Say goodbye to unicorns. The cloud centaurs are here.

Protocol caught up with Bessemer Venture Partners’ Kent Bennett to discuss the state of the cloud, the new SaaS models poised to make a dent on the industry and why the firm developed a new SaaS milestone.

​Bessemer Venture Partners' Kent Bennett

Bessemer Venture Partners developed a new SaaS milestone that it’s calling the “centaur,” for startups that reach over $100 million in annual recurring revenue.

Photo: Bessemer Venture Partners

Kent Bennett thinks the SaaS business model is the “greatest business model in the history of the planet.” As a partner at Bessemer Venture Partners, it’s fitting that he’s bullish on the cloud: Bennett was one of the main authors of Bessemer’s annual State of the Cloud report, which gives a bird's eye view of what’s happening in the cloud economy.

In the report, Bessemer analyzed everything from the new ways SaaS companies are trying to monetize their software to what areas are still underserved by SaaS. The firm also developed a new SaaS milestone that it’s calling the “centaur,” for startups that reach over $100 million in annual recurring revenue.

In a recent conversation with Protocol, Bennett discussed some of the latest trends in enterprise SaaS, from the rise of the small business cloud and the importance of cloud marketplaces to why annual recurring revenue is a much more important sign of a company’s health than valuation.

This interview has been edited and condensed for clarity.

Is there a market opportunity for more SaaS companies to service [small businesses]?

Yes, totally. The big narrative that we watched take place over the last 20 years of SaaS investing is it started horizontal and it started enterprise. So at first, this crazy notion of your software is coming from the internet and you're going to put your data in the internet —in the early days, it was your customer data — only big companies, and innovative ones at that, would go for that [idea]. And then for a decade, SaaS was really a big company, horizontal idea. And it took on all these sort of classic software functions of HR software, customer software, all that kind of stuff.

But over the past decade what we've seen is when you build a piece of software that is the core operating system for a very specific type of business, many, many good things happen. First of all, there are 1,000 features that are specific to somebody who runs a yoga studio, that you'll only build if you're only focused on yoga studios. And so over time building those 1,000 features, [customers] come to love you, they come to think your product is the thing that does everything they need, and you build some natural defensibility because anyone who wants to copy you has to spend the time to build those 1,000 features themselves.

The second thing that happened, which is almost a more powerful thing, is that once you are the core operating system of this small business, this restaurant, this dental practice, whatever it is, you're in a better position to serve them with things beyond software than any of the legacy providers.

A simple example is lending. Who's better at deciding what to lend to a restaurant: the software company that has every transaction that restaurant does every day, plus every transaction of every restaurant in the area and tens of thousands of other restaurants, or the bank down the street that asks them to fax their latest transaction record? And so of course these software companies just have much better information and ability to offer some of these integrated financial services.

Is that part of what you would consider those “indirect monetization models” that the report talks about?

That’s what it is. I would say beyond the sort of obvious bundled financial pieces, which are probably the most common indirect monetization plays we see, we’ve also seen some opportunities when businesses are transacting with other businesses. So imagine the suppliers they're purchasing from. You can build software that helps broker those transactions and can monetize it because you may lend against the transaction balances, or you may have advertising opportunities depending on the industry. So there's a couple other ways to get paid beyond just the embedded fintech. But that trend is still early in many industries, still nonexistent in some industries, and just getting started.

One thing I found really interesting in the report was the prediction that the majority of the Cloud 100 will be selling through marketplaces. What are the benefits of selling through a marketplace on the buyer’s end and then on the seller’s end?

It’s all about lowering the friction of the transaction. And it's going to depend widely on what the software is, what's the appropriate marketplace for it to sell on.

But right now, we live in a world where, imagine if, instead of grocery stores, you had to have a direct relationship with a cereal provider and the milk provider and the strawberry provider. That's the software world. Most of this stuff is sold direct. And so, of course, it's going to go to consolidated marketplaces where a buyer can see all the vendors in one place, manage all their vendors in one panel and have some comfort around pricing.

In some software categories, the price has been a little opaque and that slows down transactions. People selling software aren’t selling a used car where their goal is to get a better price on the next customer; they just want the transaction to go quickly and smoothly. And so I think for a lot of these companies, when the customers want it, they'll be happy to sell through a marketplace and just speed up the transaction.

One of the terms people have typically used to mark success is the term “unicorn.” Why do you see a need for this new way of thinking about things [centaurs] as opposed to just going with unicorns?

Unicorn was a perfect term when it was coined, like a decade or so ago. I think there were 14 or 15 private companies in the world that had a billion-dollar valuation. Most of them would have had revenue at that time, if they were in the SaaS world, of 100 billion, because at that time, SaaS companies were trading at 10 times revenue.

Back then unicorns were centaurs for the most part. And what happened, unfortunately, is we held up this term unicorn and we created a strong incentive for an entrepreneur to declare their unicorn status as soon as possible because when you were a unicorn it made it easier for you to attract attention, for you to hire people, possibly for you to attract other investment from others who wanted to invest in unicorns.

And so there were two ways to get there: One was to wait your time and grow a lot of revenue, and the other way was to just aggressively fundraise as hard as possible and try to basically pull your valuation forward. And so as a result, we saw something like several hundred unicorns created last year. Ten years ago, there were 14 in the world. Last year, there was 1.5 to two created every single day. And a lot of them, and frankly, we don't think are gonna stand the test of time.

Some certainly will, some are great companies. But some of them took a short path to a puffed-up valuation. And it's a big contributor to the noise that we're all feeling right now. So for us, this is just like a return to basics: Let's measure SaaS companies by how productive they are and how much revenue they have.

There are some regions of the world where public cloud spend is still relatively low maturity wise: The report was talking about Latin America and the Asia-Pacific region. Why is that?

Some of it is just availability of the cloud product and focus on those markets. So in some of these categories that may remain horizontal, the U.S. has been a leader and these companies have focused domestically. In other countries and maybe categories, where the U.S. leader is not likely to be the local leader for whatever reason, I think entrepreneurs in other markets have been a few years behind in sort of recognizing the power of the cloud.

If you were an entrepreneur in China five, six, seven years ago, you were much more likely to be caught up in the consumer wave and want to start a consumer company. But now, I think those entrepreneurs are seeing the cloud and seeing the opportunity there, and we're gonna see that wave.

What do you make of some of the macro trends? I think about the supply chain crisis, labor shortages. How are you thinking about those things from an investment perspective and startups that may be trying to address some of those challenges?

For us it's a huge opportunity for software. So we spend a ton of time focused on what we call B2B marketplaces, B2B procurement and supply chain software, because trillions and trillions of dollars of the global economy are still being mediated by fax machine and telephone. So there's just massive and obvious opportunities.

A lot of these markets are slow tech adopters in complicated spaces and may frankly not have a budget for software. And so some of these indirect monetization models that we spoke about earlier are the key to unlocking many of these spaces. Because maybe you can't come in and charge some big software fee for something, but if you come in with a free piece of software that mediates supply chain or procurement, there's some ways to get paid indirectly. And so that will start to unlock some of the spaces, but the need is pretty obvious.


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