Podcast Summary: Metrics that Measure Up – State of the Cloud 2023 (Episode 1)

Host: Ray Rike
Guest: Janelle Teng, Vice President, Bessemer Venture Partners
Date: May 24, 2023

Episode Overview

In this insightful episode, Ray Rike is joined by Janelle Teng of Bessemer Venture Partners to discuss the findings of Bessemer’s State of the Cloud 2023 report. The conversation covers four core topics:

1. A review of cloud company performance and equity value changes in 2022
2. Trends in venture capital and private equity investment as of May 2023
3. Key metrics and benchmarks investors are emphasizing in 2023
4. Predictions for the future of the cloud industry (teased, to be covered in the next episode)

The episode is densely packed with data, analysis, and practical advice for SaaS founders, CEOs, and growth-stage operators.

Key Discussion Points & Insights

1. Cloud Performance in 2022: “The SaaSacre”

(03:08–06:46)

• 2022 was a rough year for public cloud companies, with the BVP Cloud Index down over 40%, a much steeper drop than the broader S&P 500.
• A primary factor: “the external shock of hiking interest rates ... led to multiple compression and a significant amount of macro uncertainty.” (Janelle Teng, 03:44)
• Beyond valuation contraction, business fundamentals suffered as recession fears slowed deals, lengthened sales cycles, and shrank customer budgets.
• Initial 2023 earnings, especially from hyperscalers like Microsoft, hint at a rebound. “Microsoft ascribed 1 percentage point of Azure growth to AI services ... about $400 to $500 million in annualized run rate for Microsoft.” (Janelle Teng, 04:23)
• Despite turbulence, “the average BVP cloud index company still grew twice as fast as the average S&P 500 company” and 90% beat earnings expectations vs. 65% for S&P 500 companies. (Janelle Teng, 06:20)

2. VC and Private Equity Trends in 2023

(06:46–11:23)

• VC and private markets mirrored public pullbacks, with Q4 2022 showing the lowest funding levels since 2018 ($18B vs. $48B in Q4 2021).
• Q1 2023 continued this trend: “the venture market is on pace for a second straight year of declines ... deal count down 35% from Q4 2022, the largest quarter-over-quarter dip since 2016.” (Janelle Teng, 08:10)
• “The declining trend is still actually continuing into 2023,” but optimism around generative AI may lead to a pickup later in 2023. (Janelle Teng, 08:56)
• On timing a market comeback, there’s no consensus: “responses were actually all over the map … unlikely to return to the boom times of 2020 and 2021 anytime soon.” (Janelle Teng, 10:24)
• Key advice: “The best time to raise money is, one, when you don’t need money, and two, when you can get it.” (Janelle Teng, 11:04)

3. The Metrics That Matter in 2023

(12:30–16:40)

• Bessemer’s approach is consistent: look for “category creating businesses ... with sound fundamentals around capital and operational efficiency.” (Janelle Teng, 12:36)
• Principal metrics:
  • ARR growth
  • CAC payback period
  • CLTV to CAC ratio
  • Retention
  • Efficiency score
• Efficiency Score: The poster metric of today’s “age of efficiency.”
  • Sub $30M ARR: Net new ARR / Net burn. Benchmark >1.5
  • Over $30M ARR: ARR growth + free cash flow margin ≥ 40% (“Rule of 40”)
  • Quote: “You’ll notice in both definitions we look at a growth component in relation to a profitability component. We really do this to contextualize the relative trade-off between growth and burn for cloud companies.” (Janelle Teng, 14:05)
• Caution around free cash flow margin: “it can be fudged a little bit ... but it really does demonstrate that if you have excess dollars there, you can funnel these back into investing.” (Janelle Teng, 15:31)
• Rule of 40 is most relevant for companies >$30M ARR. For smaller companies, net new ARR over net burn is preferred, as early stage investments can distort profitability signals. (Janelle Teng, 16:40)

4. Growth vs. Profitability: Shifting Valuation Drivers

(17:32–19:31)

• Heuristic from Bessemer’s research:
  • End of 2021: 1% improvement in revenue growth = 6% improvement in free cash flow margin (for valuation impact)
  • Late 2022: Ratio moved to ~1:1, sometimes favoring profitability
  • Today (Mid-2023): “This ratio stands at 2 to 1, still in favor of growth.” (Janelle Teng, 18:38)
• This underscores how market sentiments oscillate, but also that “growth at all costs” is out, while balanced efficiency is in.

5. Memorable Quotes & Moments

• On existential market shifts:
  “It’s no secret that public cloud companies really took a drubbing in 2022 in a severe pullback event that, as you mentioned, we call it the SaaSacre here at Bessemer.”
  – Janelle Teng, 03:08

• On context and resilience:
  “The cloud model, with its recurring revenue nature, low marginal distribution costs and strong net dollar retention dynamics, is perhaps one of the most attractive business models to be invented.”
  – Janelle Teng, 06:05

• On timing fundraising:
  “The best time to raise money is, one, when you don’t need money, and two, when you can get it. So this way you’re really in the most powerful position possible in negotiations and certainly have more optionality.”
  – Janelle Teng, 11:02

• On efficiency replacing ‘growth at any cost’:
  “Following the SaaSacre of 2022, the cloud world really has shifted from the age of excess to the age of efficiency.”
  – Janelle Teng, 13:19

• On valuation drivers then vs. now:
  “At the height of bull market exuberance … a 1% improvement in revenue growth had the same impact on cloud valuations as a 6% improvement in free cash flow margin … but as we know, the market really turned abruptly … Today … 1% improvement in revenue growth has the same valuation impact as a 2% increase in free cash flow margin.”
  – Janelle Teng, 18:18

Key Timestamps

• 03:08 – The “SaaSacre” and 2022 cloud valuation collapse
• 04:23 – Microsoft’s AI-driven Azure growth as a market signal
• 06:20 – Cloud vs. S&P 500: resilience and overperformance
• 08:10 – Venture capital deal count and value declines Q1 2023
• 10:24 – No clear timeline for return to investment boom; advice on fundraising
• 12:30 – Investor metrics: efficiency, growth, and profitability
• 13:19 – Efficiency replaces “growth at any cost”
• 14:05 – Purpose of the efficiency score
• 16:40 – When the Rule of 40 is relevant
• 18:18 – Evolution of valuation drivers: growth/profitability ratios

Episode Tone & Closing

The tone of the discussion is candid, data-driven, and optimistic—despite the headwinds, both Ray and Janelle express confidence in the enduring strength and adaptability of the cloud business model. The episode ends with a teaser for the next session, which will cover Bessemer’s top five cloud predictions for 2023.

For a detailed dive into Bessemer’s benchmarks, predictions, and practical fundraising advice, this episode is essential listening for SaaS founders, CFOs, and anyone navigating the cloud evolution.