Cloud Startups Must Prove Themselves With Revenue Growth

• Bessemer VCs say cloud startups’ huge valuations don’t indicate success like they did previously.
• Revenue growth will show which startups can live up to their valuations in the downturn, they said.
• Here are some more trends the VCs found from analyzing top cloud startups every year since 2016.

Cloud-startup valuations are at an all-time high after a record amount of funding hit the sector over the past two years, spurred by the pandemic and move to remote work. But as the downturn in the public market spills into the private market, valuations can paint an overly optimistic picture — or even misrepresent — companies’ success.

In the current market conditions, evaluating companies based on revenue and business fundamentals is becoming increasingly important and a better indicator of success, Bessemer Venture Partners said in a report analyzing trends from its list of top cloud companies. 

Bessemer and Forbes have published “The Cloud 100,” a list of the top 100 private cloud companies based on both quantitative and qualitative data, annually for the past seven years. Bessemer venture capitalists say they’ve seen the valuations and revenue for the cloud startups on the list rise dramatically over time.

“While fears of recession, decreased purchasing power, and forecasted longer sales cycles are being often talked about in cloud company board rooms, thus far the performance of Cloud 100 companies continues to defy gravity,” Bessemer partners wrote in the report.

The VCs — who have invested in cloud firms like Twilio and PagerDuty — found that the average growth rate for companies on the “Cloud 100” list increased to 100% from the year prior as opportunity for cloud startups continued to grow. At the same time, the average multiple went down. The pressure to live up to these sky-high valuations is on, they said.

Beyond the movements around valuation, the report also dives into trends around specific categories — like fintech and productivity — as well as the growing global competition in the space. Here are the top trends the Bessemer VCs see in the cloud-startup space based on this year’s report and seven total years of analysis.

Cloud startups will need to come through on business fundamentals to live up to their sky-high valuations

A record $129 billion in VC funding went into the cloud market last year, according to PitchBook. This has driven valuations to astronomical levels, as is reflected in the jump in median valuation in this year’s list.

To qualify for the list, companies must have reached a $1 billion valuation, often referred to as unicorn status, though for the past few years, all the companies have exceeded that. Last year, the median valuation on the list was $3 billion; this year, it was $4.6 billion. Additionally, the total value of all 100 companies increased 43% from last year, Bessemer’s analysis found.

Despite high valuations, the average multiple for companies on the “Cloud 100” list decreased slightly from 34 times last year to 30 times this year, the partners said. At the same time, the average growth rate for companies on the “Cloud 100” list increased to 100% from a year prior. 

Those trends indicate that while multiples and valuations will probably compress, the cloud market is still going strong and that companies with strong business fundamentals are more likely to weather the downturn and live up to their valuations, Bessemer partners said.

“We won’t necessarily see valuations increasing that much year over year next year, but the underlying revenue growth will be material,” Mary D’Onofrio, a partner at Bessemer, told Insider. 

The ability to become core to users’ workflow is driving revenue  

Companies on this year’s list were also judged on a new metric, which Bessemer calls the centaur milestone, that tracks when a company reached $100 million in annual recurring revenue. It’s an important milestone for a cloud company that usually indicates the company has a steady stream of revenue and growing roster of customers who need their product or service. 

On this year’s “Cloud 100” list, 70% of the companies had already hit $100 million in annual recurring revenue, and another 10 were on track to hit it by the end of the year. On average, these companies hit that milestone within eight years of being founded. 

That “happens only when you have a really, really strong product and customer pull,” D’Onofrio said, adding: “What you’ll see across all of these companies is very, very strong customer and user acquisition, continuing to grow, and the ability to become kind of core to a given user profiles’ workflow.”

Opportunity for cloud startups continues to grow as more global companies compete

As cloud technology becomes essential to the way businesses run, the opportunity for startups continues to grow, according to Bessemer. 

Startups creating tools around productivity, collaboration, and design — such as Figma, Airtable, and Notion — saw their valuations increase as remote work made those tools essential for running businesses, D’Onofrio said. In 2020, productivity and collaboration startups on the list were worth $27 billion. This jumped to $56 billion in 2021 and to $116 billion this year, making up 6% of the entire list’s value.

Additionally, while fintech was the most valuable category, mostly due to Stripe’s $95 billion valuation, customer success, marketing, and sales startups were the most represented, with 16 companies on the list. 

Another trend Bessemer VCs have noticed over the years is that the list has become increasingly global. In 2016, it was mostly US companies, but now firms in Europe, India, and China make up more of the list. 

“We’re seeing more and more of the globalization of cloud as the business model gets adopted worldwide,” D’Onofrio said. “And it’s fantastic for cloud as well because there’s more and more TAM to be earned and captured.”

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