What's 🔥 in Enterprise IT/VC #313

Stormy 🌧️ ahead but keep the faith - the halo effect from public cloud spend is real

As I prepare for our first in-person AGM or annual investor meeting in Miami 🌴 this week, I keep asking myself how will I find the right balance between the shitty reality of today and optimism for the future. Clearly it was a rough week for tech and our story would have been much easier if the Big 3 cloud vendors showed accelerating growth. However, the stock market is a real time voting machine which trades on future expectations of earnings and this week the big 3 cloud vendors whiffed on expectations. Here are the summarized numbers from Jamin Ball.

Jamin Ball @jaminball

Cloud Giants Update: AWS (Amazon): $82B run rate growing 28% YoY (last Q grew 33%) Azure (Microsoft): In the $50's billion run rate (estimate) growing 42% YoY (last Q grew 46%) Google Cloud (includes GSuite): $27B run rate growing 38% YoY (last Q grew 36%, neither are cc)

And headlines like this from Barron’s abound “Shades of the Dot-Com Bust: The Dow Walloped the Nasdaq This Week” - not a great setting to point to the future when folks compare this to the dot-com bubble and bust.

So why am I still bullish? While I can’t predict EV/NTM multiples for the Top 5 in the future (it’s still at over 15x down from 80x), we have to remember that the underlying fundamentals about where revenue will come from, cloud spend, are still ginormous and not falling off of a cliff. Here’s a great slide from Hashicorp’s investor day a few weeks ago that beautifully encapsulates this. Notice the bottom right corner - IDC estimates 750 million new cloud native apps will be built by 2025 representing 4x growth 😲. The shift to cloud drags everything else with it, and while growth is slowing, the numbers are massive and the halo effect of spending on developer tools, developer productivity, infra, and security is real.

Speaking of this halo effect - here are some numbers on Github from Microsoft’s earnings transcript - $1B ARR in 4 years - that’s a lot of money spent on dev tooling! That $7.5B purchase price of Github 4 years ago looks like a steal now.

All of, Azure ML revenue has increased more than 100% for four quarters in a row. Now on to developers. We have the most complete platform for developers to build cloud-native applications. Four years since our acquisition, GitHub is now at $1 billion in annual recurring revenue.

And GitHub's developer-first ethos has never been stronger. More than 90 million people now use the service to build software for any cloud on any platform up three times. GitHub advanced security is helping organizations improve their security posture by bringing features directly into the developer's workflow. Toyota North America chose the offering this quarter to help its developers build and secure many of its most critical applications.

This halo effect from cloud spend also impacts cybersecurity. Gartner recently forecasted security spending to grow 11.3% to $188.3B YoY. Those are once again large and astonishing numbers and within that, we have even faster pockets of growth. Remember my comment above on 750M new cloud native apps? Well guess what, you have to secure those - app security is expected to grow 25%, cloud security slightly faster at 27%, and data privacy and security at 17% and 14%.

It’s going to be ugly for valuations in the tech sector the next 12 months as public investor rotate into other sectors, but rest assured, the true builders will keep building and will be ready when we recover. Growth at all costs is over, balanced growth is in - cut your burn, build revenue and expense models that make sense, and keep the faith 🤲🏼!

As always, 🙏🏼 for reading and please share with your friends and colleagues.

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Scaling Startups

1. This is an incredible and transparent story about founding a company and the reasons for shutting it down and giving money back to investors. So many lessons about not scaling too quickly before PMF, etc…🎩 Ethan Schecter

   15 months after launching & raising >$10M, Neta is shutting down and returning the money. I’m going to try to keep it short and simple as I believe 90% of business books could’ve been a blog post.
   
   Read Neta's post mortem: https://lnkd.in/eFXpRiih
   
   Humbled and grateful after this hell of a ride.

2. 👇🏼Activation rates by types of business models

   Lenny Rachitsky @lennysan

   Here are hot-off-the-press benchmarks for GOOD and GREAT activation rates, by product type, based on a survey of 500+ products. Thank you to everyone who contributed to this survey, and a huge thank you to @TheTimenator for partnering with me on this work. More takeaways below.

   

3. Small is beautiful

   Gergely Orosz @GergelyOrosz

   A 4-person team built + is running the #1 app on the US App Store (Gas) - currently with 1M daily users - and it’s incredible to see what a tiny team can do.

   

   Nikita Bier @nikitabier

   @HannahKonnn Four people (1 ceo, 2 engineers, 1 community manager)

4. As it relates to the shitty market now and tough times versus the opportunities ahead

   Adam Grant @AdamMGrant

   A common source of disappointment is recency bias: weighing the last week more heavily than the last year. Zooming in on the immediate past magnifies slumps. Zooming out farther reveals upward slopes. Progress is rarely visible at a snapshot in time. It unfolds over a lifetime.

   

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Enterprise Tech

1. What’s happening in WASM and why its superior to containers- Fermyon announced its $20M Series A led by Insight Partners and Docker gets into the WASM game

   Butcher argues WebAssembly is superior to containers in a number of respects, such as start-up time and compatibility across operating systems including Windows, Linux and Mac plus hardware platforms like Intel and Arm. It’s also more secure, he asserts, because it can safely execute even untrusted code.

   To explore WebAssembly’s container-replacing potential, Fermyon developed Spin, an open source dev tool for creating WebAssembly cloud apps. Fermyon Cloud is the evolution of this work, providing a platform where customers can host those apps.

2. Crypto winter is clearly here but large enterprises are still building - the future is bright

   Thomas Kurian @ThomasOrTK

   Blockchain is changing the way the world stores and moves information. Today we’re announcing Blockchain Node Engine, which will support Ethereum & enable developers to provision fully managed Ethereum nodes with secure blockchain access.

   

   cloud.google.comIntroducing Blockchain Node Engine | Google Cloud BlogBlockchain Node Engine, a fully managed node-hosting service, is available for Ethereum.

   Blockworks @Blockworks_

   Fidelity to increase its crypto unit by 25% with 100 new hires to a total of 500 people

3. 🤯 Now over $3B in crypto hacks so far this year (can’t wait to share 2 crypto security investments we’ve made in the last 12 months 😃)

   Chainalysis @chainalysis

   1/ After four hacks yesterday, October is now the biggest month in the biggest year ever for hacking activity, with more than half the month still to go. So far this month, $718 million has been stolen from #DeFi protocols across 11 different hacks.

   

4. Great overview on AWS and cloud marketplaces - benefits of burn down of existing AWS spend, faster time to close but still a discoverability issue as it gets larger

5. Going after the boring in generative AI

   Will Manidis @WillManidis

   I've never seen VCs make a bigger mistake than generative AI. They are funding many projects that are destined to be abject failures. Even worse, they are totally missing the places where ML will actually have impact and generate enterprise value. Let me explain:

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Markets

1. How public market investors are 🤔

   Gavin Baker @GavinSBaker

   1) A thread of hypotheses, loosely held. This recession will be nothing like 2002, when EPS for the companies in the S&P 500 tech GIC declined 80%. Tech EPS likely even more stable this time than in 08/09 when EPS declined only -3%ish. Function of shift to recurring revs.

and 👇🏼

Gavin Baker @GavinSBaker

15) Companies that started cutting early are going to be advantaged both near-term and longer-term. Companies with weak CEOs who cut late have to cut deeper which hurts coming out. CEOs who cut costs late = investors who “upgrade” with the mkt down 25%ish.