03 Jan Software M&A Propped up By the Cloud
We’re noticing a growing trend, software M&A opportunities are all finding themselves within one niche: the cloud. The cloud certainly encompasses a very large can of worms. While I certainly adhere to the idea that much of the cloud is just growth from the “hosting” of yesteryear, it is so much more. In fact, we know that between infrastructure-as-a-service (IaaS) is set to have the largest growth trajectory in 2013 to the cloud, in general. With all the hype, there are a few questions we are regularly pestered with when it comes to cloud computing and cloud adoption. Among them:
- Is cloud computing experiencing a market bubble? If so, how can we hedge against it?
- What happened to traditional software? It certainly didn’t go anywhere and does offer a compelling value-add? Are you seeing expansion within the realm of cloud, storage and IaaS usage that justifies the setting aside of most desktop software applications?
- What does the coming 12 months hold for the cloud and how can we profit?
History tells us that high growth areas almost always experience a bubble. Luckily, this bubble may be a bit tempered by the general market conditions and overall reduction in venture capital funds and funding in general. In fact, a recent report I read by Foley and Lardner, LLP indicated that in the past decade the number of funds has decreased by about half, going from its height in 2001 of 1200 to a more recent level of 600. In addition, TechCrunch tells us that median (not to be mistaken with average) investment size on a per deal basis has also decreased by about half. In fact, it’s a case of the top 1% getting the biggest share of the proverbial VC fund pie. But with amount being pumped into the economy for quantitative easing, we can expect there will be bubbles just about everyone, including this industry. The key is picking the winners who will last through the storm–perhaps bruised–but more prepared for the next generation of IaaS apps.
Traditional software is dying. It’s an over-repeated and perhaps annoying thing to repeat, but traditional software mergers, acquisition and venture capital have moved to their hosted counterparts. The same shift from MSFT Office is to Google Drive is occurring in nearly every facet of the cloud. Even the lower levels where SIO.Co spends its time, the cloud is seeing a massive build-out that is absolutely dwarfing traditional software. I read a recent piece in GeekWire magazine–a Seattle publication which indicated, “every single day, AWS is adding enough new servers to have handled all of Amazon when it was a $3 billion revenue company around the year 2000.” If you truly want to know where the growth is, follow the investment money trail.
Finally, we’re all a bit tepid about the general market. With fiscal cliff, debt ceiling, yada, yada we’d rather not get into too many predictions about the future of cloud computing. But we’re confident that whatever the outcome, “the cloud” in general will make it through the fray. Individual companies may have a more difficult experience.
This was a guest post from Nate Nead of Deal Capital — Mergers & Acquisitions.