B2B Tech: Cloud-First Enterprise Opportunities

The Evolution of B2B Tech Growth

Over five years ago, Neeraj Agrawal, my colleague at Battery Ventures, published a highly influential article providing guidance to enterprise-software companies aspiring to achieve $100 million in annual recurring revenue.

His framework, known as “T2D3” – representing the revenue multiplication stages of “triple, triple, double, double, double” – proved invaluable for numerous rapidly expanding startups in gauging their progress. It also underscored the significant increase in industry value creation driven by the shift from on-premise software to cloud-based solutions.

Updating the Growth Model

While many of T2D3’s core principles remain pertinent today, an update is necessary to reflect the substantial shifts impacting the broader B2B technology landscape. These changes are compelling companies to attain growth rates previously unseen.

This new approach is termed “billion-dollar B2B.” It describes the forces shaping a new generation of cloud-first, enterprise-tech leaders capable of reaching $1 billion in ARR and achieving market capitalizations exceeding $50 billion, and potentially even $100 billion.

Emergence of Billion-Dollar B2B Companies

In recent years, a pioneering cohort of B2B companies – including Twilio, Shopify, Atlassian, Okta, Coupa*, MongoDB, and Zscaler – have either approached or surpassed the $1 billion revenue threshold. Furthermore, their market capitalizations have increased tenfold or more since their initial public offerings (as of March 31, based on CapIQ data).

More recently, established companies such as data analytics leader Snowflake and video conferencing provider Zoom debuted on the IPO market with even higher valuations. Zoom, generating nearly $883 million in revenue in 2020, currently holds a valuation approaching $100 billion, according to CapIQ data.

Several other B2B “super-unicorns,” like Databricks* and UiPath, have secured private funding rounds at valuations exceeding $20 billion, as reported publicly – a level of investment unprecedented within the software industry.

This contrasts sharply with the growth timelines of older technology firms like Hewlett-Packard, Dell, and Compaq, which required 30 to 50 years to attain comparable market capitalizations.

Is the Growth Sustainable?

The question arises: is this rapid growth sustainable? I believe the “billion-dollar B2B” paradigm possesses genuine longevity – despite recent market fluctuations – due to trends such as “bottoms-up” sales strategies that minimize reliance on traditional sales teams.

The viral adoption of B2B products through active user communities and the simplified, consumer-like distribution of these products to customers are also key factors.

The Impact of the Pandemic

Moreover, the pandemic has accelerated the digitization of core functions and processes within large organizations, driving a migration to the cloud. This has significantly boosted sales for many of these B2B giants.

I will now provide further context on these trends and offer actionable advice for entrepreneurs developing innovative, cloud-first businesses with the ambition of reaching $1 billion in revenue.

The Current Shift in B2B Technology Purchasing

A significant driver behind the emergence of billion-dollar B2B companies is a fundamental change in how organizations procure enterprise technology.

Historically, purchasing decisions were largely dictated by top-level executives like CIOs and CTOs. These leaders would negotiate deals directly with salespeople, often prioritizing product features and functionality before end-user evaluation.

However, the landscape has dramatically evolved over the past decade. Today, the preferences of end-users, even those at lower levels within organizations, heavily influence corporate technology purchases.

Atlassian, with its flagship products Jira and Confluence, was an early adopter of this approach. They achieved $100 million in revenue without a substantial sales force, and their revenue reached $1.6 billion in the last fiscal year.

The Rise of User-Driven Adoption

Companies like Zoom, Twilio, and Okta are now replicating this success. They prioritize factors such as rapid value realization, straightforward implementation, and intuitive user interfaces to attract customers.

This strategy fosters organic growth within organizations, eventually compelling CIOs and CTOs to acknowledge and adopt the widely used tools.

This shift has substantially broadened the potential market for B2B technology. It has expanded from approximately 20,000 executive buyers in large enterprises to a more distributed base of over 56 million software developers, as reported by GitHub’s State of the Octoverse.

