As a New Tech Cycle Begins, These 5 Trends Will Shape the Cloud Landscape in 2024

At Cloud Apps Capital Partners, we believe 2025 will be the start of the next 14-year technology cycle, also known as the “Patterson Cycle.” 2024 will be the last year of the ongoing tech downturn, and it will be painful for a number of venture backed cloud companies, venture capital firms, and their investors or limited partners (LPs). However, mission-critical cloud companies with reasonable cap tables will start to see positive signs of this cycle ending and the next one beginning. This is good news for cloud executives, employees, entrepreneurs, venture firms and LPs who all stand to benefit from the start of a new cycle.

It can’t come soon enough. The last several years have indeed been challenging for tech in general — and the cloud sector in particular. Over the past few years, public cloud revenue valuation multiples have fallen from ~20x to ~6x and public cloud revenue growth estimates have fallen from ~30% to ~15%. There has been only one Cloud IPO over the past two years, and the handful of M&A deals that happened were primarily driven by private equity firms taking advantage of lower valuation multiples.

That said, this is not a hair-on-fire moment. Yes, discretionary, nonessential software purchases are taking a major hit and getting unplugged. But mission-critical cloud applications are seeing little churn and are embedding themselves deeper within existing customers.

People in the technology market can feel the talent market stabilizing, and they are looking forward to creating, building, and growing again. Although private company shutdowns will increase in 2024 and those people will be impacted, the worst of the current cycle has passed for the people that make Silicon Valley, Silicon Valley. They are gearing up for the next cycle. This is what we do.

What lies ahead? Here are five trends we see happening next year as the current 14-year technology cycle ends and we transition to a new cycle beginning in 2025.

1: Shutdowns and cloud venture funded company valuation corrections will accelerate

The final act of a 14-year cycle is a correction in venture portfolio valuations, which we believe will come in 2024. New venture investment activity is at its lowest level since 2018, and seed/Series A shutdowns are accelerating according to Carta. We expect this tumult to continue, and valuation corrections will be a consistent theme across the cloud venture funded landscape in 2024. This will be hard for those impacted, but it will be a necessary evil in order to restart the venture market.

It has been at least two years since late stage companies were able to raise hundreds of millions of dollars at what are now understood to be unreasonable multiples. Many of these companies will need to raise capital, despite cost cutting at much lower valuations. Already, their investors have started to lower their investment “marks” consistent with public and private comparable valuation multiples that have been in pre-pandemic ranges since early 2022. Corrections have already started to accelerate, as twice as many venture funded portfolio company valuations were marked down than up in Q3.

2: Limited partner valuations will decrease, but their asset allocations will improve

The value of LPs’ investments in venture capital funds will decrease considerably in 2024, and they will continue to cut allocation to venture capital. But, on a positive note, this will allow them to have a more accurate asset allocation model, which will enable them to invest in new venture funds at the beginning of the next cycle.

Until those valuations correct, LPs will have too much exposure to VC and PE, at 20%-40% of their overall asset value and will find it hard to plan for commitments to new venture funds. This has caused venture firms to slow their investment pace to make their funds last and to reserve more capital for their existing investments, which has reduced capital available to cloud companies that need a follow-on round.

LPs who sat out the beginning of the previous technology cycle, after the 2000 tech crash, missed out on investing in great venture capital funds and great companies, and they don’t plan to make that mistake again.

3: Talented people will flock to notable early and mid-stage cloud companies

The one bright spot in all of this is that technology layoffs peaked in January 2023 and have decelerated every month since. Many high-growth public and late-stage private cloud companies have been increasing profitability due to slowing growth and the late-stage venture funding drought.

The golden handcuffs are off for talented future founders, executives, and employees who were previously concerned about walking away from “in the money” option grants at a public or late-stage company when valuation multiples were so much higher. What’s more, smaller merit raises are now being budgeted by employers for 2024. According to a new Mercer survey, for example, the expected pay raise in the tech sector is 3.3%, which is lower than the 3.5% average raise across all industries and is a significantly lower growth rate than the technology market has seen in many years. Slower growth at big technology companies also means fewer opportunities for promotions which further decreases near-term salary and equity compensation.

People who want to join great early or mid-stage companies to build and grow again will be more likely to move to a mission-critical cloud company with a healthy cap table, and they will receive more economic upside during the next cycle.

4: It will be a great time to start a great cloud company

Salesforce, which launched in 2000 amid the dot.com wreckage, and ServiceMax, which opened its doors during the peak of the Great Recession in 2008, are examples of great cloud companies started during a downturn, and they were prime beneficiaries of the start of a new technology cycle.

During downturns, legacy companies are rewarded for profitability and efficiency — not so much for innovation. I believe this tilts the playing field in favor of seed and Series A experienced entrepreneurs, who are wholly focused on creating the next set of mission-critical cloud applications for executives at companies that are not yet leveraging the cloud and AI. The right end executives at these companies can focus on the applications that really matter to their businesses. Additionally, startups can develop their early products and find their first customers ahead of the start of the next cycle, enabling them to embark on the path to market leadership.

5: Classic Series A will be more important than ever

Entrepreneurs in 2024 need to seek out investors who can provide not only the right amount of capital but also the experience, network and focus in the cloud market from inception through early customer traction. Those venture capitalists should have managed through these big technology cycles as operating executives, investors, and board members. We call this the Classic Series A versus pre-seed or seed.

Final thoughts

Today’s technology landscape is fraught with uncertainty and 2024 will be hard, but the seeds are being planted for the next cycle to start. The best companies have always been forged in times of turmoil with entrepreneurs solving important problems for the right early customers. The start of the next technology cycle in 2025 will ultimately give birth to a new wave of world-changing cloud companies.

~ By Matt Holleran, General Partner, Cloud Apps Capital Partners