The Future of Cloud Computing | Untapped Potential

The Expanding Cloud Landscape: Insights from Battery Ventures

Battery Ventures has recently published its State of the OpenCloud report, presenting key data that demonstrates the rapid expansion of cloud services in the latest financial periods.

This report offers valuable context for the surge in capital investments directed towards emerging companies that has been noted over the last year and a half.

Accelerated Cloud Adoption

The onset of the pandemic prompted organizations to adopt cloud-based solutions – encompassing infrastructure, platform, and software-as-a-service (SaaS) – at an accelerated pace.

This shift led to substantial investments, significant initial public offerings (IPOs), and considerable revenue increases for software companies, particularly those leveraging open source code.

Valuation Growth and IPO Potential

The report highlights a notable trend: “The typical valuation for infrastructure-software IPOs has risen tenfold in the past decade.”

Furthermore, the number of infrastructure-software companies reaching a valuation of $10 billion or higher is currently at an all-time high, suggesting a robust pipeline of future cloud-related IPOs.

A Trillion-Dollar Market?

Battery Ventures estimates that the cloud market has the potential to reach a value of $1 trillion.

Given the anticipated future where the majority of work, software development, and computational tasks will be conducted within the cloud environment, this projection may ultimately prove conservative.

Still Early Days for Cloud Computing

The digital transformation is undeniably apparent and impactful.

However, this report underscores the fact that, despite the extraordinary growth figures observed recently, we are still only beginning to realize the full capabilities and potential of cloud technology.

The cloud’s potential remains largely untapped, indicating continued opportunities for innovation and expansion.

Public Cloud Growth and Acceleration

The public cloud market, particularly Amazon Web Services (AWS), represents a substantial and rapidly expanding sector. Amazon publicly discloses its cloud revenue and associated operating profits on a quarterly basis. While Microsoft similarly reports growth for its Azure cloud service, determining the precise figures is more challenging due to its inclusion within broader reporting categories.

Recent data from Battery Ventures provides a platform-specific breakdown. According to their analysis, AWS achieved a $59 billion annualized run rate in Q2 2021. Azure followed with $37 billion, and Google Cloud reached $19 billion. These figures were calculated prior to the release of Q3 results from these companies.

Notably, Battery’s Q2 data indicated a collective growth rate of 44% compared to the same period last year. This represents an acceleration from the 36% growth observed in Q2 of the previous year, during the initial phases of the pandemic. Since Q2 2020, the expansion of the public cloud has consistently remained stable or increased.

Considering the significant financial sums involved, the increase in growth from 36% to 44% is a substantial development. The combined annualized run rate for these three cloud platforms reached $115 billion by the end of Q2 2021.

It is important to recognize that AWS generated over $16 billion in revenue in the most recent quarter, a considerable increase from the $11.6 billion reported during the same quarter last year. Despite its established presence since 2006, AWS continues to experience public cloud growth nearing 40%. Both Google and Microsoft also demonstrated strong performance, resulting in a market-wide run rate of $180 billion, expanding at a remarkable 37% based on Q3 data. Battery’s assessment is therefore well-supported.

Growth acceleration from pandemic lows isn’t limited to public cloud platforms. Battery also observes similar trends among infrastructure software companies. Businesses like ZScaler, Okta, DataDog, and CrowdStrike experienced a low point in Q2 2020, with an average next twelve months (NTM) revenue growth of only 19%.

This metric has since rebounded to an average of 23%. The initial months of the COVID-19 pandemic presented challenges for cloud software and services generally, but subsequent economic shifts spurred a recovery in growth.

• AWS: $59 billion run rate (Q2 2021)
• Azure: $37 billion run rate (Q2 2021)
• Google Cloud: $19 billion run rate (Q2 2021)

Key Takeaways

The cloud computing industry is experiencing sustained and accelerating growth. This trend is driven by increased adoption of cloud services and the evolving economic landscape. Infrastructure software companies are also benefiting from this momentum.

The Ascendancy of Cloud-Based Software Development

Last year demonstrated the significant potential of cloud-based companies, with UIPath achieving a final private valuation of $35 billion prior to its IPO. Similarly, Databricks recently secured $1.2 billion in funding, resulting in a $38 billion valuation. These organizations are now realizing substantial financial gains.

While UIPath’s market capitalization has fluctuated since becoming publicly traded, it remains above $28 billion. This illustrates the continued strength of the cloud software market.

As highlighted by Battery, cloud-native solutions are experiencing rapid growth, evidenced by substantial valuations, successful IPOs, and promising prospects for long-term sustainability as public entities. Businesses heavily reliant on on-premises infrastructure are, in effect, utilizing outdated strategies.

The Valuation Impact of Cloud-Native Infrastructure

Companies specializing in infrastructure software are increasingly prioritizing their cloud-native offerings. These offerings are demonstrating faster growth rates compared to their on-premise alternatives and are directly correlated with increased company valuations.

Dharmesh Thakker, a general partner at Battery, explained that MongoDB’s cloud product, Atlas, is expanding at a rate of 83%, while its on-premise business grows at 13%. This disparity is a key driver of the company’s overall value creation.

Battery’s analysis reveals that cloud revenue is increasing at two to three times the rate of on-premise revenue for recent IPOs, directly influencing valuation increases.

The data from Battery indicates a significant shift in market perception: “The typical cloud-infrastructure software IPO now commands a valuation of $12.8 billion, exceeding the average valuation from five years ago by a factor of ten.”

• Cloud-native offerings are experiencing substantial growth.
• Higher company valuations are directly linked to cloud revenue.
• On-premise infrastructure is becoming increasingly obsolete.

The trend clearly demonstrates a preference for cloud-based solutions and their impact on company worth.

Customer Size and Business Model Observations

Battery’s recent report presents a compelling argument suggesting that specializing in a specific customer size may not be as beneficial as previously thought. Their analysis reveals that companies demonstrating longevity successfully engage with both small and large clients.

MongoDB, Elastic, and Confluent are cited as examples of cloud-based businesses that effectively cater to both self-service needs of SMBs and mid-market firms, alongside providing dedicated sales support for enterprise-level customers.

The Value of a Diverse Customer Base

The term “enduring” is acknowledged as adaptable, but the core idea is that a broader, more varied customer base contributes to greater business resilience and long-term success.

The report also highlights the increasing interest from venture capital firms in open source startups, a trend that has been previously covered by TechCrunch.

Growth in Open Source Investment

Specifically, investments in open source and cloud-native companies have risen significantly, reaching $53.4 billion in 2021 compared to $12.4 billion in 2016.

While the overall amount of capital flowing into tech companies is substantial, this figure emphasizes the considerable investment being directed towards businesses built on open source technologies.

Driving Forces Behind the Investment

This surge in investment is directly linked to the accelerating demand for cloud products, as previously discussed.

This growing demand forms the basis for many venture capital investment strategies.

Considering Battery’s perspective that businesses of all sizes represent potential customers for durable cloud companies, it’s reasonable to conclude that the demand for cloud products will extend beyond large corporations.

Every organization will require software solutions, and investors are actively seeking ownership in the future toolkit of these businesses.

The Future of Cloud Adoption

Battery’s report suggests a future where startups increasingly adopt a cloud-first approach.

While some might anticipate a slowdown in growth as we move beyond the pandemic, the prevailing trend indicates that companies will continue to accelerate their transition to the cloud, having already initiated the process.

Consequently, a sustained period of growth may be anticipated for the cloud sector in the coming years.