The Macro Factors Impacting the Cloud Economy

Mary D’Onofrio, Partner at Bessemer Venture Partners, tells us what a ‘Centaur’ is and how many private cloud Centaurs there are globally, along with some of the successful strategies they used to reach more than $100 million in annual recurring revenue. Mary also speaks on the top trends shaping the private cloud economy, along with how current economic conditions are impacting the space.  

What was the private cloud economy like last year compared to this year? And where is it headed?

In 2021, the private cloud economy was at an all-time high. After a 13-year bull market in which there was an abundance of capital in the venture ecosystem, private valuation multiples skyrocketed; however, that all changed within a matter of months as interest rates climbed and inflation reached a 40-year high this year. Multiples in the private markets have now come down to more closely reflect what we are seeing in the public cloud software markets.  

That being said, unlike previous downturns, the dynamics of this reset are more closely tied to financial market cycles rather than the underlying performance of the businesses themselves. As we look to 2023 and beyond, we at Bessemer want to remind cloud leaders that despite what feels like doom-and-gloom, cloud businesses are still displaying exceptionally strong fundamentals. 

What is a Centaur and what makes them unique? 

‘Centaur’ is a term that I coined alongside my partner Adam Fisher to distinguish a company that is doing more than $100 million in annual recurring revenue (ARR), which we argue is the new milestone demarking an enduring company. When the term “unicorn” was originally coined a decade ago, it was reserved for only 14 total companies; however, the unicorn herd has exploded to over 1000+ companies and being a “unicorn” is no longer synonymous with being a durable company.  

Growing ARR is therefore the best performance indicator of company success. We created the Centaur to point companies, investors, and even ourselves towards real value creation milestones driving topline ARR rather than valuation milestones themselves. In our research we have found that Centaurs are seven times rarer than unicorns and we’ve yet to find a single Centaur that has not been an enduring company.

How many private cloud Centaurs are there in the world? What are some that stand out? 

At Bessemer, we’ve identified approximately 160 private cloud Centaurs in the world. A few that stand out include Zapier, Canva and Forter, which have all grown their revenue at unprecedented rates. Of the Centaurs that graced this year’s 2022 Cloud 100 List, it only took 8 years from founding for them to reach their $100 Million ARR milestones.

What were some of the successful strategies that drove top private cloud companies to $100 million in annual recurring revenue?

There is no singular way to reach $100 Million of ARR, and the strategy chosen should map to the dynamics of your business, product, sales motion and customers. That being said, some successful strategies we have seen at Bessemer include expanding addressable market through new product lines, which was ServiceTitan’s strategy; introducing product-led growth strategies and coupling them with strong enterprise sales, like Calendly; and coupling market evangelism with product excellence in LaunchDarkly’s case.  

What are some of the top trends shaping the private cloud economy? 

We have continued to see particular strength in fintech, design/collaboration/productivity software and data/infrastructure, which are the three cloud sub-sectors that represent the most value on this year’s Cloud 100 list ($191 bn, $116 bn, and $96 bn, respectively).

How are the current market and economic conditions impacting the space? 

The macro factors impacting the cloud economy include inflation and rising interest rates, geopolitical uncertainty and supply chain risk. The result has been a decrease in public cloud valuations that have trickled down to the private markets as well. In the recent Cloud 100 report, we noted that private cloud valuations have decreased from 34x ARR in 2021 to 30x ARR in 2022. However, private cloud fundamentals remain strong, as evidenced by this year’s Cloud 100 basket that actually accelerated growth to +100% YoY.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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