Rocks Ahead For Cloud Companies in 2020?

2019 was another stellar year for the overall stock market (DJII ending at 28,462 up 22% from 23,328), even better for technology stocks (NASDAQ ending 8,946 up 35% from 6,635), and best for emerging cloud software and services companies (BVP/Nasdaq emerging cloud EMCLOUD ending at 1205.4 up 47% from 823.4). 

So there are ample reasons for cloud software companies to be happy. But was the wealth evenly spread? 

The first half of 2019 saw more than half a dozen IPOs in B2B SaaS: Medallia, Cloudflare, Dynatrace, Slack, Fastly, Zoom and Pagerduty all performed well immediately after their IPO.  However, the stock price of most of these companies stock prices performed far worse than any index by year end. The unweighted average share prices declined 15% between IPO and the end of 2019, and five out of seven were trading below IPO. 

Company	Share price EoY compared to IPO Percent	Market cap $ million, EoY
Cloudflare	-5%	$5.2
Dynatrace	6%	$7.4
Medallia	-16%	$3.8
Slack	-42%	$12.4
Fastly	-16%	$2.0
Zoom	10%	$18.6
Pagerduty	-39%	$1.9

WeWork’s implosion in October effectively closed the IPO window for everyone else for the remainder of the year. Bill.com was the only company to squeeze their IPO in before the very end of 2019. 

While the IPO market took a break large enterprise SaaS companies continued to consolidate via acquisitions. The software analytics space in particular went through a generational wave of acquisitions reminiscent of the first round of M&A in 2005/2006. This time the buyers were Salesforce (Tableau), Workday (Adaptive Insight) and Google Cloud (Looker) instead of SAP, IBM and Oracle. 

Hyperscalers Amazon AWS, Microsoft Azure, Google Cloud and AliCloud have still largely been absent from making huge acquisitions. The growth and size of the hyperscalers far exceeds that of most other software companies, and their firepower will eventually be deployed towards more acquisitions higher up the software stack. Google Cloud’s acquisition of Looker may be the first indicator.

Clearly, there is enough money in the venture capital ecosystem to fund every startup that is worthy.The abundance of capital has trickled down from the large growth fund such as Softbank Vision to seed funds where seed round sizes have tripled since 2012. But the Softbank/WeWork writeoff has demonstrated that large funds are struggling to achieve their target returns. The Softbank Vision Fund has reportedly dialed back on its investment strategy of supersized rounds, and several of their portfolio companies have gone into restructuring mode. 

Are all of these events indicators of more down rounds to come?

Image credit: renemagritte.org