state of the cloud report 7.28.2015

State of the Cloud Report

2015Byron Deeter

www.bvp.com/cloud @bdeeter

AGENDA

• State of the Cloud Industry: Where are we today?

• Metrics that matter: How are we doing?

• The outlook ahead: What does it mean for me as a cloud CEO?

2

WE’VE HAD SOME SKEPTICS ABOUT CLOUD COMPUTING THROUGH THE YEARS…

“Mice Nuts”

Vacation time

=

The Innovator’s Dilemma

“Water Vapor” & “Nonsense” “It will be gone in two years”

3

BVP’s CLOUD INVESTMENTS

1997 2000 2010

ASP Delivery+

Recurring Rev

Cloud Computing

(SaaS + PaaS)

SaaS

2015 4

5

THEN…

<$25bn Total Cloud Market Cap

2008 - Top 10 Public Cloud Companies($ in mm)Count Company MarketCap1 Salesforce $7,4042 Netsuite $2,3323 Concur $1,5904 DealerTrack $1,3175 blackbaud $1,2476 AthenaHealth $1,1617 Ariba $8058 The Ultimate Software $7779 Taleo $74910 Constant Contact $594

Source: Public company data per CapIQ. 2008 as of 1/1/2008. Today as of 5/29/2015

…NOW!Today - Top 10 Public Cloud Companies

($ in mm)Count Company MarketCap1 Salesforce $50,5372 LinkedIn $26,2853 Workday $16,9154 ServiceNow $13,5175 NetSuite $7,7286 The Ultimate Software Group $4,9247 Athenahealth $4,8198 Veeva $4,1869 Medidata Solutions $3,30210 Proofpoint $2,847

6

THEN…

Source: Public company data per CapIQ. 2008 as of 1/1/2008. Today as of 5/29/2015

<$25bn Total Cloud Market Cap

~$180bn Total Cloud Market Cap

2008 - Top 10 Public Cloud Companies($ in mm)Count Company MarketCap1 Salesforce $7,4042 Netsuite $2,3323 Concur $1,5904 DealerTrack $1,3175 blackbaud $1,2476 AthenaHealth $1,1617 Ariba $8058 The Ultimate Software $7779 Taleo $74910 Constant Contact $594

CLOUD REVENUE

Source: Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed growth cut in half for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester.

20087

$5.6bn

CLOUD REVENUE UP 10X IN LAST SIX YEARS

Source: Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed half’d growth for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester.

8

$18bn

$9bn $3bn

$26bn

$56.6bn

Public Pure Play Cloud

Legacy Software Cloud Revenue

Private Cloud Unicorns

Private Cloud

2008 2014

$5.6bn

CAGR 35.8%

CLOUD REVENUE UP 10X IN LAST SIX YEARSPROJECTED TO GROW OVER 2X IN NEXT

FOUR

$18bn

$9bn $3bn

$26bn

$56.6bnCAGR 22.8%

% of Total

Number ofCompanies

47%

5%17%

32%

thousands

2811

42

Source: Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed half’d growth for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester.

Public Pure Play Cloud

Legacy Software Cloud Revenue

Private Cloud Unicorns

Private Cloud

2008 20182014

$5.6bn

CAGR 35.8%

$127.5bn

9

SAAS APPROACHING 30% OF APPLICATION SPEND

2013 2014 2015 2016 2017 20180%

10%20%30%40%50%60%70%80%90%

100%

On Prem SaaS

Source: IDC, Worldwide Enterprise Application Spend by SaaS and On-Prem, 2013-2018.

2013 -2018 CAGR

(2.8%)

17.6%

SaaS vs On Prem Penetration into Total Application Spend

10

THE FIRST CATEGORY HAS FALLEN: CLOUD CRM IS AT A TIPPING POINT

2013 -2018CAGR

19.6%

(3.9%)

2013 2016 20180%

20%

40%

60%

80%

100%

120%

65%50% 38%

35%50% 62%

On-Prem Cloud

Source: IDC, Worldwide Enterprise Application Spend by SaaS and On-Prem, 2013-2018. Gartner Worldwide CRM Spending By Vendor, 2013.

