Everything you need to know about cloud outage insurance

Companies collectively spent $61 billion on cloud infrastructure in Q4 2022, and there’s more growth to come. Yet, businesses are poorly protected from losses caused by cloud downtime.

“Cloud service providers typically offer service level agreements (SLAs) that outline their commitments to service availability and performance,” AV8 general partner Amir Kabir told TechCrunch+. But while penalties are usually involved should agreed-on service levels not be achieved, these rarely cover full losses that a cloud outage could cause its customers.

Case in point: After millions of websites went offline after a major data center fire in France, a small online seller complained in the press that her cloud provider, OVHcloud, was only offering her a voucher worth a few months of free hosting — around $30, when she estimated the actual damage as closer to $2,000.

For e-commerce businesses large and small, it is easy to see how cloud downtime can result in a loss of revenue. But cloud outages can have a negative revenue impact on businesses of all kinds, whether it is because of productivity loss, or because they have their own SLAs with customers to whom they may owe compensation.

The usual corollary of risk is insurance against it, but when it comes to cloud downtime, the insurance sector hasn’t fully caught up yet.

Everything you need to know about cloud outage insurance by Anna Heim originally published on TechCrunch

SaaS retention benchmarks: How does your business stack up?

Retention isn’t a silver bullet, but in SaaS, it’s the closest thing to it.

High retention indicates strong product-market fit. It is proof that you are solving a real problem and are adding value to your customers.

High retention also means better growth. Companies with best-in-class retention grow at least 1.5x-3x faster.

Finally, high retention means a more capital-efficient business. In SaaS, acquiring customers is the most costly part of running your business. Even at scale, sales and marketing expenses make up the majority of your expenditure. If you are unable to retain these expensive-to-get customers, your business is going to be less efficient and cost more to scale.

It’s no surprise, given all this, that companies with higher net revenue retention often command higher valuations.

How can companies know if their retention rate is up to par? And with the recent market downturn, is retention lower than it used to be?

There’s no better way to answer that than to look at real data. At ChartMogul, we studied more than 2,100 SaaS businesses to bring retention benchmarks and trends to the SaaS community. Here are our key takeaways.

Retention in 2022 was harder than ever

More than half of SaaS businesses had lower retention in 2022 when compared to 2021. A challenging macroeconomic environment meant subscribers reassessed and cut their SaaS spend. This is in sharp contrast to 2021, which saw almost 70% of businesses having a higher retention rate in 2021 when compared to 2020.

Percentage of companies that had a higher net revenue retention vs. previous year

Percentage of companies that had a higher net revenue retention vs. previous year. Image Credits: ChartMogul

This trend of retention being lower in 2022 vs. 2021 is not unique to SaaS startups. SaaS behemoths like Snowflake also saw their retention come down from the highs of 2021.

SaaS businesses over $3m in ARR should target a net retention rate of over 100%

What is considered a good net retention rate differs by the stage of your business.

In the pre-product-market-fit stage of the business, net retention is usually poor. As startups grow and find product-market fit, net retention improves. Finally, as companies reach scale and become category leaders, net retention often goes over 100%.

When benchmarking, always keep the stage of your business in mind. Businesses with ARR in the range of $1 million-$3 million have a top quartile net retention rate of 94%. Those in the $3 million-$15 million ARR segment have a top quartile net retention rate of 99%. Businesses at scale with ARR in the range of $15 million-$30 million have a top quartile net retention rate of over 105%.

Net revenue retention rate (%) by ARR range

Net revenue retention rate (%) by ARR range. Image Credits: ChartMogul

A net retention rate of less than 100% means that your ARR decays, which means that you have less ARR today than a year ago from the same set of customers. A net retention rate of over 100% indicates strong product-market fit and showcases your ability to compound your revenue from your existing customer base.

Amongst higher ARR ranges, more businesses have a net retention rate over 100%. Just over 35% of SaaS businesses in the $15 million-$30 million ARR range have a net retention rate of over 100%.

