24 Jan 2023

California has been drenched with “atmospheric rivers” over the past few weeks, pouring down much-needed rain and snowpack throughout the state. However, while the West Coast’s wet season is limited, investors and acquirers still have their heads in the clouds. We’re talking about clouds in the world of IT, dominated by the San Francisco Bay Area.

Increasingly, investors and acquirers are demanding that target companies – those seeking capital or an acquisition – offer a cloud-native service. That was in fact one of the drivers for our recent deal advising ForePaaS in its acquisition by OVHcloud. Much of reasoning comes down to ease and efficiency, both for customers in buying cloud services and for vendors in scaling those customers. Software hosted on a public cloud is easily scalable, enabling customer accounts to grow without the customer needing to manage and scale their own infrastructure.

Many entrepreneurs may not recognize the growing divide between on-prem subscription and cloud (which is naturally subscription) valuations. For example, consider data warehouse companies Snowflake versus Teradata. Pure cloud provider Snowflake is currently valued at 22x revenue whereas majority on-prem provider Teradata is valued at just 2x.

We’re not necessarily saying though that that on-prem subscription businesses can’t get great deals – our client TimeXtender’s capital raise with Monterro proves the opposite. And generally speaking, growth equity investors tend to appreciate on-prem subscription software companies, but partially because of the upside for a transition to cloud. This is especially true in Europe. Overall though, in valuations for sale transactions to a strategic provider rather than a financial acquirer, the cloud is pulling away.

Oftentimes we advise those seeking an investment or acquisition that aren’t yet cloud-native to not only have a cloud service on their roadmap, but also be actively working on such a service prior to seeking a transaction.