State of the Cloud 2023 - with Janelle Teng, Bessemer Venture Partners (Episode #1)

**Ray Reich** (0:00)
Hello, I'm Ray Reich, Founder and CEO of RevOp Squared, and your host of the Metrics that Measure Up podcast. We talked 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.
Welcome to today's episode of the Metrics that Measure Up podcast. Today, we are joined by Janelle Teng, Vice President at Bessemer Venture Partners. We'll be covering four main topics from the Bessemer Venture Partners State of the Cloud 23 report with Janelle. First, recap of the cloud performance in 2022 from an equity value perspective. Second, current trends here in May 2023 in VC and private equity investing. Third, some of the key performance metrics that investors are looking at, maybe with a little bit more of a granular lens in 2023 Fourth, the top predictions for the cloud in 2023 from the report. Janelle, please take a moment to give a brief background of your journey to becoming a guest on the Metrics that Measure Up podcast.

**Janelle Teng** (1:24)
Thank you, Ray. So great to be chatting with you today. Hey everyone, I'm Janelle, a Vice President on Bessemer's Growth Equity Team, where I focus on Series B to pre-IPO investments in enterprise software and cloud infrastructure. I'm a co-author of Bessemer's annual State of the Cloud Report and also work on the firm's Cloud 100 initiatives. For those who aren't familiar with Bessemer, Bessemer is a global venture capital firm with 20 billion in assets under management. We invest in many areas across enterprise software, consumer, and healthcare at all stages from seed to pre-IPO. We have a particularly strong track record in Cloud investing, having partnered with companies in this space for over two decades now. We currently hold the record for the most number of Cloud IPOs and M&A's across all US venture capital firms. I'd like to say when we talk about the Cloud, I think we do know what we're doing here. Examples of our past and present portfolio companies include the likes of Shopify, Twilio, OfZero, Pinterest, HashiCore, LinkedIn, and Twitch.

**Ray Reich** (2:28)
Pretty impressive roster there, Janelle. And I go way back over 20 years, even before one of your partners, Byron Deeter, was a partner. I worked with him and he was a founder and CEO of his own B2B company. But here it is May 23, and people are still discussing dramatic changes in Cloud company valuations that happened in 2022, the SaaS occur as we call it, right? So let's go ahead and spend just a couple of minutes with that rearview mirror and specifically looking at things like equity value changes in 2022, but then quickly pivoting to, are we seeing a light at the end of that tunnel now that we're in May of 2023?

**Janelle Teng** (3:08)
Yeah, it's no secret that public Cloud companies really took a drubbing in 2022 and a severe pullback event that, as you mentioned, we call it the SaaS occur here at Bessemer. Since the start of 2022, the BVP Cloud index is down over 40 percent, which is certainly a more marked decline compared to other indices such as the S&P 500 A main driver of the pullback was the external shock of hiking interest rates. As we all know, within the year, we moved out of a hyper-low interest rate environment, really at an aggressive record-breaking speed, and this led to multiple compression and a significant amount of macro uncertainty. In fact, today, the average forward trading multiple of the BVP Cloud index has not just normalized, it's in fact slightly reset below the trailing 10-year average, as well as the pre-pandemic long-term averages. Beyond multiples, the macro instability also impacted business fundamentals. We start seeing that in the second half of 2022, where Cloud companies faced many headwinds stemming from recessionary fears. These are things like lengthening sales cycles and tighter customer budgets. But to your question about whether we're seeing glimmers of hope now at the end of the tunnel, we kicked off the new earnings season a couple of weeks ago, and initial signs do point toward a more optimistic environment. For instance, Microsoft reported better than expected earnings, pointing to AI as a key area for reinvigoration. In fact, Microsoft ascribed one percentage point of Azure growth to AI services.
One percent might sound small, but this roughly translates to 400-500 million in annualized run rate for Microsoft according to Morgan Stanley. The company also noted favorable feedback on its AI-powered business applications. Even though we invest in software startups, we tend to look at these large tech companies and hyperscale vendors as an index for software and cloud purchasing behavior to see if we can learn any market signals. And so this is all quite positive. And year to date, the BVP Cloud index is currently up about 5%.