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State of the Cloud 2023 - Top Five Predictions with Janelle Teng, Bessemer Venture Partners (Episode #2)
00:25:51
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- [00:01]
A
Hello, I'm Ray Reich, founder and CEO of RevOps Squared and your host of the Metrics that Measure up podcast. We talk to a wide variety of B2B SaaS and Cloud Thought leaders, executives, investors and people just like you to discuss the metrics and benchmarks they use to make metrics informed decisions. Now, on to today's show. Janelle, thank you so much for coming back and spending some more time with me because I loved how we talked about what's been going on with the cloud market and what was in the cloud report. But let's talk about the future because we're entrepreneurs, you're VC investors. The future is what's most important to us, right Janelle?
- [00:52]
B
Yeah, and I love the what we talked about in the last episode was a little bit more doom and gloom and definitely looking forward, I think we have more optimism. So looking forward to this discussion.
- [01:02]
A
But we did talk about efficient growth and even though you know we're trying to balance growth and profitability, your number one prediction for 2023 was really interesting and it talked a little bit about the importance of efficient growth and technologies enable that. So can you share a little bit more about your prediction number one?
- [01:23]
B
Yeah. As we talked about in the last episode, following the pullback, there is now a rising imperative for efficient growth. And over the last year we've seen many high growth companies in our portfolio really adapt to this new paradigm quickly. They start to implement strategies to drive efficient growth. One of these strategies was to adopt new solutions to help them optimize costs for existing software and cloud spend. And I know you might laugh, it sounds a bit counterintuitive that you're adopting new software to fight existing software spend. But companies are realizing that they really have limited visibility into managing their software costs and risk and and therefore need to leverage really best in class third party solutions to help them along this vector. And so as a result we do anticipate an acceleration and adoption of tools such as Cloud FINOP software to help manage your cloud usage and costs. There are SaaS purchasing solutions to help rationalize vendor spend and there are even engineering productivity tools to improve developer workflows and help to automate R and D resource allocation.
- [02:28]
A
Yeah, it's interesting. I just did a whole series on SaaS spend management. We actually had one of your portfolio companies, founders and CEO Eric Christopher from Zylo. And it's amazing the sprawl of SaaS spend, especially in the go to market functions. It really hasn't been controlled or managed. And there's great solutions out there that just don't help you reduce your costs, but actually increase the efficiency of buying new cloud technology but doing it through a centralized process. But here's one thing I wanted to double click on cloud spend from a delivery of your SaaS solution. You know we have AWS or Azure or Google Cloud. Do you see more and more organizations looking at that cost of goods sold contributor cloud spend as a major operational efficiency opportunity?
- [03:17]
B
Oh, most definitely. I think cloud spend is probably one of the important areas that folks are really paying attention to because that impacts gross margins. And gross margins are set the ceiling for profitability on your business. And we like to say it's at least one of the most, if not the most important metrics for long term health of any SaaS business, especially those built in the cloud. And as an example, public cloud companies with gross margins under 50% structurally find it difficult to then drive over 20% of free cash flow margin. So most SaaS companies actually prior to the paradigm shift really had no visibility in into how much they were spending on cloud services and even why? Because they didn't have proper processes or systems to understand and manage their cloud spend. And in fact, with the sort of paradigm shift in 2022, not only are folks now leveraging new software to help them really manage their cloud finops, they're in fact even conducting like systematic reviews of their code bases to understand what they can optimize. And they're going into refactor code in order to have their code run more efficiently to subsequently sort of drive lower cloud hosting costs?
- [04:29]
A
Yeah, there's a lot of founders and CEOs and CFOs who listen to the podcast and I'm sure they're like, yeah, yeah, I'd love to get my gross margin up from 64% to 70%. Are there any kind of great early stage companies that are providing technology that might help them gain insights and visibility into that Janelle, that you can just share?
