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From the future of cloud management to cloud spend in the age of machine learning, our latest cloud investor survey has given me lots of food for thought. It once again came to mind when I read a new report on cloud marketplaces. These have consolidated as a new revenue avenue, but is it ever too early for startups to go that route? Let’s look into it. — Anna
Where the money’s at
The sky’s the limit for the cloud market. If Alphabet’s earnings missed expectations in Q3, it is certainly not because of Google Cloud, whose revenue grew 37.64% year on year last quarter, from $4.990 billion to $6.868 billion. Meanwhile, Microsoft’s “Azure and other cloud services” grew 35%.
One of the key factors that make cloud revenue resilient even in a more morose macroeconomic context is committed spend. This creates tailwinds not just for AWS and its competitors, but also for independent software vendors selling through their marketplaces.
Cloud marketplaces were already on the rise in 2021, with Andreessen Horowitz partner Martin Casado proclaiming that they were becoming the channel for selling software. But the fact that enterprise buyers are now reluctant to enter new contracts makes this channel even more appealing to vendors.
“The clearest benefit is being bundled into the overall billing commitment of a customer to that cloud provider,” Boldstart Ventures partner Shomik Ghosh told TechCrunch.
However, investors taking part in our survey also had reservations about cloud marketplaces as a key distribution channel for early-stage startups. Angel investor Anshu Sharma said that his own company, data privacy startup Skyflow, is “yet to be listed on any marketplace.”
Never say never, though: “We are now considering joining a marketplace, nearly four years after we started the company,” Sharma said. This begs the question: What should a startup consider before incorporating cloud marketplaces into its go-to-market strategy?
Frictionless spend and other selling points
For all we bang on about usage-based pricing, multi-year cloud contracts are still very much a thing in the enterprise world. This committed cloud spend makes buyers less likely to think twice: “If that contract is not fully utilized by end of term, then the customer ends up paying for services not rendered,” Ghosh said.
But there are other benefits, Ghosh added: It also “speeds up the procurement cycle” and “allows the customer to consolidate billing” — a growing concern in the age of sprawling SaaS bills. Team8 co-founder and managing partner Liran Grinberg concurred, saying that “cloud marketplaces streamline the customer’s purchasing process dramatically, which is a major advantage for both customers and vendors.”
I was reminded of their remarks this week while reading Tackle‘s annual State of Cloud Marketplaces report, which is based on a survey of software sellers and buyers conducted last summer. While it is unclear how many of these chose to list on a cloud marketplace, the reasons why they did are interesting. Here they are, from most to least common:
- Unlock co-sell opportunities
- Advance partnership with cloud provider(s)
- Easy access to budget dollars by tapping into buyers’ preexisting spend with cloud provider(s)
- Accelerate deal velocity
- Open a new channel for revenue
- Streamline contracting and simplify procurement
This hints at why cloud marketplaces are increasingly popular with software vendors, but also perhaps why they aren’t for everyone. This doesn’t exactly read like top priorities for early-stage startups, does it?
Learning from failures
Tackle clearly has skin in the game — the Idaho-based unicorn has raised $148 million to date to help software companies sell through cloud marketplaces. But its report doesn’t sweep all concerns under the rug. Instead, Tackle dedicates an entire section to seller failures. Why? Because it estimates that 15% of companies that attempted to launch a Cloud GTM failed in their first year.
Arguably, examining what went wrong there is also self-serving, as it is meant to improve the sector in the long run — but it is also infinitely more useful for readers than the typical rosy-eyed forecasts, which makes it my favorite part of the report.
Called “Learning 5: Learning from Seller Failures,” the chapter starts by acknowledging that not everyone will succeed in this new model, then dives into lessons. “Some of these learnings are truly independent of [company] size,” Tackle notes, “but some are very specific to companies of certain sizes.”
When it comes to the type of companies closest to my heart, startups below $25 million in annual recurring revenue, here are the failure factors that Tackle lists:
- You don’t have product-market fit, so identifying your value prop for cloud buyers is harder.
- Because your teams are still small and likely stretched, you don’t have an owner who is committed to making cloud selling successful (not launching, but actually selling).
- You have set unrealistic expectations for the cloud co-sell motion and/or aren’t consistently investing into this strategic channel.
- You lack experience and knowledge of how to make it work so you spin your wheels guessing, researching, trying, and failing.
The first bullet point resonates with what we heard from Quiet Capital founding partner Astasia Myers: That cloud marketplaces offer an accessible, flexible option for companies to scale their GTM motion” — which implies product-market fit (PMF).
“We encourage startups to consider cloud marketplaces once they have found PMF, not before,” the VC said. “To successfully leverage cloud marketplaces, a solution’s product marketing, value proposition, and return on investment need to be clear while exhibiting a fast time to value, which happens post-PMF.”
Decision factors
Every investor I talked to for our survey had positive things to say about cloud marketplaces. But they also mentioned cons that go beyond the need for PMF. For instance, Myers stated that “during the early stages of a business, it is important to have direct relationships with customers to continue to iterate and to create referenceable champions.”
While calling cloud marketplaces “an interesting channel for product awareness and for users to kick the tires on semi-complicated cloud offerings,” Menlo Ventures partner Tim Tully said he “wouldn’t recommend that early-stage startups spend much energy trying to pigeonhole themselves into the marketplaces.” He learned firsthand, he argued, that “the first-party experience is always better than the marketplace experience.”
Skyflow’s Sharma also relied on his direct experience to add perspective on the topic. “As a product executive at Salesforce, I helped build the industry’s very first cloud marketplace (AppExchange) nearly 15 years ago,” he recalled. He also thinks that the channel “can be very valuable to startups.” But “at the same time, as a startup, I am hesitant to be in a marketplace from day one, as it can commoditize your offering.”
Is it a matter of time, then? And is four years in, or post–Series B, the right point at which startups should consider taking the leap? Tackle CEO John Jahnke shared some thoughts with me on the matter. From his point of view, “any seller who has product-market fit and is investing in scaling their go-to-market could be a fit for the cloud marketplaces.”
“It’s really more about readiness than stage,” he said.
For Jahnke, readiness means answering yes to the following questions: “Do you have executive alignment, a clear owner, and a plan to drive initial transactions? Do you see this as a long-term strategic channel versus a vehicle to do a handful of deals? Are you willing to invest more as you prove the pattern?”
“Typically, the answers to these questions lead to growth-stage companies who are investing heavily in scaling their GTM, but we have seen sellers who have been successful at all stages,” Jahnke added.
“Post-PMF and ready to scale” does sound like a much broader target than “late-stage startups,” which likely explains why cloud marketplaces are being considered earlier than they used to. “Historically, we saw startups join cloud marketplaces at Series D+. Now we are starting to see companies consider it post Series B,” Myers attested.
That might not make cloud marketplaces the channel for startups to sell software, but founders now have a good reason not to overlook the opportunity. After all, in Myers’ words, “startups need to meet buyers where they are.”