Expanding Market Reach

The market now includes millions of small and medium-sized business owners utilizing technology via their smartphones. This trend was also highlighted in the “Software 2021” report by my colleagues Neeraj and Brandon Gleklen.

Shopify, a billion-dollar B2B company with $2.9 billion in revenue in 2020, exemplifies this benefit. They focus on providing the infrastructure for 68 million small-business websites globally.

Furthermore, software is increasingly being adopted in traditionally “blue-collar” industries, such as restaurants and home contracting. This expansion further increases the overall market size.

Companies like Procore, ServiceTitan, and Toast – which have collectively secured nearly $2 billion in funding – demonstrate this trend.

Embarking on the Path to a Billion-Dollar Enterprise

What strategies can be employed to capitalize on current market trends and establish a company generating $1 billion in revenue? Here are five key recommendations to consider.

Prioritize Community Engagement: Cultivate Users Before Pursuing Large-Scale Sales. As previously noted, your product’s initial impact should stem from user engagement, not solely from sales efforts. This necessitates fostering a substantial and satisfied user base who will advocate for your product and accelerate its organic adoption within their respective organizations. Once substantial organic usage is observed, organizations may be prepared to commit to significant subscription agreements.

Numerous examples of B2B companies achieving billion-dollar valuations demonstrate the effectiveness of this approach. Atlassian serves as a prime illustration. MongoDB (fiscal 2021 revenue: $590 million) similarly leveraged the success of its widely adopted, free open-source offering, subsequently employing a dedicated sales team to facilitate customer onboarding with their initial paid applications. While Zoom doesn’t offer an open-source product, its growth was initially fueled by a thriving community of enthusiastic users utilizing a free service – a trend that accelerated with the widespread shift to remote work last year. As users became accustomed to Zoom’s intuitive design and ease of operation, they transitioned to paid subscriptions for extended calls and advanced features.

Strategic Timing for Enterprise Sales Force Activation. Many billion-dollar B2B organizations have demonstrated skill in identifying the optimal moment to deploy an enterprise sales force to secure larger contracts. Snowflake (fiscal 2021 revenue: $592 million) exemplifies this strategy. The data company initially adopted a low-touch, bottom-up sales model that proved highly successful, valuing the company at approximately $3.5 billion by late 2019. Subsequently, the company appointed Frank Slootman, former CEO of ServiceNow (2020 revenue: $4.5 billion), to bolster enterprise sales and drive the company towards an IPO. Since Slootman’s arrival, the company’s revenue run rate has more than doubled, alongside increased investment in sales and marketing. Snowflake currently boasts over 77 customers contributing more than $1 million in annual revenue, a significant increase from the 31 prior to Slootman’s tenure.

Snowflake has also benefited from a simplified pricing structure centered on consumable units, with billing based on actual consumption. This approach, also utilized by Twilio and MongoDB, instills confidence in customers, assuring them they will only be charged for the services they utilize. This also aligns with the billing structures of major cloud providers, such as AWS and Google Cloud, streamlining payments and fostering positive relationships.

Dropbox, a file/storage service with fiscal 2020 revenue of $1.9 billion, underwent a comparable evolution. The company’s regulatory filings indicate that 90% of its revenue originates from self-service channels, but “once prospects are identified, [our] sales team works to broaden the adoption of [our] platform into wider-scale deployments.” As of December 31, Dropbox had 15 million paid users, including 500,000 teams utilizing Dropbox Business accounts.

Evolving from a Single Product to a Diversified Portfolio. Initially, your focus will likely be on a single product addressing a specific need. This is a prudent approach. However, once you establish leadership in a particular product category, expanding into related areas with new offerings can be advantageous. Developing this roadmap early is crucial, as is determining the appropriate timing for its implementation.

Crowdstrike (fiscal 2021 revenue: $874 million), a security firm, initially concentrated solely on endpoint security, a market where it achieved success but also faced considerable competition. The company now provides a broader platform encompassing cloud security, threat intelligence, and log management, among other products.

