The Great Migration and the next 10-year cycle in cloud

Over the next 24 months, we believe that we will witness a profound migration of senior cloud talent from public and late-stage private SaaS companies to healthy early- to mid-stage companies that offer a more rewarding professional growth opportunity and higher financial return potential.

Here is why:

The party is over

And what a party it was! For well over a decade since the 2008/2009 Great Recession, the cloud market has known only one direction: up and to the right.

Almost without interruption, the market grew, public investors got the hang of SaaS economics, and IPOs became more frequent and more lucrative. That swelled private-market investment activity, valuations and the list of cloud unicorns. The pandemic-induced rush to digital transformation of business, paired with stimulus money and cheap capital, acted as a massive catalyst, causing conditions to become unsustainably frothy in 2020 and 2021.

But since late 2021, public cloud stocks have given up 50% of their combined market capitalization, and the IPO window has all but closed down. Private late-stage companies that took big rounds at high valuations face valuation resets, most of which are only beginning to materialize in their annual 409A FMV assessment cycles.

Venture firms, meanwhile, have drastically reduced their investment activity, and terms have swung back in favor of investors. Funding rounds are smaller, at lower valuations, and are finalized after more due diligence. Supposedly, there is a lot of dry powder in new funds, but investment firms have recognized that they need to be careful and only invest in winners to make up for the much lower return potential of their 2021/2022 investments.

The next 10-year cycle is starting

We have been here before in 2000 and 2008. Technology and cloud companies tend to see boom cycles that seem to last around a decade or so, and after a crash, the next cycle starts.

Now is the time for great new businesses to be born and to grow. There are specific and logical reasons why dozens of category-creating cloud companies got their start at or just after a downturn. See, for example, Box, Coupa and Anaplan (all 2006); Zuora and ServiceMax (2007); Zscaler and Twilio (2008); and PagerDuty and Okta (2009).

We contend that 2022 is the start of the next 10-year cycle in cloud, and that is making many people in the space wonder how they should best play their cards.

The Great Migration

The answer is clear once you think about it. Now is the time to start your own company or join a healthy early- or mid-stage cloud company.

Companies are extending cash runways, and cloud leaders are feeling that pain as they lay off parts of their teams and face even more work and pressure. At the same time, much of their equity is probably underwater. Growing back into their past valuations and a lucrative exit are goal posts that have moved far off into the future.

Conversely, early-stage companies were not bid up as much, and many are sitting on right-sized valuations as they begin to scale. There are many great Series A and Series B companies with a strong product and clear product-market fit, a demonstrated GTM motion, enthusiastic customers, a clean balance sheet and an uncomplicated cap table.

As a senior executive, you can own a larger share of equity, build a strong team as talent becomes more available and create a major impact on the trajectory of a company. By the time these companies reach scale, the cloud market will be booming again, creating a more positive outcome in terms of personal reward and financial benefit for these senior folk.

There is broad consensus in venture circles that the early stage is now most lucrative, and although the overall activity is down, many investors in this space have the appetite, capital, know-how and operating experience to fund and help such companies catch this next wave.

For strategic thinkers, it is too good an opportunity to miss.