Cloud Services: Toughing the Winter Out?

Alex Wang
Mar 10th, 2016
There has been much discussion around the currently unfavorable venture market conditions. As thoroughly discussed in our previous post, “A Down Market: When Liquidity Matters”, both public and private tech markets have been going through a tough time in recent months.  The silver lining here, pardon the pun, may lie in the cloud.

According to CBInsights, between December 1, 2015 and February 29, 2016, three major startups have been confirmed to have gone through down rounds, with two others rumored to have, as shown in Exhibit 1. More alarmingly, 11 companies had “down-exits” for less than what they’ve raised, especially Gilt Groupe ($284M raised, $250M at exit). 

Exhibit 1: Companies (Potentially) Raised Down Rounds Since December 2015 

Source: CBInsights

Among the companies that raised capital in the past three months, we’ve seen ups and downs. In general, institutional investors are becoming much more cautious over valuation and much more sensitive to companies’ fundamental performances. For these reasons, companies such as Foursquare and Jawbone went through significant price corrections. However, we’ve found one sector to remain relatively stable in this market in fundraising- Cloud Services.

Investors Remain Positive on Proven Cloud Services Companies

Cloud services usually have relatively high scalability, high margins, and stable income streams. Traditionally, institutional investors are highly interested in this sector. In fact, venture capitalists indicated highest confidence in cloud services as shown in the 2015 Global Venture Capital Confidence Survey.

Enterprise planning software Anaplan, and enterprise app management platform AppDynamics, respectively just raised their latest rounds in December and November 2015. These two companies continued their price hikes, as shown in Exhibit 2. Compared to the previous round, share prices for Anaplan and AppDynamics increased 42% and 38%, respectively.
Exhibit 2: Original Issue Prices by Round- AppDynamics and Anaplan

Source: VC Experts, EquityZen

So what have these two companies done right?
  • AppDynamics: as an eight-year-old sector leader in enterprise app management, AppDynamics works with leading organizations of all sizes in various fields. Its customers include Nasdaq, Cisco, Direct TV, the Container Store, and OpenTable etc. In 2014, AppDynamics achieved a record-breaking 175% YoY growth in its annual bookings. (latest valuation $1.9B)
  • Anaplan: Anaplan has been able to show consistent and impressive growth as a nine-year-old company. For the year 2015, Anaplan managed to grow its user base by 71%, and currently has 15 global offices. (latest valuation $1.09B)
Source: Company Websites, Press Releases, TechCrunch

In the meanwhile, ad-tech cloud SaaS company BloomReach raised an almost flat round, indicating that while investors are still confident in its future prospect, they are getting more conservative. This could also be partially attributed to the intensified competition in the ad-tech/SEO space.

Exhibit 3: Original Issue Prices by Round- BloomReach
Source: VC Experts, EquityZen

In the Current Market, Company Fundamentals are Key

We believe that no sector in this market is a safe haven. Although cloud services as a whole has been relatively more stable than the other sectors, it’s the company fundamentals that matter the most.

Currently, investors are much less forgiving when they see any unsatisfactory or slightly alarming results. Meanwhile, worse-than-expected fundraising results of high profile companies have anchoring effects over the entire sector. Longer exit horizons also make investors more cautious when pulling out their checkbooks.

Although fundraising has been increasingly more challenging, we are optimistic that companies that have strong fundamentals, continuously demonstrate sustainable growth towards cash generation, and have the ability to defend their competitive positions will either remain favored by investors, or eventually come back up when the down market shifts up. Moreover, many of these companies may already have sufficient cash to tough it out.

Opportunities Exist for Both Shareholders and Investors

For accredited investors, now may be a good time to invest in private stocks as they potentially come with discounts. Investors can thus get access to the upside of high growth private companies’ promising prospects, especially in the cloud services sector. Whereas for shareholders, liquidation now may be a good idea to preserve value, diversify risks, and reduce opportunity through getting the liquidity to invest in a more diversified portfolio. You may find more of our previous analysis on this topic here.

I’d love to hear your thoughts. Drop me a line in the comments section below.

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