Investment

The cloud-based software revolution is the next big investment boom, says family office

The performance of cloud-based software providers is set to eclipse the world’s Fang current internet giants – according to Bessemer Venture Partners. 

BVP believes six companies are set for sector dominance – Microsoft, Twilio, Salesforce, Amazon, Adobe and Shopify. It has branded the group MT SASS. 

Each of them uses the cloud to sell Software-as-a-Service (SaaS) plus scores of other winners like PayPal, ServiceNow,  Zoom and Square. 

SaaS revenues are likely to grow from $258 billion in 2020 to $364 billion in 2022…

Their share prices have doubled in a year, according to the Bessemer-Nasdaq Emerging Cloud Index, comprising nearly 50 stocks. 

The Cloud Computing ETF sponsored by Wisdom Tree has risen 95% since inception in 2019.

BVP, backed by multi-family office firm Bessemer Trust, has played a big role in getting family offices involved along established names like Iconiq Capital, Bain Capital, Sequoia and Li-Ka Shing’s Horizons Venture. 

The Bessemer family office has always taken pride in being at the cutting edge of new corporate opportunities, as described by Family Capital on 27 October, opening an office in Silicon Valley back in 1975. 

The cloud is accessed by racks of, say, 50,000 servers connected to network clusters. The world has hundreds of data centres each capable of storing 1 billion terabytes of data and estimates say we generated 40 billion terabytes last year. So there is still spare capacity. 

According to Aaron Levie, CEO of SaaS content manager Box: “The cloud is becoming as fundamental to how the world runs as the electric grid, telecom network, or the railroad.” BVP does not disagree. 

SaaS companies service clients previously more used to using internal or external IT programmers. Boston Consulting Group says SaaS will control 40% of the software market this year. BVP believes it will comprise the “vast majority” of software applications by 2030. 

Service supplier BMC says 93% of chief information officers are planning to adopt, or upscale, a broad range of SaaS applications, including ancillary services.

We do not sense the importance of SaaS because everything takes place behind the scenes. But services from the cloud have become essential to big brands like McDonald’s, Netflix, Uber, Pinterest, Linkedin and Spotify. 

Companies like Shopify and Salesforce help clients win, and retain, business. Remote working, transactions, human resources, and secure payment applications are more specific services which have boomed in the pandemic, as face-to-face contact has shrivelled.

More complex content can be downloaded through providers like Google App Engine and Amazon Web Services. Robotic processes are available from the likes of UiPath and Automation Anywhere. 

With the help of machine learning and robotics, Hyperscience, backed by BVP, wants to help executives manage their companies. Services such as 3D Printing, the internet of things and self-driving cars will also rely on SaaS.

SaaS revenues are likely to grow from $258 billion in 2020 to $364 billion in 2022, according to consultant Gartner, as downloads become increasingly sophisticated, easy to download and client-friendly.  

Service provider BMC says: “Customers are increasingly adopting the subscription-based pricing model to satisfy growing IT needs –despite limited IT budgets, particularly for SMEs and startups.”

And the businesses have the potential to be highly profitable, given that stocks Wisdom Tree ETF can already boast average gross margins of 69.7% against 46.8% from the S&P 500 index. Booming forecasts led to a stream of IPOs last year. 

Acquisitions capped by Salesforce’s $28 billion bid for Slack was just one of a stream of acquisitions as firms jostled for leadership of their particular niches. 

There is certainly no shortage of opportunities and competition is growing. But BVP believes the biggest players will end up dominating the industry.

This was the case with the Fang internet giants – Facebook, Amazon, Apple, Netflix and Google – who collectively generated 2,300% over the last decade and helped the S&P 500 gain 215%. And MT SASS has already started to outperform them.

Shopify CEO TobiasLütke points out: “Reaching scale not only means you’ve captured a large slice of the market, but also that you’ve set the pace of innovation for the rest of the industry.”

This is true to Gorilla Economics invented by management consultant Geoffrey Moore where a hi-tech business with a 50%-plus market share is well-placed to retain and fund its leadership for as long as growth continues.

BVP points out Microsoft’s SaaS business is growing by 50% a year. CEO Sataya Nadella, renowned for his cloud expertise. Amazon founder Jeff Bezos is enjoying success with Amazon Web Service, growing by 30% a year.

Adobe has reinvented itself to offer creative cloud services. Salesforce has a strong vision for expansion into client and workplace services. Twilio has taken leadership in cloud communications. Shopify has carved an awesome reputation for helping clients build businesses. 

Many of the services generated by SaaS are already exciting consumers in the same way they were enchanted by the automobile and aeroplanes of a hundred years ago. If we ever win the war against the pandemic, they could help the market to roar yet higher.

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