSEMER POV: WHAT BALANCE OF GROWTH AND
PROFITABILITY WOULD YOU RATHER SEE IN A BUSINESS?
For private, venture-backed businesses,
efficiency doesn’t really mean profitability
54%

18. SaaS will fight SaaS
inefficiency and sprawl
PREDICTION 1

19. SaaS will fight SaaS
inefficiency and sprawl
PREDICTION 1
ENGINEERING PRODUCTIVITY
& DEV FINOPS
CLOUD COST MANAGEMENT
SAAS OPTIMIZATION
SERVICES AND SOFTWARE

20. 0 10 20 30 40 50 60 70 80
AI/Machine learning
Supply chain software
Vertical SaaS
Data infrastructure
Cyber Security/data privacy
Climate Software
SMB SaaS
Legal/Finance SaaS
Healthcare SaaS
Developer platforms/tools
Embedded Fintech
Sales/Marketing/Customer Experience SaaS
B2B marketplaces
BI/AnalyticsSaaS
Bessemer’s Sentiment Score measures investor
enthusiasm across the cloud ecosystem

21. Climate software
drives the green
energy transition
PREDICTION 2

22. Climate software drives the
green energy transition
ENERGY
Solar
Wind
Heat pumps
TRANSPORTATION
Charging software
Battery analytics
BUILT WORLD
DISTRIBUTED ENERGY RESOURCE
INFRASTRUCTURE
PREDICTION 2
PROJECT FINANCE AND ENERGY
DEVELOPER SOFTWARE
Energy efficiency
Sustainable design

23. 0 10 20 30 40 50 60 70 80
AI/Machine learning
Supply chain software
Vertical SaaS
Data infrastructure
Cyber Security/data privacy
Climate Software
SMB SaaS
Legal/Finance SaaS
Healthcare SaaS
Developer platforms/tools
Embedded Fintech
Sales/Marketing/Customer Experience SaaS
B2B marketplaces
BI/AnalyticsSaaS
Bessemer’s Sentiment Score measures investor
enthusiasm across the cloud ecosystem

24. The dawn of
the AI era

25. Even if you’re living in a cave, you’ve seen the side
project that became the fastest growing app in history
chatGPT
Instagram
Spotify
Facebook
Twitter
Netflix
0 500 1000 1500 2000 2500 3000 3500
100
102
104
106
108
Number
of
Users
Days Source: UBS Research
AI will
transform how
we live, work,
and interface
with machines

26. The myth of the AI monopoly
VS.
DECENTRALIZED
CENTRALIZED

27. AI innovation is leading to a fat head with
a long, growing, thriving tail
VS.
VS.

28. PREDICTION 3
This moment will cement multiple
“pillar” AI-native companies
FULL STACK
MODEL + APP
APPLICATION LAYER
COMPUTE PROVIDERS
DEVELOPER TOOLS AND ENABLERS
HORIZONTAL FOUNDATION MODELS OPEN SOURCE AND/OR VERTICAL MODELS
Consumer AI-native AI-native SaaS Apps Embedded AI
Every other
tool should
be here!

29. PREDICTION 3
The majority
of the value
produced by
AI will flow to
the end users

30. PREDICTION 4
LLM adoption rapidly spreading
among SaaS applications
AI-NATIVE COMPANIES EMBEDDED AI

31. Status quo bias alert!
– Larry Ellison, 2008
”…We’ve redefined cloud computing to
include everything that we already do….
Maybe I’m an idiot, but I have no idea
what anyone is talking about. What is it?
It’s complete gibberish. It’s insane. When is
this idiocy going to stop?
”

33. PREDICTION 4
LLM revolution will
impact every single
category of SaaS

34. 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
In the past we had to
speak computer language.
Today computers speak
our language (NLP).

35. Over the coming months, fear
will build as we enter the trough
of disillusionment.
ACCURACY
CONCERNS
⎻ AI Hallucinations
LEGAL AND ETHICAL
CONCERNS
⎻ IP issues and liability
⎻ AI Biases
⎻ Potential regulation
⎻ Data governance
Why your lawyer is afraid of
AI, and probably has some
reasons to be…

36. New technology can drive fear
of the unknown
1840 1850 1860 1870 1880 1890 1900 1910 1920 1930
Electricity,
automobiles,
airplanes, &
elevators all
inspired fear
in society.
IN 1889, ELECTRICITY WAS “AN UNRESTRAINED DEMON”
We believe in
embracing innovation
And while the industry
needs to proceed cautiously

