Enterprise Technology Spend Shifts Present Continued Opportunities
Here at Bowery Capital, we continue to outline where CxOs are in their current enterprise technology upgrade cycle, a trend that lies at the core of our investment thesis. As a result of this shift, we expect “next-generation” technology spend to hit $468B over the next ten years as legacy technologies are swapped out for new. In addition, we see some of this $468B coming from net new areas of spend where humans are displaced by new process, new system, or new automation software. Taking a look at exit data since our last update on this, we continue to believe that we’re early in this cycle. Cumulative revenues of exited next-generation companies is roughly $60-70B of replacement which in our models represent only about 15-20% of the estimated market opportunity. Over the last few years, a number of key themes have emerged corroborating our view that most of the enterprise opportunity lies ahead of us and that enterprise technology spend shifts are upcoming.
1. The Displacement Of On-Premise Solutions Is Early. There’s a cloud option out there for almost every IT workload, but a survey from the Uptime Institute indicates that about two-thirds of enterprise computing is still done in company-owned data centers. While projections vary and you are still seeing product end markets in SaaS infrastructure and SaaS applications grow by 40%+ y/y we are still moving in the right direction with a lot of opportunity. The story is not fully written and enterprise technology spend shifts will continue to occur here.
2. Traditional Vendors Are Increasingly Investing In Next-Gen Offerings. Startups aren’t the only ones taking advantage of this massive shift in spending. The “tech titans” are fully offering as-a-service versions of their own products. Microsoft, Oracle, SAP, and other company’s cloud revenue continues to grow at a huge clip. IDC has predicted correctly every year for the past three years that about 20%+ of all new business software purchases will be SaaS, benefitting long-standing tech leaders and startups alike.
3. Next-Gen Solutions Are Growing The Overall Market. By replacing spend previously allocated to services or personnel, next-gen solutions are bringing new dollars into the tech market. Yesterday’s personnel or consulting expenditures become tomorrow’s SaaS or IoT revenues. This is the core message behind Marc Andreessen’s now-famous “Software Is Eating The World” piece. The key takeaway here is that even Fortune 500 companies are starting to understand that every non-core function has the potential to be replaced by newer, easier-to-adopt alternatives; and their spending behavior is beginning to reflect that mindset as companies work with increasingly young and innovative vendors.
4. Greenfield Opportunities In Vertical Markets Remain Untapped. Several cloud software companies have already made waves serving vertical markets: Veeva Systems, Fleetmatics, Guidewire, and MindBody are just a few public-company examples. Per Bain research, however, fewer then 15% of companies in transportation, energy, manufacturing, and several other sectors view themselves as being active cloud software adopters. As we detail in another recent report of ours (“Opportunities In Vertical Software”), the Bowery team expects many more vertical SaaS success stories as the specialization of enterprise tech continues and we will continue to make investments here beyond our portfolio beyond companies like Transfix (trucking), CredSimple (healthcare), and Fero Labs (manufacturing).
5. As Consumers Migrate To Mobile, Companies Need Next-Gen Tools To Follow. It’s already well known that consumers are rapidly adopting mobile to manage nearly every aspect of their lives, including how they buy products and services. Certain categories of commerce moved online seemingly overnight (e.g. flowers, office supplies), for example, and the same is happening in mobile. In order to market to, track, engage with and support customers on new platforms like mobile, enterprises must employ next-gen solutions that can transact in new forms of data. Connected industrial sensors, in-store beacons, mobile marketing attribution and mobile CDN are just a few examples.
The enterprise spend shift to cloud software is underway, and by our measure, we’re still early in this cycle. Over the next few years, growth in enterprise tech upgrades will likely out-shadow anything we’ve seen to date. And that means unprecedented opportunity for smart investors, corporate innovators, and startup founders alike that want to get in on these enterprise technology spend shifts.
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