16%

13%

10%7%4%

50%

Salesforce SAP OracleMicrosoft IBM Other

Source: IDC, Worldwide Enterprise Application Spend by SaaS and On-Prem, 2013-2018. Gartner Worldwide CRM Spending By Vendor, 2013.

Over 50% of CRM revenue will be cloud In 2016… …and Salesforce is already the market share leader!

11

2015 CRM BATTLE - CLOUD 1 : ON PREM 0

WE’RE JUST SEEING THE TIP OF THE ICEBERG!

42 Public Pure PlayCloud Companies

28 Private CloudUnicorns

thousands Existing Private Cloud Companies

? New Cloud Companies Yet To Be Formed!

Only 3 % Penetrated in IT Spend

Source: Gartner, estimates per 2013. Cloud spend of $39bn includes SaaS, PaaS and IaaS. Overall IT spend of $1.428tn includes Data Center Systems, Enterprise Software and IT Services

300 UP AND COMERS IDENTIFIED IN THE CLOUDSCAPE…

14Originally published in 2014. Updated versions will be available at www.bvp.com/cloud

...28 OF WHICH HAVE GROWN INTOPRIVATE CLOUD $1B+ BUSINESSES …

DropboxStr

ipe

Zenefits

Cloudera

Atlassi

an

Pure Storage

DocuSig

nSla

ck

NutanixDomo

Surve

yMonke

y

Mongo DB

InsideSa

les.com

MuleSoft

Jasper

AppNexus

Sprin

klrTwilio

AppDynamics

Actifio

Cloudflare

Evernote

Good Technology

Eventbrit

e

Looko

ut

Qualtrics

PluralSight

Marklogic

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0 $10

$5 $5 $4$3 $3 $3 $3

$2 $2 $2 $2 $2 $2 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1

Private CloudCompanies Valued

at$1bn

$ in bn

15Source: Valuation estimates based on publically reported press releases.

THE CLOUD INDUSTRY HAS OUTPERFORMED

Growth

~160%69% above the Nasdaq in

same time period

Exits

32

IPOs in BVP Cloud Index

Market Cap

+$140bnOf new market cap: from

$40bn to ~$180bn9

Public cloud acquisitions totaling$18.8bn in value

10

Cloud IPOs

Public Cloud Market Cap

~$40bnRepresenting

BVP Cloud Index Performance In the Last 3 Years

BVP Has Funded…

16Of the 42 Public Cloud

Companies

~1 /4Representing

Source: BVP Cloud Index and Capital IQ.

STRONG BVP CLOUD INDEX PERFORMANCE IN THE LAST YEAR

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ. Legacy software includes Microsoft, IBM, Oracle, Cisco, SAP, HP, EMC, Adobe, Citrix, ADP

Welcome Shopify to the BVP Cloud Index!

42 Pure Play Public Cloud companies

100%

260%

80%

100%

120%

140%

160%

180%

200%

220%

240%

260%

280%

1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015

BVP Cloud Computing Index42 Publicly Traded Cloud CompaniesIndexed as of Jan. 2011 | @ 5/29/15

BVP Cloud Index Nasdaq Index S&P Index Dow Jones

17

BVP CLOUD INDEX EXPECTED TO 3X IN 5 YEARS

Public Cloud Market Cap

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

6/2/2010 10/15/2011 2/26/2013 7/11/2014 11/23/2015 4/6/2017 8/19/2018 1/1/2020

~$1tn

~$500bn

~$300bn

We predict the BVP Cloud Index will Hit $500bn market cap by

2020

18Source: BVP Cloud Index and Capital IQ.

AGENDA

• State of the Cloud Industry: Where are we today?

• Metrics that matter: How are we doing?

• The outlook ahead: What does it mean for me as a cloud CEO?