- [04:48]
B
Yeah, we actually published a tactical playbook of 40 tactics that our portfolio companies are implementing in order to drive efficient growth. And there is a section there, when you looked at the gross margin section of the report that sort of talks about different software that our portfolio companies are using to help them drive some gross margin optimization and specifically reduce their cloud hosting costs. So it definitely recommend folks to check out that report again. A lot of our research is open source and we like to share best practices within our portfolio as well as to the public and anyone else building sort of cloud software. And so definitely check out that report and it has specific names in there and also as case studies about how, how these solutions were implemented and the magnitude of cost savings that folks were able to experience.
- [05:35]
A
Janelle, can you just for the listening audience, is there a particular section of your website? Is it the Atlas component? Where can they find that?
- [05:41]
B
Yeah, if you go to our website, bvp.com, it's in Atlas, which is our newsletter. And the title of that report is a CEO's tactical guide to Driving Profitable Growth. And in there you'll find again 40 tactics across our portfolio that have been implemented to help drive towards efficient growth.
- [06:01]
A
Now we're in May 2023. We're a B2B Cloud and SaaS podcast. It wouldn't be right if we didn't talk about AI and generative AI and large language models. And in fact, I believe that three of your top five predictions centered around the emergence of AI. So would you mind sharing a little bit more about maybe let's start with prediction three, which is really interesting that the initial value of AI will probably be produced to the user, not to the company. So can you talk a little bit about that?
- [06:35]
B
Yeah, and I love that we're talking about AI because I might be kicked out of the VC club if we didn't mention it in either episode. So the AI and large language model landscape really is evolving quickly. There seem to be groundbreaking announcements or exciting new launches every 24 hours. So at Bessemer, we're really keeping a pulse on where does value accrue the most during this AI revolution. Is it in the foundational models? Is it where the compute and chip providers are? Is it at the application layer? Is it at the data infrastructure and developer tooling layer? So what we've come to realize after looking at the entire stack, is that really the ultimate winner in this AI chapter is probably the end user, since AI will create massive consumer surplus, whether it is in improving an individual's productivity at work or enabling an individual to create new types of content in their personal lives. And I would say this is quite distinct from previous AI chapters. Something we've noticed that is highly unique about the current AI revolution is the unprecedented democratization of AI research through APIs or open source models such that end users now have access to these technologies and can embed and build upon the latest AI developments. And additionally distinct from their predecessors who prioritize enterprise distribution such that corporations could capitalize on new breakthroughs first, today's AI businesses are granting firsthand exposure of the latest technology directly to consumers. So an example is OpenAI releasing ChatGPT directly to the world to the masses. And ChatGPT hit 100 million monthly active users in two months, making it the fastest growing consumer application in history. So what's so exciting about this revolution is that consumers truly have a front row seat and priority access in today's AI revolution.
- [08:34]
A
You know, this is really interesting that it's going to accrue to the end user because I tell a lot of my early career employees, go and learn everything you can because the people who can can master the use of generative AI are going to the people who have real secure jobs. Three years from now you're not going to be put out of work, you're going to have more work because you're the master of prompts, et cetera. But does that say, Janelle, that it's not going to be a traditional sales led selling it at the enterprise level? It's going to be more of a, I hate to use acronyms but PLG or product led growth motion, where the individuals, either consumer or at the companies are going to be the people who introduce it to their company.
- [09:15]
B
Yeah, we, I love that, you know, talking about sort of bottoms up growth because at Bessemer we actually call the phenomenon that we're seeing within generative AI the B2C to B flywheel. This is a business to consumer to business flywheel. And what does that mean? So there, as we've talked about, you know, with ChatGPT hitting 100 million monthly active users in two months, there's unprecedented levels of consumer excitement, consumer adoption and consumer distribution for AI applications today. And this consumer excitement is subsequently really fueling enterprise readiness at rapid speed. So as individuals get increasingly comfortable with AI applications in their personal life and values accruing to them, they are subsequently questioning how they can bring these capabilities into the workplace. So for instance, you know, if, if I can use AI to summarize my notes and my to do list, why can't I use that to summarize my notes at work? If I can ask ChatGPT a question, why can't I use AI for intelligent search and query on, you know, my, my CRM or my company's database? And if I can use chat GPT to create tweets, why can I use AI to create content at work? So what they're doing is that they are really questioning sort of real enterprise use cases. And this flywheel and consumer pool is so powerful and that corporations can't really ignore it and is really driving them to evaluate how enterprises can incorporate AI tools into their workplace. And so we believe that this will consequently drive accelerated growth for AI native companies selling AI products.