Net revenue retention leaders by ARR range

Net revenue retention leaders by ARR range. Image Credits: ChartMogul

SaaS retention benchmarks: How does your business stack up? by Walter Thompson originally published on TechCrunch

Is there really a march from the public cloud back on-prem?

It turns out that the cloud is expensive, and the more workloads you move to the cloud, the more it costs. Go figure.

When we were in the “growth at all costs” phase between 2021 and 2022, it was easy to ignore or minimize the costs associated with operating in the cloud. But when companies started scrutinizing every entry in the technology budget, it became pretty clear that the cloud bills were big and only getting bigger, and maybe we should look for ways to lessen that budgetary impact.

The brute force way would be to say, “let’s just move back on-prem!” But there are major questions about this approach. Why did you move to the cloud in the first place? Maybe you were thinking there would be cost savings. But even if you were wrong on that point, it’s the agility of the public cloud that has always been its primary value proposition.

Think back for a second to the bad old days of on-prem, when you had to plan for capacity. If your company grew faster than you anticipated, you were pretty much stuck, putting your business in a very vulnerable position. The corporate procurement process has always been fraught with time-consuming bureaucracy. You have to plan to buy servers, then you need to rack and stack them. Even if you want to do that, do you still have the personnel with that skill set? Chances are you’ve been hiring for a cloud DevOps world.

While it’s possible to move certain workloads with less pain than others, consider that earlier this month, Ofcom, a U.K. communications watchdog, issued a report criticizing the top cloud infrastructure players for making it too hard to move workloads between clouds — and presumably back on-prem, if that was the desire. If it’s truly so expensive and difficult, how does it make sense for companies to do that?

I decided to explore if companies really want to move back on-prem. I asked a group of industry experts about it, and while I got a decidedly mixed set of answers, it seems that the cloud repatriation idea is being greatly exaggerated.

The cloud infrastructure market is vast and growing

Let’s start with the fact that the cloud infrastructure market is huge, even as it’s slowing down amid the economic uncertainties affecting every industry. The market reached over $200 billion in 2022. The fourth quarter was up 21% to $61 billion, per Synergy Research. While it was down from the prior year, when the market grew at 36%, it was still a substantial market by any measure.

“From a numbers perspective, we continue to see strong growth in the cloud market — 2022 worldwide spending on cloud infrastructure services was up 26% from 2021, despite problems in China and a much-strengthened U.S. dollar — while investment in enterprise on-prem infrastructure remains weak,” John Dinsdale, chief analyst and research director at Synergy Research, told TechCrunch+. “Servers shipped to enterprises grew by 3% in 2022. Looking ahead, we continue to forecast strong growth in the cloud market and weak growth in on-prem infrastructure.”

Is there really a march from the public cloud back on-prem? by Ron Miller originally published on TechCrunch

UK regulators could be right about cloud portability obstacles

U.K. communications watchdog group Ofcon reported last week that it was investigating cloud infrastructure vendors — paying particular attention to Amazon and Microsoft — for making it too difficult to move workloads from public clouds. This raised a legitimate question about the obstacles to portability.

The report pointed to three things in particular that Ofcon would investigate: egress fees, the payments these companies charge when customers want to move data from their platforms; general restrictions on interoperability and portability; and discounts they use to keep companies with large workloads on their platforms.

Ofcon is investigating whether cloud vendors, especially the largest ones, have been deliberately putting up roadblocks to keep customers from changing vendors, giving consumers fewer options once they’ve committed to a particular seller. That could put smaller competitors at a distinct disadvantage.

Ofcon typically looks at consumer issues like the cost of broadband, but it sees cloud computing as a public utility, where pricing has a direct impact on U.K. businesses. The inquiry suggests the U.K. authorities see a possibly deliberate attempt on the part of these companies to keep their customers in the fold.

Of course, every company wants to keep its customers from churning. That in itself is not necessarily a problem, but if these companies are setting up systems to make it difficult for customers to switch, that becomes an issue for groups like Ofcon. It’s worth noting that the United States Federal Trade Commission also announced an inquiry into public cloud vendors last month, asking for public comment on market power and security risks. It joins the EU, which launched an investigation into Microsoft last year.

