In the previous article, we found that Fortune 1000 companies’ budgets are moving towards more startups that touch upon the pain points, away from incumbent software companies. Funding activity in the enterprise sector has increased by 55.4% in the third quarter of 2019, with startups raising USD 41.5 billion in total.
The market, however, encountered several ups and downs, influenced by the stock performance in the secondary market. Starting from 2016, public SaaS companies have been experiencing a bull run that brought forward revenue multiples to 9.5x during the third quarter of 2018. The correction followed at the end of 2018, with the forward multiple decreasing to 7.1X. A resurgence back to 9.6x followed in the middle of 2019, venture capitalist at Redpoint Tomasz Tunguz wrote.
From a sector-specific perspective, Enterprise infrastructure and Risk & Security have led the way in median dollars raised in 2019. Enterprise infrastructure and Financial services have collectively garnered the most interest from early-stage investors.
When looking at top enterprise tech sectors that received funding from 2017 through the third quarter of 2019, we found a strong consistency across the deal count and deal value. Software / Applications is the top category, receiving the most funding and deal count. We include lots of SaaS applications across different industries in it. Data / Analytics (business intelligence and big data are riding on the crest of the wave) and Enterprise infrastructure (requiring a large investment to scale up for startups, with lower deal count) round out the top 3 categories.
According to an SEG report, over the past three years, Sales & Marketing, Analytics & Business Intelligence and HR & Talent Management remained the top three product categories in terms of M&A deal count.
On the public market, the enterprise software sector continued to see successful initial public offerings in 2019. Average returns on those eight companies mentioned in the picture above are 39.8%. In the Software / Applications sub-industry, Dynatrace provides software that uses artificial intelligence to help companies monitor and manage their business applications. Datadog, offering essential monitoring service for dynamic cloud infrastructure, is the most recent software IPO to open big. Risk & Security have made a presence in the IPO landscape as well, with the listings of web content optimization Cloudflare and Cloud-native endpoint security software CloudStrike making dents in the marketplace.
What is reshaping the enterprise market in 2019? We see plenty of overlooked trends, with more on the horizon: open source software movement, for instance, is gaining a lot more steam. In 2018, Salesforce Ventures injected in Docker, a leading open source solution in the market, and completed the USD 6.5 billion acquisition of MuleSoft. During the shift from propriety cloud software to open source, the community is playing a more critical role in enterprise Product-Market-Fit (PMF) and Go-To-Market (GTM) strategies. The value of getting into a game of network effects within the developer community is clear – it reduces Customer Acquisition Costs (CAC) for SaaS companies.
Developers gain more power in enterprises. On the other hand, we see more automation solutions extending to more people across different departments in enterprises. Collaboration and workflow management tools are changing how designers and engineers work together.
As a result, businesses are becoming more data-driven; solving database scalability and multi-cloud management are also bringing more challenges and opportunities for next-generation startups born in the cloud era. Their idea: managing all resources and workload using orchestration tools to solve the complex problem of managing multiple environments.
“ I’m busy automating. More specifically, I’m developing software to automate everything,” said the founder of open source company HashiCorp, Mitchell Hashimoto. This company’s platform provides a consistent workflow to provision, secure, connect and run infrastructure for any application to help enterprises address the realities of the multi-Cloud. The licensing of open source technology originated a decade ago as a pet project for engineers to democratize access to software. Nowadays, the open source space has moved into a new era, with the successful IPOs of Elastic and MongoDB, IBM’s USD 33 billion acquisition of Red Hat and the USD 5 billion mergers of Cloudera and Hortonworks. Databricks, HashiCorp and Confluent are among the most high-profile IPO candidates in the US. More than 100 of Global 2000 companies had paid for HashiCorp’s products as of 2018. Influenced by the community, open source companies are shifting the trends led by cloud-sourced software vendors. Open source is a powerful distribution mechanism. It drives sales if companies have designed a set of mature GTM and commercialization strategies. Though it is now used by large enterprises everywhere, the shift is still in the early stage of development.
What is shaping tomorrow?
Security, security, security. The top cloud challenges in 2019 are governance, expertise and security. Among them, we see security as the top priority, as SaaS is largely replacing traditional on-premise COTS applications over time. During this process, it has disrupted the conventional relationship between enterprises and customers on security. One McKinsey survey suggested that many SaaS vendors are yet to understand the new reality. One implication here is DevSecOps – also known as a new set of security solutions for DevOps teams.
Serverless services draw clients in further. In the very beginning, the cloud provided VMs with a fixed pool of hardware. Then it moved on to provide managed services with some popular use cases, say, Database-as-a-Service (DBaaS). A significant number of public cloud users are now leveraging services beyond just the underlying compute, storage and network services. Popular serverless services are machine learning, relational DBaaS, push notifications and data warehouse.
Changing pricing model. Pay-as-you-go models are expected to substitute subscription to become the new mainstream in a cloud-native environment, just as the subscription broke the dominance of licensing when the cloud adoption became popular. Emerging companies adopting the new pricing way are Databricks and Snowflake.