Hello from the midst of Disrupt 2020: after this short piece for you I am wrapping my prep for a panel with investors from Bessemer, a16z and Canaan about the future of SaaS. Luckily, The Exchange this morning is on a very similar topic.
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Today we’re parsing some data that Bessemer and Forbes shared regarding their yearly Cloud 100 list. It’s a grouping of private cloud and SaaS companies, giving us a good look into valuation trends over time and also where the most valuable startups are focusing their efforts.
The data show a changing focus from the biggest and most impressive private SaaS and cloud companies. And the valuation trends show how growing private valuations could limit future returns, given historical results.
Of course, modern cloud valuations make it hard to be bearish on SaaS revenue multiples, but all the same, how much higher can they go? Every startup looks cheap when money is cheap. Let’s get into the numbers.
A changing sector focus
The Cloud 100 cycles companies in and out as time passes. As the list is focused on private companies, cloud and SaaS firms that sell to another company or go public leave the cohort. And new companies join, keeping the total group at precisely 100 companies.
Here are the top five sectors those 100 companies are focused on, in order of popularity:
- Sales/Marketing/CX: 19
- Data/Infrastructure: 17
- Design/Collaboration/Productivity: 12
- Vertical: 12
- Security: 10
From the 2019 list, the “Design/Collaboration/Productivity” group saw the biggest gain in share, rising from eight companies in 2019 to 12 in 2020. A simple read of that suggests that there are a good number of rising SaaS and cloud companies excelling in that space today. This tracks with the number of tweets about Figma that I have to read every day.
From 2019 to 2020, “Sales/Marketing/CX” and “Data/Infrastructure” effectively held station, staying the most popular cohorts (or tying) amongst the two years. Given how many types of companies you can shove inside of each bucket, that’s perhaps not surprising.
But yesterday’s IPO from Snowflake — a data-focused cloud company — helps us parse why that particular sector has been so hot. Huge demand is driving huge growth for some of its players, meaning that valuations are going up and venture capital dollars are flowing in.
The result of that sort of thing? Rising valuations, usually. And that’s what the 2020 list brought en masse. Indeed, a longitudinal chart showing the varying Cloud 100 cohort valuations by year shows how the private world of cloud and SaaS companies has changed:
The full list was worth $99 billion in 2016, $116 billion in 2017, $138 billion in 2018, $166 billion in 2019 and $267 billion in 2020. So after a few years of steady growth, 2020 has seen the value of the Cloud 100 explode.
That is all well and good for founders and VCs, provided that those valuations can be defended. But notably the rising figure could hint at lower, future, public market and venture capital results. Why? Because the 2016 list, the group that has had the longest time to season, is worth $543 billion. That’s a cracking return from its $99 billion private valuation in 2016. But it would only be a double for the 2020 group. That’s less good.
You could argue that the 2020 cohort will manage just as good a return, but that would require the creation of around $1 trillion in future value. That’s much harder to do. And, the 2016 Cloud 100 cohort had more total space in which to build; today more of the old world has already moved to the cloud. So, it should prove harder over time to generate those sorts of returns, perhaps.
But there is good news out there all the same. Public markets have proven warmly welcoming to unicorn-priced private cloud and SaaS companies. And COVID-19 is said to have accelerated a great host of startup momentum, especially among SaaS and cloud players. So the days of good returns is hardly done.
Perhaps what is going is that private investors are more willing to pay for future growth today, boosting the value of this year’s Cloud 100 to record highs, simply to get into the most attractive deals. If so, we won’t see poor returns in time per se, but front-loaded valuation gains instead. There are risks to that sort of work, as cloud multiples could compress, effectively marooning some cloud and SaaS companies with valuations they can’t support.
Turning to valuations, according to a dataset that was provided to TechCrunch, the average valuation for the 2020 Cloud 100 works out to 25x ARR, while the median valuation for the same group tots to 20x ARR. This is above the data that Bessemer has on public cloud multiples, which tends to land in the upper-teens, and not the low-twenties. But as the Cloud 100 (private) are growing more quickly than the companies on the Bessemer cloud index (public), you could argue that it’s the public group that are the group that could be overpriced, at least in relation to one another. Compared to historical norms, both cohorts are very expensive.
Finally, there are 87 unicorns on this year’s Cloud 100. That means we need to see 87 IPOs to clear it out. I point that out to merely indicate how many more IPOs the market needs to handle all this private wealth that is being created.
We can stop being downers now. To the cloud bull, the 2020 Cloud 100 list is a triumph, with the huge value of the group managing its largest one-year gain in valuation on record. Leave it to us to find something to worry about!