Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today we’re talking to Alex Niehenke, a venture capitalist with Scale Venture Partners, who has an interesting argument to make: The SaaS and cloud market is maturing, and incumbents are squeezing startups out of certain parts of the market. However, there are still places to put capital to work, and Scale has a notable track record. The venture firm has put money in a number of cloud SaaS companies that are public today, including Box, Bill.com (a recent IPO), RingCentral and Hubspot. Scale has also put significant capital to work in SaaS companies over time, including from its most recent $400 million fund (the firm writes $5 to $25 million checks).
But instead of talking about what’s worked for the firm in the past, we’re looking to the future. Niehenke believes that we’re heading for a cloud slowdown in the next few years, something that I’ve only ever heard one other venture capitalist bring up. So I got some of his time, and we drilled in.
Why might cloud growth slow, and what would it mean for startups? Let’s find out.
Slowdown
Chatting with Niehenke by phone, the venture capitalist decided to ground our conversation about a slowdown at a somewhat meta level, saying that when we discuss cloud and SaaS companies “we’re talking about things that are mature at this point.”
If you talk to cloud and SaaS bulls, you’ll often hear a different argument. Some industry minds believe we’re in the early innings of the SaaS takeover of enterprise software. Niehenke, in contrast, noted that the transition from on-premise software to the cloud has already gone back years. Considering his own career, the idea of packaging software into a cloud and SaaS product was “still controversial” when he joined Scale seven years ago. Looking back 20 years, the “whole notion of doing things in the cloud was borderline crazy,” he says.
So the changeover from traditional software to software as a hosted (cloud) service (SaaS) has been afoot for decades. In that time, the category become so well known, according to Niehenke, that if he goes to a “family reunion [today], people are talking about SaaS and the cloud.” His family is a bit nerdier than mine, I suppose, but what matters is that “20 to 25 years into these trends, we have seen a maturation, we’ve seen the emergence of large category leaders.” And with the arrival of large players, “there is increasingly a shortage of room throughout the ecosystem” for startups. According to Niehenke, “the leaders of scale and a substance” are impacting the ability of startups to grow.
In our conversation, Niehenke gave an example, saying that if “you are trying to be a sales or marketing SaaS [or] cloud startup, there just isn’t much room anymore,” thanks to “the dominance of Salesforce and Adobe” in those categories. He also cited Amazon as squashing the cloud infrastructure startup market.
In his view, “the technology boom around SaaS and cloud that we saw 10 [or] 15 years ago” when on-premise software could be taken to the cloud and generate a “$1 billion, $2 billion, $5 billion company” is “relatively exhausted and finite.”
So what is exciting?
I was curious about what Niehenke’s broader thesis meant for vertical SaaS companies, the hosted software shops that target single industries with tailored code. Would startups focused on vertical SaaS solutions keep cloud and SaaS spend growing? Or, in contrast, does Niehenke include vertical SaaS in the mix of firms that will, in aggregate, slow down as the market gets saturated?
He seems bullish on some spaces in SaaS, noting that his prior points were about the industry in aggregate. There are still market opportunities in SaaS and cloud that excite him, places where startups “don’t have to [fight] with Amazon or Salesforce sales and marketing dollars” or “ten different software products competing” for marketshare. He cited financial technology, insurance, transportation and trucking, and real estate as areas ripe for investment, noting that in “this kind of aggregate maturation portion of a cycle, that’s where you can still find the most positive exposure.”
Why those areas? Niehenke gave TechCrunch a couple of reasons:
- Regulated industries may generate hugely valuable companies, despite the old view in the venture world that regulated industries are anathema. (He gave Airbnb as an example of outsized success in a regulated space.)
- Industries that have lots of workers that are not just at-desk-white-collar-staff are a space where software has room to grow. (Microsoft has been working on this as well.)
So while Niehenke does think that cloud is maturing — and that incumbents are squeezing out smaller players from the SaaS market — there are still places where he wants to make deals and cut checks. Given his day job, that’s good news.
As a takeaway for you and I, we’re just starting to hear from some venture capitalists that cloud growth could slow. They might be early to the idea, but the trend had to start at some point. Perhaps that point is now.