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BVP Cloud Computing Index – August 2013

September 4, 2013

ClthCASV9C5Joud computing allows users to use computing resources through the Internet using web-based tools and applications.  This is the way most of us access our e-mail, interact on social media and increasingly, work with word processing and spreadsheet software.  Increasingly, businesses are moving their operations and financial management applications from single-tenant software hosted on their own servers to “the cloud.”

Cloud computing companies largely sell their software through subscriptions and are generally referred to as software-as-a-service (“SaaS”) companies.  It is a good practice to set a minimum period for the subscription term, since it can often be expensive to sell to and “onboard” a new customer.  Many SaaS companies’ require at least a twelve-month subscription period.  It follows that a critical factor in the success of a SaaS company (and many other types, for that matter) is customer retention.  The more customers that leave, the more expensive it gets for a company to keep up its revenue stream, since it costs more to find, sell and begin service to a new customer than it does to maintain an existing customer.


Bessemer Venture Partners Cloud Computing Index

Bessemer Venture Partners (BVP) is a venture capital firm that was an early investor in this disruptive technology and supported the development of a number of companies who have had tremendous commercial success developing and selling their cloud software.  They created the BVP Cloud Computing Index,  which tracks stock prices for cloud software companies whose shares are traded in the public market.  The index was released in July, when the combined market capitalization for the thirty companies selected reached $100 billion.  The BVP Cloud Computing Index rose 68% from a January 2012 baseline, significantly higher than the NASDAQ and S&P marks, which grew 38% and 35%, respectively.

BVP has just updated their report through the end of August.  They added two companies to the index – Cvent, a company that took advantage of the JOBS act and recently filed for a public offering; and SPS Commerce, a supply chain services company.  The index now includes a total of thirty-two cloud computing companies.

The market continues to show its approval – the index rose to 185% (from the January 2012 baseline) an increase of seventeen points from the July report.   On a “same store” basis (excludes the two companies added in August) the market capitalization increased eight percent to nearly $118.6 billion.  The biggest gainers were the two big dogs of the pack – Salesforce increased $3.8 billion (14%) to $29.3 billion and LinkedIn rose $3.9 billion (17%) to $26.9 billion.  On a percentage basis, the biggest increase (36%) went to Marketo, an advertising technology company with a market capitalization of $1.3 billion.

BVP provides us with some operations metrics as well.  One caught my eye this month – the gross customer retention rate.  As a group, the average retention rate is 89 percent.  Workday, a software company with financial, HR and other applications whose shares have risen steadily since its 2012 IPO, reports a 99 percent retention rate.  That’s hard to beat.  Interestingly, the retention rates that bring down the index average are from some of the companies that sell software designed to find, convert and keep customers.  Four of the five companies with the lowest retention rates (80 – 81 percent) are in this broad category.   Exclude those companies from the calculation and the average increases to ninety-one percent.   Here, the companies selling ways to improve market share are having the hardest time retaining their own subscriptions.  Perhaps customer selection needs improvement, somebody is overselling and setting unrealistic customer expectations or the software is difficult to use.  It could be any combination of challenges that come with these things.  The fact is, sales and marketing is not always that easy and these companies’ customers will always be insisting on reliable metrics, sure-fire methods and quick results.  The market simply may not be giving them time to prove themselves before the next best thing comes along.

From → Technology

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