Atlassian, originally focused on project management and collaboration software, has broadened its scope to include online chat, task organization, and incident management. Similarly, Datadog* – founded in 2010 with a narrow focus on cloud-native infrastructure monitoring – has diversified into application-performance monitoring and log management, achieving revenue of just over $603.5 million in 2020.

Strategic Growth Through Mergers and Acquisitions. As your company grows, organic expansion may become insufficient. You will need to explore external opportunities, such as acquisitions, to rapidly integrate missing product functionality without disrupting the focus of your existing teams. (Atlassian’s product diversification was largely driven by acquisitions.) These acquisitions can range from large, transformative M&A deals to smaller, incremental tuck-in acquisitions.

Recent trends indicate that several billion-dollar B2B companies are pursuing innovative – and substantial – M&A strategies for growth. Salesforce has been a particularly active acquirer in the tech sector over the past decade, acquiring companies such as ExactTarget ($2.5 billion in June 2013), Tableau ($15.7 billion in June 2019), and most recently, Slack ($27.7 billion in December 2020). Communications/messaging API provider Twilio has also demonstrated a preference for inorganic growth through acquisitions, including customer-data platform Segment ($3.2 billion in October 2020).

Prioritizing Talent and Cultivating Company Culture. Attracting and retaining the right talent, and effectively managing company culture, has consistently been a significant challenge for rapidly expanding B2B companies. Now, with the disruption of traditional office culture by COVID-19, these issues are even more complex. Will you adopt a fully remote model? Will you recruit C-level executives from anywhere, without requiring them to relocate to a central location? If you choose a hybrid approach, how will you address the costs associated with existing office leases in expensive cities like San Francisco or New York?

Diversity and inclusion are also critical considerations, as research demonstrates a direct correlation between these factors and a company’s financial performance. Several billion-dollar B2B companies are making significant strides in this area. Salesforce CEO Marc Benioff previously announced a $3 million investment to equalize pay between men and women at his company; by 2019, Salesforce had allocated over $10 million to increase the compensation of female employees. Okta, a billion-dollar B2B company, recently published a comprehensive State of Inclusion report detailing its efforts around “DIB,” or diversity, inclusion, and belonging.

“We are committed to DIB because it’s not just the right thing to do, but because it’s the smart thing to do for our employees, our community and our business,” CEO Todd McKinnon stated in the report’s introduction. Transparent initiatives like these are essential for attracting top talent.

Emerging Billion-Dollar Companies in the B2B Sector

A shift in focus towards the end-user, rather than solely the purchaser, coupled with the implementation of self-service and viral marketing strategies common in consumer technology, is enabling innovative B2B tech firms to sustain substantial growth.

Specifically, these companies are capable of maintaining annual revenue increases of 50% or higher, even while operating at a scale of $300 million to $500 million.

Optimizing Growth and Profitability

Leveraging user and developer communities to enhance research and development efforts, alongside a reimagining of traditional enterprise sales approaches, allows for the streamlining of customer acquisition costs.

This, in turn, leads to reduced operational expenses and improved profitability, potentially exceeding 30% operating margins at scale.

Future Valuations and Predictions

The next wave of successful B2B tech companies are poised to reach valuations of $50 billion, and potentially even $100 billion.

It is anticipated that an increasing number of these high-valuation companies will emerge throughout this year and into 2022.

*Indicates a company currently or previously within the Battery Ventures portfolio. A comprehensive list of Battery Ventures investments can be found here. Past investment performance is not indicative of future results, and no assurances can be made regarding the profitability of any identified investments or future recommendations.

Information sourced from external parties is considered reliable but has not undergone independent verification for accuracy or completeness, and its validity cannot be guaranteed. Battery Ventures assumes no responsibility to update or amend this content, nor to inform readers of any changes or inaccuracies in the information presented.