19

PROFITS & CASH FLOW ARE ULTIMATELY KING

For All Types of Businesses…

Oil Producer Retailer Cloud Company

20

SIX KEY CLOUD VALUATION METRICS

ARR % ARR Growth Retention / Upsell

CAC Payback % Gross Margin Burn Rate / FCF

21

ARR AND ARR GROWTH ARE BEST LEADING INDICATORS

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

$201

$253

$124

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

T-4 T-2 T+0 T+2 T+4 T+6 T+8 T+10 T+12

Pre IPO Post IPO1 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%

Inevitably growth decelerates with scale

Public Cloud Company Runrate Revenue Public Cloud Company YoY Growth

(Starting From Four Quarters Prior to IPO, $ in m) (Starting From Four Quarters Prior to IPO)

Source: SEC fillings. BVP Cloud Index public companies. T = Quarter 22

23Year 1 Year 2 Year 3 Year 4 Year 5

$10 $15 $23

$34 $51

($16)($24)

($36)

($54)

($81)

($8) ($12) ($18)($27)

($41)

CAC PAYBACKResulting P&L for 3 companies growing at 50% new bookings with different CAC paybacks

Total cash burn: $106MNew BookingsS&M CostsCash Flows (Gross Profit – S&M)

1 Yr CAC Payback 1.5 Yr CAC Payback 2 Yr CAC Payback

Year 1 Year 2 Year 3 Year 4 Year 5

$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)

Total cash burn: $0M Total cash burn: $53M

Note: Assumed 50% growth in new bookings every year, 80% gross margin, and no other expenses. 23

RETENTION / UPSELL1% churn results in ~$20m ARR loss after 4 years

~$20m ARR delta

between 1% and 2%

monthly churn

1% net upsell churn

drives additional

$35mm ARR

Note: Assumes monthly new bookings increases by $10k per month.

3% monthly churn

1% net upsell monthly churn

1% monthly churn

2% monthly churn

24

Year 1 Year 2 Year 3 Year 4

$10 $10 $10 $10

$0

$8

$16

$24

-8

CAC PAYBACKCAC payback and retention are inter-related - strong upsell can counteract high churn

RevenueS&M CostsCash 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.

Year 1 Year 2 Year 3 Year 4

$10 $12 $13 $15

($8)

$1

$12

$24

-16

Results in same cash flow after 4 years

25

ARR % ARR Growth Retention / Upsell

CAC Payback % Gross Margin Burn Rate / FCF

CLOUD METRICS THAT PUBLIC AND PRIVATE INVESTORS ARE VALUING TODAY

26

GROWTH IS THE BIGGEST DRIVER OF CLOUD VALUATION

0% 10% 20% 30% 40% 50% 60% 70% 80%0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

f(x) = 15.8903499312364 x + 1.75600623498971R² = 0.394499390045924

'14-'15 Rev Growth vs 2015 Rev Mult

% '14-'15 Revenue Growth

2015

Rev

enue

Mul

tiple

0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500%0x

5x

10x

15x

20x

25x

30x

35x

40x

45x

f(x) = 6.61235045668493 x + 3.03456487451253R² = 0.450231422304107

1 Yr Forward Growth vs ARR Mult

% 1 Yr Forward Growth

ARR

Mul

tiple

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ Source: 55 private company transactions

Private Cloud CompaniesPublic Cloud Companies

+10% Growth Results in +1.5x Rev Mult +10% Growth Results in +0.6x Rev Mult

27

RETENTION IS TYPICALLY THE 2ND MAJOR DRIVER ON

VALUATION

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ

2015 - Public Cloud Companies

y = 5.8057x1.5288

R² = 0.1819

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

50% 75% 100% 125% 150% 175% 200%

% Retention vs 2015 Rev Mult

28

PRIVATE MARKETS ARE LESS FOCUSED ON RETENTION RATES IN CURRENT ENVIRONMENT

2015 – Private Cloud Companies2013 – Private Cloud Companies

y = 5.9847x + 2.185R² = 0.1954

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

0% 50% 100% 150% 200%

ARR

Mul

tiple

Retention

Retention vs ARR Multiple

Source: 17 private company transactions

y = 1.4953x + 11.845R² = 0.0019

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

0% 50% 100% 150% 200%

ARR

Mul

tiple

Retention

Retention vs ARR Multiple

Source: 55 private company transactions29

STRONG BVP CLOUD INDEX PERFORMANCE IN THE LAST YEAR

100%

260%

80%

100%

120%

140%

160%

180%

200%

220%

240%

260%

280%

1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015

BVP Cloud Computing Index42 Publicly Traded Cloud CompaniesIndexed as of Jan. 2011 | @ 5/29/15

BVP Cloud Index Nasdaq Index S&P Index Dow Jones

BVP Cloud Index up ~40% in the last year…

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ. Legacy software includes Microsoft, IBM, Oracle, Cisco, SAP, HP, EMC, Adobe, Citrix, ADP. NTM represents next twelve months.