When we asked Microsoft and Amazon about the report, they both said they are working with Ofcon and are committed to a competitive market in the U.K. Yes, that’s all well and good and exactly what you would expect from the vendors, but do these groups investigating anticompetitive behavior have a point?

UK regulators could be right about cloud portability obstacles by Ron Miller originally published on TechCrunch

SaaS is still open for business, but it’s going to take longer to buy and sell

The “Great Restructuring” continues and Layoffs.fyi tracked 80,000 lost jobs in tech in January 2023. This brings the total to well over 230,000 from more than 1,000 companies since 2022. Yet, despite all the negative headlines, the SaaS market continues to see steady growth. Gartner predicts software spending will increase by 11.3% this year, but my company’s internal data leads me to be slightly more bullish.

The fourth quarter of 2022 and the first quarter of 2023 show steady increases in both spending and requests for new purchases. We analyzed more than $2.5B in SaaS spending from 18,000 deals across 2,500 suppliers and anticipate that SaaS spending will increase 18% this year.

Yet while software spending continues to grow, buyers and sellers face immense challenges dealing with the impact that layoffs and underlying economic uncertainty will have on the software market.

The bottom line? In 2023, SaaS is still open for business, it’s just going to take longer to buy and sell.

A flat renewal is the new “upsell”

One of the most direct and immediate impacts of recent tech layoffs on the SaaS sector is a decline in seat licenses. A quarter of a million layoffs equals tens of millions of individual seat licenses lost for SaaS suppliers.

We analyzed more than $2.5B in SaaS spending from 18,000 deals across 2,500 suppliers and anticipate that SaaS spending will increase 18% this year.

We have seen average contract value (ACV) going up in some of the most popular software categories. This includes cloud data integration (which includes products like Fivetran and Celigo) up 82% as a category, mobile device management (which includes products like Jamf and Kandji) up 84% as a category, and project management tools (which includes products like Asana and Monday.com) up 78% as a category. Even so, we predict that SaaS vendors across the board will see contraction at renewal, not expansion.

Suppliers can expect a distinct downturn in both the growth rate and share of wallet (the amount a customer spends regularly on a particular software vs. buying from a competitor). We have seen suppliers attempt to recoup lost revenue with renewal uplifts as high as 20% (compared to the typical 3-5%.) Unfortunately, many customers aren’t in the position to approve that much of an increase. The sooner SaaS vendors can normalize the idea that even a flat renewal is a massive win in this economy, the better off they will be.

Mitigate the impact of layoffs on purchase and renewal cycles

Over the past six quarters, renewal cycles have remained consistently above 60 days on average. The fourth quarter of 2022 represented a breakthrough, as renewal cycle time decreased 11% –– from 63 days in Q3 to 56 in Q4.

Unfortunately, we predict that continued layoffs and restructuring will drive that number back up in 2023. Early Q1 data validates this hypothesis, with renewals increasing 2% to 57 days and net new sales cycles increasing 10% to 46 days.

A study by SAP showed that 55% of companies with more than 50,000 employees claimed that staff shortages have significantly slowed their procurement operations. Two-thirds of those same companies blame increasingly distributed teams for purchase decision delays.

SaaS is still open for business, but it’s going to take longer to buy and sell by Walter Thompson originally published on TechCrunch

The cloud backlash has begun: Why big data is pulling compute back on premises

The great cloud migration has revolutionized IT, but after a decade of cloud transformations, the most sophisticated enterprises are now taking the next generational leap: developing true hybrid strategies to support increasingly business-critical data science initiatives and repatriating workloads from the cloud back to on-premises systems. Enterprises that haven’t begun this process are already behind.

The great cloud migration

Ten years ago, the cloud was mostly used by small startups that didn’t have the resources to build and operate a physical infrastructure and for businesses that wanted to move their collaboration services to a managed infrastructure. Public cloud services (and cheap capital in a low interest-rate economy) meant such customers could serve a growing number of users relatively inexpensively. This environment enabled cloud-native startups such as Uber and Airbnb to scale and thrive.