- [10:51]
A
Speaking of accelerated growth, I had one of your colleagues on about a little over a year ago, Mary D', Onofrio, who helped author the scaling from 0 to 100 million. But I think it was prediction number five in your State of the Cloud 23 report where you think AI will dramatically and even halve the growth from 100 million to a billion dollars for AI native companies. So can you provide a little bit more color on that?
- [11:18]
B
Yeah, no, that's a very, very bold prediction. But what we've seen at least from the signals of adoption with again, let's say the ChatGPT example where it is the fastest growing consumer application in history, the pull and excitement that we're seeing is so unprecedented where we really believe that the time is now and the sort of the enterprise readiness is there, the consumer excitement is there. And so all the sort of external settings and the tailwinds are so massive that it is going to propel businesses building in this space, selling in this space, to really be accelerating faster than ever before as folks sort of crave new applications of AI in their lives and as well as at the workplace.
- [11:59]
A
But Janelle, in your report you even highlighted like no, Twilio, one of your great portfolio successes went from 100 million to a billion. It took them four years. I think Canva did it in three years. So this big bold estimate is people are going to companies going to be able to grow in 1.5 to 2 years from 100 million to a billion.
- [12:19]
B
Yeah, I think we've seen at least the early signals of some of the AI native companies, at least the first movers. We are seeing that sort of like really highly positive momentum. And again, you know, even the companies that we've talked about in our graph in the report were bottoms up companies. They were companies that were selling, you know, product led growth where they had a lot of developer pool or marketing pool or consumer pool at the bottom that then fueled their B2B business. Again we just see sort of this B to C to B adoption osmosis and flywheel if you will, within the AI revolution to be so incredibly powerful. And that we think is actually going to be magnitudes faster in acceleration compared to sort of non AI native companies.
- [13:01]
A
Well, so happy that I'm in the middle of this industry and able to watch it grow because I don't know if you knew this Chanel, but back in 1995, 96, 97, I was at Netscape, which was kind of, they unleashed the power of the Internet with the browser. And you know how much we have changed over the last 20 years. If we're going to change at twice to speed. Right. Gordon Moore and Moore's law is going to be very happy. Right, because a law that he said was for semiconductors is going to apply to AI. But since we're doing a second half of the episode, we have time to go on prediction number four. And if I'm not mistaken, I believe that was talking about that the application layer of cloud companies are really is where we're going to see the most impact and change initially. What does that mean and can you share with the audience kind of what your perspective is on that?
- [13:49]
B
Yeah, we've chatted a bit previously. What is so unique about this wave of AI revolution is really the democratization of access to AI technologies. So in the past the power of AI was really confined to organizations that had their own research teams or organizations that had a specific focus on AI. And what we see that's so different about this wave is that there is democratization where any company can now embed AI into their products, into their workflows, without needing their own team, without needing their own research group, and really is as easy as a click of a button if you're, you know, plugging in an API. And they're also open source models if you want to build it yourself on someone else's sort of foundation. And so because of that we really see the power for every company in any layer of the stack, especially at the application layer where their main niche may not be in AI. They can now embed AI in many different ways into their products again into their workflows, into their daily operations. And we think that every company will probably be an AI company. That's to say I will be table stakes in the future. Just as if we think about the cloud migration, we have so many companies that migrated to the cloud. Again with Internet and mobile, as we had mentioned before, we have companies sort of moving into that space as well and really re platforming. We think that we're looking at a truly a platform shift where every company will be an AI company or at least have some sort of embedding of AI in their business.
- [15:20]
A
Yeah, for 20 plus years I've been talking about one of the unleveraged assets of B2B SaaS and cloud companies is the transactional data they have in their database to help their customers actually be more intelligent about what this automation can allow them to do to increase efficiency. And I just can't wait to see all these transactional systems become insight and intelligent systems in the future. But like you said, you didn't want to get kicked out of the VC club. I don't want to get kicked out of the citizen of the world club. Even though I didn't bring this up as one of the top things we talked about, prediction number two was really talking about cloud for good. And it was really about how we can look at climate change and different climate variables using cloud technology. So I think that was prediction number two. Do you mind sharing just a little bit of insight on that one?
