Why Mission-Critical Cloud Startups Are Powering Ahead in Today’s Uncertain Tech Economy

The big story in cloud software last year was a slowdown in growth, as businesses assessed their spending priorities ahead of an expected recession. Between calendar year 2021 and 2023, annual revenue growth for the 20 largest public cloud software companies fell from 32% to 15%.

Modern businesses are becoming increasingly reliant on the cloud. But they are getting more particular about what they need and don’t need from a cloud provider. It seems clear the market is bifurcating between mission-critical cloud providers vs. nice-to-have apps. If what a cloud company is offering is merely a nice-to-have, it might not be around much longer. By contrast, cloud companies delivering mission-critical cloud applications still have a very bright future ahead of them.

What do I mean by a mission-critical cloud company? These are companies that focus on a particular executive title — and what that exec and their teams need to do their jobs — versus an individual doing their job. In fact, mission-critical cloud companies can be formed by owning a specific job title and bringing a compelling solution to that role.

Before, relatively few job titles were addressed by the cloud. For instance, there was Salesforce for the VP of sales, Workday for the VP of HR, and NetSuite for the VP of finance. But now there are so many other roles that can be addressed by and benefit from cloud software, whether it’s the VP of product, VP of operations, or even VP of customer data privacy.

A great example is KloudGin, an integrated cloud field service and asset management solution that is targeted at the VP of Operations at utility companies. Or DataGrail, which offers a cloud platform that helps CISOs and VPs of compliance better manage compliance with data privacy regulations. Another good example is Propel, which is making it easier for product management leaders to work smarter and grow their business. And then there is Clearstory, which is helping VPs of construction finance and construction project leaders become more efficient through a cloud-based solution that reduces risk, wastes less time, and improves partner relationships.

A massive opportunity ahead

Let’s take a step back. At the start of last year, nearly every economist in the world was forecasting a U.S. recession. As a result, if you were a CEO, CFO or CIO at a billion-dollar company, you spent pretty much all of 2023 planning for said recession. You worried about costs and deeply scrutinized every expense.

CIOs, for example, spent a lot of time examining the money their companies were allocating to software applications. And, as they did so, they asked a basic question. Can our employees do their job without this app? If the answer was yes, CIOs ripped out that software or made plans to wind it down. But if the answer was no, they can’t do their job without it, CIOs fought to keep the application because they understood that it was mission-critical.

This is why mission-critical cloud applications, for everything from construction finance to product lifecycle management, represent a massive opportunity for forward-thinking cloud startups. One, because they’re now essential. And two, because large companies are coming to recognize this fact and are more and more willing to remove their tired, old-school client-server applications and install cloud applications in their place.

Take, for example, a manufacturing company that’s been using the same mainframe or client-server system for the past 20 years. Yes, that system has done a reliable job running the core business processes for the past two decades. But it’s never going to help the manufacturing company with its digital transformation efforts.

Today, a large percentage of the applications still in use at companies are on-premise software packages that might be 20, 30 or even 40 years old. And those applications are a nightmare to maintain. They require scores of people to support them. And they’re not delivering the productivity that users need.

A recurring process that favors cloud apps

Companies of all sizes are realizing they need to fundamentally improve the way they operate and they’re recognizing that the cloud is a very good way to do it.

In fact, we’ve seen this process play out every time there is a downtrend in the technology sector. For example, following the dotcom crash, CIOs were forced to examine every dollar they spent. This is when Salesforce emerged and enticed companies to move off their legacy CRM systems like Siebel Systems and embrace the cloud. The recession and dotcom collapse accelerated revenue growth between 2001–2005 at Salesforce, with mid-market companies moving off homegrown and legacy on premise applications prior to the company going public in 2005. After gradually attracting these small and midsize customers, Salesforce was able to move upstream and land top-tier enterprise customers like Cisco and Dell in 2006, which helped seal the long-term success of Salesforce. I was leading the Salesforce AppExchange when Cisco and Dell were announced.

In 2008, during the Great Recession, the process played out again. This time around, the winners were companies like ServiceMax, a leader in the field-service software industry. What ServiceMax did was move a mission-critical enterprise business application into the cloud and offer a better way for customers looking to move off their cumbersome legacy apps. ServiceMax’s big breakthrough came in 2011, when a division within GE selected it as its go-to platform for field-service agents. Prior to that, ServiceMax had a great SMB and mid-market business where they built strong references and prepared themselves for the enterprise, just like Salesforce. The technology was so valuable that GE Digital ended up acquiring ServiceMax for just under $1 billion in 2017. I served as a board member for ServiceMax and was proud to have championed its Classic Series A funding round when the company was still pre-revenue.

It’s important to note that both Salesforce and ServiceMax were sub $10M businesses when the customer focus and acceleration occurred, ultimately bringing more mid-market and enterprise business customers to them once they demonstrated customer success. Now, next-generation mission-critical cloud companies like DataGrail, KloudGin, Propel, and Clearstory are on a similar path. They’re moving a new class of essential business applications into the cloud and offering customers an easy way to leave behind those old-school on-premise apps that can only be updated every few years and slow down the business. They’re delivering cloud-based apps that foster innovation and take businesses to the next level.

A pivot point for cloud people

If you’re working at a cloud company, now is the time to consider your position. If you’re at a startup or mid stage company delivering mission-critical apps, you’re in a good place, despite the turbulence in the tech market. Already, we’re seeing sales accelerate at these businesses. By contrast, if the company you work at doesn’t offer mission-critical solutions, it’s time to consider thinking about to one that does.

Meanwhile, if you’re an entrepreneur with an idea for the next great mission-critical cloud application, you shouldn’t hesitate to move forward with your venture. And when you do, you’ll need the right partners to help you succeed. Specifically, you’ll need investors who understand the new funding model for enterprise cloud companies, as well as experienced advisers who can provide the operational guidance necessary to build a global, category-leading company.

We at Cloud Apps Capital Partners strongly believe that the need for mission-critical applications will accelerate the success of cloud startups with reasonable valuations/cap tables and the right product offerings. After all, that’s how Salesforce and ServiceMax became global category leaders. At CACP, we focus exclusively on mission-critical cloud companies and are honored to work with entrepreneurs and teams delivering mission-critical solutions.

~ Matt Holleran, General Partner, Cloud Apps Capital Partners