To Grow Or Die In The Cloud
Editor's note: Byron Deeter is the lead cloud specialist at Bessemer Venture Partners. A few years ago, most people couldn’t tell you what the cloud was, let alone anticipate a market in which the sexy, highly anticipated consumer Internet IPOs were flops while the seemingly nerdy sectors of cloud and enterprise computing ended up driving the technology market returns.
window washers

Editor’s note: Byron Deeter is the lead cloud specialist at Bessemer Venture Partners. Follow him on Twitter @bdeeter.

A few years ago, most people couldn’t tell you what the cloud was. They certainly couldn’t foresee a market in which the sexy, highly anticipated consumer Internet IPOs would be flops while the seemingly nerdy sectors of cloud and enterprise computing would end up driving returns within the technology markets. For entrepreneurs and investors in cloud computing, market valuations are skyrocketing as acquisition activity heats up, the IPO markets are open, and venture dollars are finally flooding into the segment. Simply put, for participants in the cloud computing market, our time has finally come.

Businesses are moving toward cloud-based operations in a permanent way, and the fundamental business metrics of the category leaders are enjoying staggering growth as a result. A few minutes of scrolling through a few pages here gives a clear sense of the scope and potential of the market.

The IPOs of companies like WorkDay and Eloqua (then acquired), are further evidence of market support for these compelling business models. And private companies such as ClearslideBizo and Twilio all announced significant (even market-moving) news that signaled further growth and opportunity not only for them but also for the industry at large.

Best-of-breed cloud applications will lead the next wave of innovation.

How will this play out in 2013 and beyond? Best-of-breed cloud applications will lead the next wave of innovation. The momentum in the enterprise segment and the continued hyper-growth of cloud computing will force legacy suite vendors to attempt to buy their way more deeply into the cloud markets. The leading “next-generation” SaaS vendors, including Salesforce.com, Workday, LinkedIn, NetSuite and Concur, are finding it necessary to aggressively expand into adjacent product offerings or risk being disrupted by newer  applications that are challenging them from all sides.

Laws Of Cloud Computing

As a former founder of a cloud-computing startup (and now an investor in the space), I’ve tried to leverage the lessons learned throughout my efforts, as well as those of my partners, our portfolio company executives, and other leading cloud entrepreneurs, to create some best practices with which to thrive in this market. So starting in 2008, the cloud investment team at BVP developed Bessemer’s 10 Laws of Cloud Computing.

One very notable addition is the recent inclusion of a new law: “Grow or Die.” There is currently a land-grab market opportunity around cloud that is a once-in-a-decade (or more) phenomenon. Growth and innovation are critically important to capture the long-term leadership position, because aggressive challengers are lurking close behind the leaders in many cases.

Grow Or Die Investor-Style

From an investment standpoint, Grow or Die means recognizing that there are market and company windows of opportunity in which to be aggressive. Aggressive doesn’t mean investing blindly in sales capacity when a product and/or the market isn’t ready. But if there are compelling business economics, then it is actually irresponsible not to invest in growth to capture the full market potential — because if you don’t, someone else will.

Grow Or Die Entrepreneur-Style

From an entrepreneurial perspective, Grow or Die means that you need to be extremely proactive in thinking through the right rate and pace of investments, and when to really go “all in” on the business. Box CEO Aaron Levie is a great example of this mentality and is an extremely popular speaker on this topic. Box has visibly raised a significant amount of capital and is extremely aggressive at capturing market share – essentially striving to dominate the Microsoft SharePoint ecosystem.

Numerous alternatives existed for them, including organically growing the business at a much slower rate from existing cash flow, raising modest amounts of venture capital to grow at a more measured rate, and/or selling out along the way. Instead they believe (as do the rest of us as investors!) that the opportunity is sufficiently large and the unit economics are sufficiently compelling, that the additional dilution from additional financing is less than the long-term value creation that comes from growing the business at an even faster rate.

Given the tremendous tailwind in the cloud market, the re-platforming opportunity of software overall, and the unique window of time in which startups are actually advantaged relative to the incumbents, many companies have real opportunities to build category-defining products that achieve true market dominance. These factors (along with the huge valuations!) combine to make it a great time to be a cloud entrepreneur, and a really fun time to be a cloud investor.

[Images: Washers and windows.]


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