- [16:13]
B
Yeah. So our prediction number two is that climate software helps to drive the green energy transition. And the time really is now. We've seen the falling price of renewables, we now have new legislation supporting investment into the green economy. We have increased consumer activism, really making us very optimistic about our climate future. And with such significant resources being dedicated to innovation and research in the energy sector, we are then subsequently witnessing the rise of entrepreneurs building for green energy technologies or the emerging ecosystem of renewable energy players. And so to support this sort of growing green economy, if you will, we predict that the emergence of new cloud software will be tailor made to power the energy transition. So very much like vertical SaaS but for climate software.
- [17:05]
A
Got you. So it's powering the greenization of society, not just measuring things like ESG initiatives need. It's actually affecting the rapidity of the change.
- [17:16]
B
Yes, spot on. And there are some categories there like vertical software for solar or EV or heat pump companies. We also have companies focused on distributed energy resource infrastructure. We have project financing and energy developer software. And we also have software focused on the built world. So infrastructure, energy efficiency and sustainable design. So really is quite a robust ecosystem system.
- [17:42]
A
It's interesting once in being a student of the state of the cloud report, I remember, I believe it was last year, it might have been 21, where you talked about marketplaces, especially vertical marketplaces. And this is really kind of a next generation of that. It's the vertical marketplace for the greening of our environment.
- [18:02]
B
Spot on. And again, climate software, as we pulled our Bessemer investment team, climate software and climate marketplaces did jump, you know, a few degrees higher than in our previous sort of sentiment score. So I definitely think the timing is now where we're seeing a rise in entrepreneurship in the space. And we're consequently very excited to back folks that are building there.
- [18:22]
A
And Janelle, I'm sure so many people are listening to this and saying, wow, Janelle really knows what's going on out there in the industry. So I have a lot of aspiring entrepreneurs who haven't founded their own company as listeners. We also have early career professionals who think maybe the VC or private equity kind of path would be very interesting. So here you are, vice president at one of the leading, as measured by ipos, the leading venture capital firm. What would you tell an early career or recent college graduate who wants to become a venture capital? What advice would you give them right now?
- [18:58]
B
You know, I see venture capital and entrepreneurship or founding and whether you're an operator really as two sides of the same coin. It is a very intertwined ecosystem. And if you're really excited about venture capital, I would say you need to be excited about startups as well and really try to learn things from the other side. And so I recommend I myself started my career at a startup before transitioning into being an investor and I think it's made me a better investor, given me more empathy to help the folks and founders that I'm working with. So I definitely recommend if you're interested in venture capital, I would say be interested in startups more broadly and definitely try to learn from the best founders because that will make you a better investor. And you know, in terms of timing, with the power of generative AI really unleashed to the world, I think we're in the midst of a major platform shift in the SaaS landscape and many interesting businesses will be built during this time. Again, I believe this platform shift will perhaps be more powerful than previous inflection points, including the advent of the Internet, the introduction of mobile migration toward cloud, And I think in this Cambrian moment there really is no better opportunity and time to be building in SaaS or at least looking at working at a startup in the SaaS role. So I definitely recommend thinking about that route as well if you are thinking about VC to really just get a different viewpoint and to give yourself more empathy as you go into the financing industry.
- [20:23]
A
I love that some of the best VCs I've ever worked with were also founders and entrepreneurs. They went out and they had that applicable experience which made them so helpful as my VC partners. And you have a unique seat into what's going on in this industry and world class companies and world class CEOs. Is there someone right now, Janelle, that you're like, follow this person. She or he is. They're going to be a rock star in the future?