37. But first let’s take a breath…
what do LLMs actually do?
The 101 on LLMs

38. OUTPUT
INPUT
- Any data going in
- Training
INFORMATION
- English, Japanese, Pig Latin
- Java, Python, COBOL
- Images, Sound, Web logs
- Any sequence of information
PROMPT
- Extract info
- Summarize
- Translate
- Proof
- Debug
ANALYZE
- Answer a question
- Generate a draft
- Make a list
- Write a poem
- Write a program
GENERATE
LLMs are predictors…from a starting
“prompt” they predict what follows
INFORMATION
PROMPT
LLM
ANALYZE
GENERATE
ACTION
DIALOGUE

39. Four steps to LLM adoption
Internal audit:
Look inside - identify
departments and
functions where AI tools
can have most impact
Reevaluate the
product roadmap:
Use first principles and
an AI-native lens to
assess product roadmap
Take first steps:
Choose actionable
projects and get busy
road-testing capabilities
Build a long-term plan:
Consider downstream
implications for competition
and defensibility (what’s your
AI “next act”)
1. 2. 4.
3.
ANALYZE BUILD
Self-evaluation: inner workings of your company &
Product
Experimental action Long-term strategy

40. Management Marketing Sales Customer Support
Software Engineering HR Administrative
Legal
INTERNAL
AUDIT
LLMs offer efficiency to
every internal function
a. Document automation
b. Legal research
c. Compliance assessment
a. Decision support
b. Improved communication
c. Performance analysis.
a. Content creation
b. Market analysis
c. Campaign optimization
a. Lead generation
b. Collateral creation
C. Forecasting
a. AI chatbots
b. Knowledge base upkeep
c. Sentiment analysis
a. Code generation/review
b. Bug analysis
c. Documentation
a. Recruitment assistance
b. Onboarding and training
c. Policy management
Document/email drafting
b. Scheduling
c. Task management

41. Training/help
Training/help
Training/help
Look at your product from first
principles and rebuild your roadmap
⎻ Reading/writing within app
⎻ App-specific language
YOUR
APPLICATION
REWRITE THE
PRODUCT ROADMAP
⎻ Predictable repeatable
sequences of workflow
within your product
PRODUCT
WORKFLOWS
⎻ What do users write or speak after
using app? (e.g. emails, reports)
⎻ Is your app part of a larger
predictable work sequence - will
an integrated product win?
CROSS-PRODUCT
WORKFLOWS

42. Exciting AI-complementary
technologies for B2B software
applications
Plugin Ecosystem
EXPERIMENTAL
ACTION
Managing Sensitive Data
Vector Embeddings for
Semantic Search

43. The race is on, just ship it!
→ Give every employee access to LLMs
→ Run AI Hackathons
→ Empower a skunkworks team
→ Start with safe, feasible and high impact features
→ Don’t worry being experts in tuning from day one
→ Speed of execution is your biggest edge
EXPERIMENTAL
ACTION

44. AI itself is table stakes, use
it to strengthen your moats
LONG-TERM
STRATEGY
AI will be an implementation detail, and the value will all come back to
Product & Distribution
LONG TERM
FOCUS ON YOUR MOATS
Seamlessly
integrate AI
1.
Moving from tools
to outcomes
2.
Efficient
distribution
3.
Unique data moats
(where applicable)
4.

45. $ ARR in Millions
Years from
$100M to $1B
$100M
$200M
$300M
$400M
$500M
$600M
$700M
$800M
$900M
$1,000M
0 1 2 3 4 5 6 7
Source: Bessemer Analysis
AI Native companies accelerate
path to $1 billion by 50%
AI NATIVE
PREDICTION

46. Five predictions from the cloud multiverse
1.
SaaS will fight
SaaS inefficacy
and sprawl
2.
Climate software
drives the green
energy transition
3.
The majority of the value
produced by AI will flow
to the end users
4.
The LLM revolution
will impact every
single category
of SaaS
5.
AI Native companies
accelerate path to
$1 billion by 50%

47. State of the
Cloud 2023
Get more cloud & AI
insights from Bessemer

48. Resources for AI-native founders & builders
Entrepreneurs building this new frontier, email us: ai@bvp.com
AI builder community for
BVP portfolio
Credits, discounts, & preferred
support from compute providers
and foundation models
Advisor network of AI
researchers and experts
Community & Talent
platform

49. Thank You
bvp.com/cloud
@BessemerVP