30

BVP CLOUD INDEX GROWTH DRIVEN FROM ORGANIC GROWTH NOT MULTIPLE EXPANSION

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ. Legacy software includes Microsoft, IBM, Oracle, Cisco, SAP, HP, EMC, Adobe, Citrix, ADP. NTM represents next twelve months.

5.7x

3.4x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015

NTM Multiples Over Time

BVP Cloud Index Legacy Software

Peak - Jan 20149.5x

…Cloud multiples back down to historical averagesBVP Cloud Index up ~40% in the last year…

100%

260%

80%

100%

120%

140%

160%

180%

200%

220%

240%

260%

280%

1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015

BVP Cloud Computing Index42 Publicly Traded Cloud CompaniesIndexed as of Jan. 2011 | @ 5/29/15

BVP Cloud Index Nasdaq Index S&P Index Dow Jones 31

PRIVATE CLOUD MULTIPLES ARE TRADING AT A PREMIUM TO PUBLIC CLOUD MULTIPLES

5.7x

3.4x

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

NTM Multiples Over Time

BVP Cloud Index Legacy Software

11.8x

Private Cloud Transactions

Source: 42 companies in BVP Cloud Index as of 5/29/2015. CapIQ. Note: Private cloud transactions based on 55 private transactions in the last 6 months where 11.8x is average ARR run rate multiple. BVP Cloud Index multiple and Legacy software multiples are both NTM GAAP revenue.

32

Valuation Gap

Revenue Multiples

TAKEAWAY: GUARDRAILS FOR VALUATIONRepresentative SaaS Business ($20mm ARR)

50% 50-100% 100%+

85% 85-95% 95%+

24 mos 12-24mos <12 mos

minimal 100-125% 125%+

50-60% 60-75% 75%+

Key Factors

1 Yr Fwd Growth

CAC Payback

Gross $ Retention

Upsell Retention

Gross Margin

Team Product Competitive DynamicsTAM

Good Better Best

33

AGENDA

• State of the Cloud Industry: Where are we today?

• Metrics that matter: How are we doing?

• The outlook ahead: What does it mean for me as a cloud CEO?

34

THE OUTLOOK AHEAD

• The Cloud Wins– First category (CRM) goes over 50% cloud in 2016– Now at 42 public cloud companies in BVP Cloud Index – Welcome Shopify!– BVP Cloud Index crosses $500bn by 2020

• Major Trends & Coming Disruptions– Industry cloud comes of age– Cyber security a threat and an opportunity– B2D opportunity for developers and entrepreneurs– Further commoditization of IaaS– Cornered animals: More M&A from legacy vendors ahead– The dawn of enterprise mobile

35

INDUSTRY CLOUD ON THE RISE

1

2

3

Software adoption moved from “nice to have” to “table stakes”

Winner take most dynamic – can win 50% of a market

Mobile expands the non-desk workforce by 80%

2005 2010 2015$0$5

$10$15$20$25

$0.0 $1.5

$23.2

Market Cap ($ in bn)

# of Companies 0 2 12

Source: Capital IQNote: Public vertical SaaS companies include 2U, Athenahealth, Benefitfocus, Dealertrack Technologies, Fleetmatics Group, RealPage, Textura, Veeva, Q2 Holdings, Opower, Guidewire, Shopify

Public Industry Cloud Companies

Notable Private Industry Cloud Companies

Drivers of Industry Cloud

36

CYBER SECURITY: A HOT MARKET AND A KEY THREAT

37

B2D MARKET TAKING OFF

38

FURTHER GROWTH OF IAAS - GREAT FOR SAAS

2013 2014 2015E 2016E 2017E$0

$2

$4

$6

$8

$10

$12

$2.8$4.3

$6.0

$8.2

$11.2AWS Revenue ($ bn)

