AWS re:Invent 2022: Navigating a cloudy future

“This year’s conference provided substantial content around the ecosystem of software vendors addressing the needs of enterprises, as cloud has become a critical component of the IT domain – broadly summarized in three areas: cost management; complexity of environments; and optimizing the cloud. But what do these trends mean for M&A activity?”

Cost optimization is King

The early days of rapid growth in spending on public cloud services led to the emergence of solutions to provide better understanding, allocation and optimization of cloud spend. But where has that taken us?

• In 2017, we had the opportunity to work with a leader in the space, CloudCheckr, on their $50m Series A capital raise, and have spent considerable time with many stakeholders in this area since, giving an excellent vantage point as the market matured and an initial a wave of consolidation occurred
• At the same time, the concept of FinOps* was adopted to reflect the fact that financial decisions had to balance needs of performance, reliability, security and compliance - and even led to the development of an eponymous foundation to promote best practices and standards
• Every year on a continuous basis, new cloud services are introduced and more companies build and/or move workloads to the cloud. Now, spiking inflation and the prospect of a global recession have sharpened every corporation’s focus on how to better manage costs across the board
• As a result, the AWS re:Invent 2022 Expo floor was blanketed with messages promoting the ability of a broad set of vendors to optimize cloud spend

“Given the deep, ongoing demand for these capabilities and the variety of approaches to the problem from both a technical and business perspective, we believe the cost optimization/FinOps market opportunity will provide real value creation for investors and a rich set of strategic acquisition opportunities for buyers in the future”

Complexity must be tamed

Since the late 1990s, complexity in IT environments has been one of the principal generators of demand for IT management tools in the open computing era:

• Pre-cloud, complexity was driven by variety in compute, storage and networking platforms – giving need to manage these holistically
• Now, the distributed and ephemeral nature of the cloud dramatically increases IT complexity, and the rapid adoption of new technologies (eg containers and serverless functions), drives an even larger step function increase
• As these new cloud native approaches comprise a growing portion of the IT estate - and as enterprises adopt more agile application development approaches - the separation of development and IT operations responsibilities and functions has begun to blur
• So, ‘DevOps’ was born - the concept that IT infrastructure and operations practices must be folded into the process of developing applications to speed deployment and improve performance
• In addition to addressing the exponential increase in complexity, IT management tools now must also be able to deliver value to users that have no expertise in IT infrastructure. This condition extends also to security and compliance requirements as well.

“We noted numerous vendors at AWS re:Invent 2022 providing monitoring, management, and security tools designed specifically to address new and emerging cloud technologies and this shift to a DevOps approach.  Given the secular nature of these IT changes and the expected breadth of demand, we believe this area will also be ripe with opportunities for investors and strategic buyers alike.”

A maturing market for enterprise cloud solutions

The large cloud providers offer a broad and deep set of native tools with their services, to enable typical monitoring, management and security functions. However, the demand from enterprises for third party solutions for the same functionality is well established, growing and persistent. This demand is being driven by several factors:

• Just as diversity of server, storage and networking suppliers drove demand for third party management tools in the past, leveraging multiple cloud vendors is driving the same type of demand today
• Public cloud services are designed to be self-service, easy to scale and enable broad access to sophisticated capabilities. These core design features are often directly at odds with typical enterprise approaches to IT where they are responsible for meeting compliance requirements, operational best practices, security policies and margin targets
• Third party tools allow enterprises to achieve their goals while enabling cloud users to take maximum advantage of benefits that cloud computing offers, across multiple cloud providers
• Professionals with skills necessary to fully utilize the cloud native tools to achieve and maintain enterprise IT objectives are scarce and expensive, and the pool of skilled resources is not expected to grow at the same pace as cloud adoption
• Third party software tools and managed services enable enterprises to achieve their objectives despite this substantial and growing skills gap.

“We saw at AWS re:Invent 2022 an expanding portfolio of software and managed services providers addressing a broad set of needs related to enterprise usage of cloud services. We also noted a substantial increase in the number of growth equity investors attending the conference.  While one might say they were there because they had more time on their hands given the relative slow down in software investing in 2022, based on the conversations we had, we believe the broader interest among a wide set of leading growth equity investors is testament to the maturing of this segment of the market.”

*FinOps:(“ …an evolving cloud financial management discipline and cultural practice that enables organizations to get maximum business value by helping engineering, finance, technology and business teams to collaborate on data-driven spending decisions”) https://www.finops.org/introduction/what-is-finops/