Bessemer Venture Partners Launches Flagship State Of Cloud 2023 Report
The report explores how AI will transform human-machine interfaces and force SaaS leaders to reimagine their businesses.
Bessemer Venture Partners launched the 2023 edition of its flagship report, The State of the Cloud. The report looks ahead at the cloud economy over the next 18–24 months and captures major cloud trends around the world, including in India. It further explores how AI will transform the human-machine interface and force SaaS leaders to reimagine their business and product models for value creation.
Here are some crucial insights from the report:
Cloud Market Landscape
The rapid adoption of cloud technologies by enterprises against the backdrop of the pandemic resulted in a bull run for cloud markets. The public cloud market capitalisation catapulted to a peak of $2.7 trillion in November 2021. But as with other market indices, mean regression set in. Cloud markets took a drubbing in 2022’s SaaSacre due to rising interest rates and a volatile environment. SaaS IPOs went on hiatus, software mergers and acquisitions dropped, and—simulating the public market—VC funding was reduced.
However, the long-term outlook for cloud markets looks positive. One of the reasons behind this is that the cloud model may be the best business model ever conceived. Not only does the model allow enterprises to achieve sales efficiency and net revenue retention, but it also helps efficiently generate net new recurring revenue, in as much as top cloud companies generate $18 of enterprise value from $1 of investment over a year.
Not surprisingly, SaaS businesses have valuations of 10–20 times their annual revenue, and cloud markets have consistently outperformed other market indices. In just a decade, from March 2013 to March 2023, public cloud market capitalisation has increased from $283 billion to $1.3 trillion and, despite headwinds, is higher than pre-pandemic levels.
Realising Fundability Benchmarks
Notable for enterprises is that VCs aren’t particularly drawn to slow, profitable growth. Rather, their objective has always been to seize a market opportunity in earnest and make the most of it. In an environment where VC wallets have tightened, to attract capital, businesses must be able to tell a compelling and convincing story about a market opportunity that has high growth potential.
In the evolving cloud economy, the key to drawing funding for venture-backed enterprises will be fundability—showing your investors that you’re in control of your business’s core performance levers.
To achieve this, it’s imperative for SaaS leaders to set "good, better, and best" fundability benchmarks and steer their enterprises towards them. These benchmarks should cover areas such as customer acquisition cost payback, operational efficiency, net revenue retention, time to cash out, revenue growth, and logo retention.
Efficiency Insights For Cloud Leaders
What the dip in the cloud infrastructure market has done is shift the focus of enterprises from absolute growth or growth-at-all-costs to efficient growth. No longer are cloud enterprises valued per absolute growth; rather, efficiency scores are considered a useful valuation metric.
This means that cloud leaders today are looking to carefully balance the trade-offs between growth and profitability. It, thus, becomes essential for SaaS ventures to invest in growth, which is achieved at "optimal costs" and not at "any costs."
The State of the Cloud report lays out some predictions against the backdrop of this changed business priority. Firstly, SaaS businesses will fight inefficiency and sprawl by optimising cloud costs using cloud FinOps and cost management platforms, plus improving workflows using engineering productivity tools.
Secondly, climate software will drive the green energy transition. Even as the climate ecosystem improves with falling prices for renewable and green initiatives, one key differentiator will be an energy transition powered by the cloud. This includes vertical software for solar, EVs, and heat pumps; distributed energy resource infrastructure; project finance and energy developer software; and those for energy efficiency and sustainable design.
The AI Age
The watershed moment in the cloud economy has undoubtedly been the dawn of AI. Just two months post-release, OpenAI’s ChatGPT garnered 100 million monthly active users in January this year, becoming the fastest-growing consumer app in history. This leads to another prediction by this cloud report: AI will drive most of the value created for the end user.
Over time, the number of AI-native companies and product offerings will rise phenomenally, making open AI increasingly affordable and accessible. This growth will not just be restricted to centralised players like OpenAI, Google, or Microsoft but also to smaller businesses deploying low-cost AI ecosystems. This will help create healthy competition in the area and keep prices in check, eventually passing the value on to users.
The report also predicts that the large language model will rapidly spread and transform the SaaS application layer. As the age of AI begins, legacy tech companies must transform their business models as new-age start-ups hasten the process of integrating LLMs into their products. The future will thus be about embracing innovation rather than being in fear of the incredible unknown that AI technology instills in businesses and the workforce.
AI Adoption For SaaS Leaders: Four Critical Steps
For seamlessly adopting AI, SaaS leaders must take the following steps:
Internal audit: Identify departments and areas that can be impacted the most by AI integration since LLMs have the potential to improve internal efficiencies.
Reimagine product roadmap: Enterprises must explore how best they can leverage AI when building products from the ground up.
Act and ship: Agility is the key in today’s cloud economy, and businesses must integrate AI and execute in haste.
Long-term plan: Leaders must contemplate future market implications and leverage new AI-powered features to improve product, execution, and distribution for long-term value creation.
Cloud Trends In India
The State of the Cloud report further throws light on the cloud trends in India, the major being:
In 2022, 4.7% of all global VC dollars were deployed in India, equaling $25.7 billion.
2,367 Indian start-ups were funded by VCs in 2022; 468, or 20%, were cloud or SaaS businesses.
Compared to global businesses, cloud companies in India are quicker at adopting a multi-product strategy.
Indian SaaS companies are leveraging AI to help productise services, said Anant Vidur Puri, a partner at Bessemer Venture Partners.