Source: Robert Baird & Co, 2015. Monthly uniques per Comscore, Feb 2015. 39

~80mm unique visitors a month 50 billion "pins" on Pinterest

MORE M&A AHEAD

40

• Classic Innovator’s Dilemma allowed cloud entrants to thrive

• Too late to build

• Too expensive to buy

• Will be fatal to many

Legacy Software vendors are cornered animals today

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 bothhome 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%

41

THE MOST EXPENSIVE REAL ESTATE IN THE WORLD

$ / Sq Ft $5k $10k $20kThe Penthouse @ One

Hyde Park, London $15k

17 Upper Phillimore Gardens $6k

Buckingham Palace $6kKennsington Palace $4k

$2mm+

Note: Assume each mobile icon is ½” (so 1 sq ft is equal to 576 mobile icons). Assume MAU is equal to mobile app installs. Uber - 450k WAU, 900k MAU (assume WAU x 2 = MAU) as of 12/2013. Valuation of $3.5bn as of 08/2013 Snapchat – 30m MAU at $10bn valuation as of 08/2014Whatsapp – 450m MAU at $19bn valuation as of 02/2014 Instagram – 30m MAU at $1bn valuation as of 04/2014

42

THE MOST EXPENSIVE REAL ESTATE IN THE WORLD

$ / Sq Ft $5k $10k $20kThe Penthouse @ One

Hyde Park, London $15k

17 Upper Phillimore Gardens $6k

Buckingham Palace $6kKennsington Palace $4k

$2mm+

$2.2m

$192k

$24k

$19k

Note: Assume each mobile icon is ½” (so 1 sq ft is equal to 576 mobile icons). Assume MAU is equal to mobile app installs. Uber - 450k WAU, 900k MAU (assume WAU x 2 = MAU) as of 12/2013. Valuation of $3.5bn as of 08/2013 Snapchat – 30m MAU at $10bn valuation as of 08/2014Whatsapp – 450m MAU at $19bn valuation as of 02/2014 Instagram – 30m MAU at $1bn valuation as of 04/2014

43

ENTERPRISE MOBILE HAS MORE MONETIZATION POTENTIAL THAN

CONSUMER MOBILE

…but enterprise apps are exploding # of enterprise mobile apps growing over 210% in 2014

20% of all developers globally are targeting enterprises, up from 16% just six months ago

1

2

Consumer Enterprise

1,258

142

# of Apps in IOS (units in 000s)

Enterprise 10% of IOS apps

Source: Appfigures, Statista (May 2015), Vision Mobile

…and enterprise apps have higher monetization potential

3

Enterprise

Consumer

31%

56%

26%

25%

25%

12%

9%

4%

9%

3%

$0-$1k $1-$10k $10k-$100k$100k-$500k $500K+

43% of enterprise apps make >$10k / mo vs 19% for consumer

apps

44

There are 10x more consumer apps than enterprise…

ENTERPRISE MOBILE WILL DISRUPT CLOUD

45

Become great on mobile, or your next challenger will!

A SPECIAL THANK YOU TO…

• Kristina Shen - great effort and insights in building this report

• Peter, Umair, Adam, Alex, Bob, Brian, Cecilia, David, Ethan, Felda, Jeff, Jeremy, Kent, Mark, Steve, Sunil & Sunil, Thea, Tiffany, Trevor, Vishal, and the rest of Bessemer’s cloud team

• The amazing cloud founders and executive teams we’ve had the privilege of working with and learning from

• Our awesome partners @ Bessemer Venture Partners, Salesforce Ventures, & Salesforce.com

• To download BVP content: www.bvp.com/cloud– BVP Cloud Industry Report www.bvp.com/cloudreport – BVP Cloud Index @ www.bvp.com/cloud/comps– BVP Cloudscape @ www.bvp.com/cloud– BVP Industry Software Revolution @ www.bvp.com/cloud – BVP Security for Startups – 10 Step Cybersecurity Plan @ www.bvp.com/cyber 46

Presented at Bessemer Venture Partners & Salesforce VenturesCloud CEO Summit, June 2015

For more information visit www.bvp.com/cloud @bdeeter @kshenster & @ bessemervp©2015 Bessemer Venture Partners