At Cloud Apps Capital Partners, we believe a new approach is needed for investing in enterprise cloud startups: Skipping the traditional seed round and moving straight to the Classic Series A funding.
While skipping the seed round may not be necessary for other types of technology or consumer ventures, enterprise cloud startups are a different animal. For them, the typical seed-financing round of $2 million coming from a headless syndicate is simply not enough.
Enterprise cloud startups are attempting to build mission-critical solutions and solve weighty problems for business. As a result, they require significant funds to assemble a team of highly qualified engineers and executives, and deliver a meaningful enterprise-grade product that is capable of serving a global customer base from the moment of launch.
Having recently closed our second fund, we have a clear understanding of the three major benefits of Classic Series A backing:
1. Meet the Need for Larger Capital Investments
One of the biggest evolutions of the cloud happening now is its move from non-mission-critical apps to mission-critical ones. Our belief is that today the cloud is so reliable that even the most mission-critical apps can thrive in the cloud.
Indeed, we are witnessing a substantial change in the types of cloud business application entrepreneurs seeking investment. The problem, however, is that these mission-critical cloud apps have simply not been well served with capital.
If a founder comes to us with a mission-critical cloud app, simple math tells us that they cannot get to market, address a global customer base, and tackle the inevitable sales and marketing challenges with a basic seed round of $2 million from headless syndicates. Experience tells us that these companies need approximately $5 million to $10 million dollars to get it right and achieve success.
Consider two success stories from our portfolio that skipped the seed round and embraced a Classic Series A round. The first is Propel, an innovative startup that is redefining product lifecycle management, the world’s fourth-largest software category, and is doing it all in the cloud.
Propel CEO Ray Hein was a seasoned enterprise software executive, and he instinctively understood that building a PLM product that could help people collaborate on product information across the entire supply chain simply could not be built for $2 million. We stepped in with Classic Series A backing and, since the investment, Propel has rapidly become a rising star in the enterprise cloud market.
Another portfolio company in which we were a late stage investor, ServiceMax, recognized that mission-critical field service management solutions were quickly moving to the cloud. The founders had deep domain expertise, and we were able to support their growth with Series A backing, beginning when I was at my prior firm, as well as with talent acquisition via our vast network of impact executives and our relationships with leading cloud companies. The result? ServiceMax was acquired for $915 million by GE in 2016.
Now, that is not to say that Cloud Apps Capital Partners doesn’t work with other investors. We often partner with leading seed and angel investors because they can add real value to a Classic Series A syndicate. We also work with complementary-but-larger venture capital firms because they understand we can help portfolio companies gain real traction in the market.
2. Target Underserved Enterprise Lines of Business
Today there are executive titles within the corporate organization that are not currently well served by the current enterprise cloud providers. By building apps that better target these job titles/functions and then integrating them with other solutions at the API-level, the cloud-driven enterprise comes to life.
That’s why we want our startups to have a clear idea of the job titles they want to build their business around. Whether the company is marketing to the director of X, the VP of Y or the manager of Z, it needs to be a role that a global company can be built around.
In fact, cloud software is well suited to job titles it never reached before, like general counsel, plant manager and VP of field operations. And now, because the cloud market is global and exponentially larger, it makes economic sense to go after those job titles. It’s even possible to build a global cloud company around these kinds of job titles.
In every meeting, we ask the entrepreneur: What title are you building your business around? This enables us to assess whether the founders understand the needs of their target buyers and whether they can fulfill them over a long period of time.
3. Supplement Deep Domain Expertise with a Network of Cloud Executives
In my experience, the most successful entrepreneurs and investors in the enterprise cloud market have built and sold new products before at each stage of the app continuum – from company launch to exit. They understand the operating expenses involved at each stage, the investment expertise at each stage – and how that changes when a startup moves from initial growth to IPO conversations with Wall Street.
All of our portfolio founders come to us with a deep understanding of the long-term customer problem and domain expertise. Our value-add comes from bringing our 20-plus years of experience to bear and connecting our portfolio to our vast network to fill key roles within their organizations and introduce them to important new customers and partners.
The Road Ahead
What’s does the future hold for enterprise cloud startups? We believe significant opportunities in the market still exist. I’ve heard investors speak on the record that they feel there is shrinking opportunity in the cloud space going forward, but we beg to differ.
Today, with the expansion of the internet to the far corners of the world, the global market for enterprise cloud solutions is poised for massive growth. Startups can get out of the gate with a global perspective and a global customer base. Indeed, we currently have some portfolio companies with a presence in more than 180 countries.
Companies large and small all over the world need great business apps running in the cloud – and startups that provide them will enjoy considerable success. We look forward to helping build that next great wave of global, category-leading cloud companies.
Matt Holleran is general partner at Cloud Apps Capital Partners.