- [20:50]
B
Yeah. I would highly recommend following Melanie Perkins, who is the co founder and CEO of Canva. And for folks who aren't familiar with Canva, Canva is a cloud startup that wants to empower everyone in the world to design and in full transparency. Canva is one of Bessemer's portfolio companies, but I want to emphasize that I would be recommending everyone to follow Melanie even if Canva wasn't a portfolio company that we work with because for one Canva is the highest valued female founded startup in the world and Melanie really beat all odds to achieve this milestone. For instance, she built Canva from Australia, not Silicon Valley and is a great source of inspiration for all budding entrepreneurs trying to build an enduring global business. And you know the company has also publicly disclosed that it is not just high growth but actually profitable. You know, as we know in a startup land is quite a rare feat to achieve both sides of this sort of power. And Melanie often shares some really solid lessons that are valuable to every founder and startup operator, so highly recommend following her on Twitter and other social media channels.
- [21:57]
A
The last question I wanted to ask you to give the listening audience a chance to get to know a little bit more is what tool every SaaS company should be using. And I'm going to steal your thunder because I'm going to say Canva because even someone like me actually does my own design now on Canva, so it takes a non design person allows me to do at least basic stuff. But is there another tool that you think every SaaS company should be using to help fuel their growth?
- [22:22]
B
Yeah, it's not a tool per se, but I think following the theme of this entire episode, I do think that every SaaS company should at least be exploring how AI can help to supercharge their business both in terms of bottom line impact, you know, such as employing AI tools to boost productivity and maybe automate some workflows like note taking or content creation. But they could also be thinking about embedding AI into their product features to to drive top line growth and I love that. You know you mentioned Canva and this is obviously not not scripted or planted, but Canva actually has incorporated new generative AI tools into their platform and I actually use Canva to create all my charts and presentations and you just type in sort of what you want and it kind of spits it back out for you. So it's like supercharged presentation builder if you will. And it saved me a lot of time and again I'm not particularly I think you're more creative than me, Raym. Not like necessarily necessarily a great designer or professional creator, but it's helped me really produce some really great quality charts and presentations. And so I think everyone needs to at least try out the power of AI in their lives, whether it's with an AI native tool or an existing platform that maybe has incorporated AI features. Definitely something to try out and I think it will just as it's changed your life, it probably changed your personal life and then also can supercharge your productivity at work.
- [23:42]
A
Well, you just told me something new because we're getting ready to publish our 2023 benchmark report that has lots of charts and graphs. I'm going to hop right over to Canva right after this podcast and see if they can automate some of that for me because I hate doing it in my Adobe and Photoshop and doing it that way. Well, Janelle, thank you so much for your time. I really appreciate it. I know you poured your heart and soul, along with some of your peers, into the State of Cloud 23 report. Let me ask you one last question. Is there anything we I didn't ask you that you really want people to go and make sure they see in the report.
- [24:16]
B
I think the last year was a bit of a multiverse, if you will. On one hand we had quite a bit of doom and gloom in the headlines. But what I would say is that I think there is a lot of optimism ahead and I would say check out the report. Even if you're feeling down about the state of the cloud, I think it will show you that there are a lot of areas for optimism. And this is a Cambria moment for the entire industry and there's no better time and opportunity to be building in SaaS. So I'm more optimistic about the State of the Cloud than ever before.
- [24:44]
A
And once again, for people who now want to go read the report, where can they find it?
- [24:50]
B
Yes, if you go to our website@bvp.com and go to Atlas, you'll see the report which is titled State of the Cloud 2023.
- [24:59]
A
Janelle Ting, Vice President of Bessemer Venture Partners, thank you so much for your time. I sincerely appreciate it.
- [25:05]
B
Thank you Ray. So fun to be on with you.
- [25:07]
A
And to our listening audience. If you've enjoyed our conversation with Janelle Taine, you'd like to hear people like Byron Dieter from Bessemer or Nick Mehta from Gainsight, or Jeffrey Moore who wrote Christ into Chasm metrics that measure up. Go ahead and subscribe in your favorite podcast app. Go ahead and give us that five star rating so it can amplify the reach to your colleagues and peers. And thank you so much for listening. And once again Janelle, thank you. Thank you for listening to today's Metrics to Measure up podcast. If you would like to learn more about B2B SaaS, metrics and benchmarks, please visit revopsquared. Com.