Over the next decade, companies flocked en masse to the cloud because it lowered costs and expedited innovation. This was truly a paradigm shift and company after company announced “cloud-first” strategies and moved infrastructures wholesale to cloud service providers.

Cloud-first strategies may be hitting the limits of their efficacy, and in many cases, ROIs are diminishing, triggering a major cloud backlash.

The growing backlash

However, cloud-first strategies may be hitting the limits of their efficacy, and in many cases, ROIs are diminishing, triggering a major cloud backlash. Ubiquitous cloud adoption has given rise to new challenges, namely out-of-control costs, deepening complexity, and restrictive vendor lock-in. We call this cloud sprawl.

The sheer quantity of workloads in the cloud is causing cloud expenses to skyrocket. Enterprises are now running core compute workloads and massive storage volumes in the cloud — not to mention ML, AI, and deep learning programs that require dozens or even hundreds of GPUs and terabytes or even petabytes of data.

The costs keep climbing with no end in sight. In fact, some companies are now spending up to twice as much on cloud services as they were before they migrated their workloads from on-prem systems. Nvidia estimates that moving large, specialized AI and ML workloads back on premises can yield a 30% savings.

The cloud backlash has begun: Why big data is pulling compute back on premises by Jenna Routenberg originally published on TechCrunch

Q1 2023 market map: SaaS cost optimization and management

When engaging with our portfolio companies as well as with new investment opportunities, we’ve noticed that “profitability” and “efficiency” are two words that are often grouped with “growth” in every sentence.

Three months into 2023, investors continue to use buzz words like “responsible growth,” “business efficiency” and “quality marketing” when explaining how VC-backed companies should do business this year. That may be true, but there is no textbook for how a company can actively reduce its budget without slowing down growth in the near term.

Over the past few months, we have examined, demo’d and reviewed over 30 companies that we define as “first-degree, gross-margin-enhancing businesses.”

What does this mean? The “first-degree” part of that has to do with the now. Investors are knocking at the door to see improvements every quarter. Companies that can help you with long-term efficiencies will not help you when you next look to raise money in six, 12 or 18 months.

The “gross-margin-enhancing” part of this definition is important because simply reducing costs in lieu of growth will not work. Likewise, maximizing growth with little sensitivity around costs won’t work in 2023.

saas cost optimization

Image Credits: Ibex Investors

In this article, we’ll look at emerging companies that can efficiently and effectively support organizations in their efforts to deliver growth while optimizing and managing costs in the near and long term.

Given the market right now, investors want to see companies following forecasts more than ever.

The value proposition of the companies in this mapping is to help businesses continue their growth journey while optimizing and reducing costs in their current business structure. That said, there is no-one-size-fits-all solution. For this reason, we have defined three key categories of gross margin enhancement:

  • Cloud infrastructure cost optimization and management.
  • Vendor stack cost optimization and management.
  • Next generation FP&A tools.

Cloud infrastructure cost optimization and management

There is a constant struggle to balance stepping on the gas to improve product (i.e., raise cloud spend) and pushback from the CFO’s office when it is time to cut back.

CTOs and technical leads know how to cut cloud costs, but it can be difficult to pinpoint to what degree a certain change can negatively impact a company’s top line, not to mention the time it takes to execute reduction and optimization requests repeatedly. Companies want to continue to grow and do it rapidly, but they simply cannot allow themselves the freedom to flex their cloud spend like in past years.

Several companies are solving these problems with different focuses: Finout, Cloud Zero, Vantage and Anodot support both enterprise and middle-market end users and offer solutions to manage the cloud as well as Kubernetes. Some of these players provide solutions not only to support key cloud providers but also other cloud infrastructure vendors (such as Data Dog and Snowflake).

Other companies focus on more specific use cases. For example, Kubecost focuses on Kubernetes management. There are also companies that aim to help you cut costs: Zesty (for cloud) and Cast (for Kubernetes) fall in this space.

Q1 2023 market map: SaaS cost optimization and management by Ram Iyer originally published on TechCrunch