Did growth endurance endure?

The days of “hypergrowth” are increasingly fleeting for software companies. What happened to growth endurance and when will it bounce back?

In one of my TechCrunch pieces last year, I reflected upon how driving incremental growth was considerably challenging for software companies in 2023, as the industry faced headwinds on both new logo acquisition as well as existing customer expansion. Additionally, many companies took heed of the efficiency mandate, and the pendulum swung to focus on profitability instead of growth.

Alas, a somber moment is upon us where as of today, there remains only one public software company projected to grow >30% in the next twelve months (chart below). SentinelOne is this last bastion of “hypergrowth”.

Source: Bank of America, “Software Market Update” (March 2024)

Adding to this grim reality is the fact that the percentage of under 20% growers has been increasing over the last three years. This cohort now makes up ~82% of the group, up from ~70% just a few years ago:

Source: Guggenheim Securities, “Monthly Software Market Valuation and Performance Update” (March 2024)

This is somewhat surprising since software companies, especially cloud businesses that are perceived to be somewhat early in their S curves, are commonly assumed to be able to rapidly compound growth or exhibit stronger “Growth Endurance” compared to businesses in other industries. “Triple-triple-double-double-double” is a common growth mantra for private SaaS companies aspiring toward unicorn status. On the public side, using a decade’s worth of data from 2010-2020, my colleagues and I at Bessemer noted in our State of the Cloud Report from 2021 that emerging public cloud companies were impressively able to retain 80% of their growth from one year to the next:

Source: Bessemer Venture Partners, “State of the Cloud 2021” (3/10/21)

However, given the recent observations of quick decay in the growth buckets for cloud companies, I wondered if these growth endurance trends had changed since we published our report in 2021. Revisiting this discussion was pressing since our initial analysis was run on pre-SaaSacre data, when macro conditions were arguably more exuberant. Indeed, when I re-ran the analysis on reported data from 2020-2023, EMCLOUD companies showed weaker growth endurance in the ~65% range during this period:

But it’s not all doom and gloom as the outlook is picking up. While the post-SaaSacre period has been challenging, analysts predict that 80% of public software companies will accelerate YoY growth (i.e. show >100% growth endurance) at the end of 2024:

Source: Evercore, “Software 2023 Review and 2024 Outlook” (January 2024)

There are certainly emerging market signals supporting this prediction. Revenue uplift arising from new AI opportunities serves as an example: 

“As the rate of Gen-AI product innovation continues at a healthy pace, and with a growing number of proof points around adoption, we gain conviction that Gen-AI will be the most significant revenue growth driver for the company near-term… With management calling out Azure, M365 and Security as the areas where Gen-AI can have the greatest revenue uplift, we feel comfortable in our view that Azure will be the main vector of AI in the near future and M365 Copilot can unlock a +$135bn TAM over time.” - Goldman Sachs, “Bolstering Gen-AI revenue opportunity while maintaining profitable growth framework” (2/29/24)

AI excitement aside, we’re also seeing subsiding cloud cost optimization headwinds, which is a positive development since IaaS consumption trends tend be a relatively reliable index of future downstream SaaS demand:

Source: Morgan Stanley, “New Stack 4Q23 Preview” (2/26/24)

With signals of light emerging at the end of the tunnel, Guggenheim Securities purports that the market is already starting to price in some of this optimism around growth:

Source: Guggenheim Securities, “Software Market Insight” (March 2024)

And with profitability still expected to remain a core mandate in the coming year (chart below), I’m hopeful that software fundamentals will look more compelling than ever before in 2024.

Source: Evercore, “Software 2023 Review and 2024 Outlook” (January 2024)

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