Venture investors are tripping over themselves to throw money at cloud startups. VCs tell us why this market is so hot

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• The most successful cloud companies are raising hundreds of millions of dollars in private, venture funding before going public.
• The top 50 cloud companies on the Forbes Cloud 100 Index have raised an average of $370 million apiece.
• Those big investments are necessary for cloud companies to reach enormous multi-billion valuations, and those high valuations are becoming necessary to dazzle public investors when these cloud companies IPO, VCs tell Business Insider.
• By raising hundreds of millions in capital, “these businesses are growing faster than ever before,” Byron Deeter, partner at Bessemer Venture Partners told Business Insider. “They used to take 10 years to get to $100 million in revenue and now they do that in three or four years.”
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Cloud companies are raising money at seemingly huge numbers these days. The top 50 cloud companies, (as named by the Forbes Cloud 100 list) raised an average of about $370 million apiece in capital. And the average funding of the top 100 cloud companies is about $283 million each. 

While that seems like an enormous amount, investors and industry experts say big rounds of private funding help these companies achieve big, multi-billion valuations before they go public. And big valuations are what’s becoming expected of cloud companies when they IPO, investors say.

Cloud startups are looking at companies like Slack and Zoom that went public this year and saw big gains in valuations on day one of trading — from $7.1 billion to $15.7 billion for Slack; and from $1 billion to $9.2 billion for Zoom. 

Cloud companies looking to go public in the future want investors to believe that they, too, can reach such heights.

Need $3 billion or more

Ideally, private investors would love to have the chance to fund decacorns, startups valued at $10 billion or more, Jason Lemkin told Business Insider. Lemkin is a VC and founder of SaaStr, a company that helps other cloud software startup founders build their businesses.

Lemkin, who first noticed this trend of cloud startups raising huge funding amounts, said that, at the very least, cloud startups are expected to go public at a valuation of $3 billion or more. And that means they have to raise close to $300 million in funding if they want a shot at succeeding.

Byron Deeter, a partner at Bessemer Venture Partners, agreed with that and said cloud companies are now going public at two to three times the size than they did a decade ago, and therefore have to raise proportionally more money. A company that went public at a valuation of $750 million a few years back, would now be expected to go public at a valuation of $1.5 billion to $2 billion, Deeter told Business Insider. 

There’s a few things driving this. One is that capital is plentiful for promising cloud startups so it’s easier for them to raise such massive rounds of funding at high valuations. Another piece is that companies are waiting longer to go public, becoming huge companies while still private. When they do decide to go public, they are a lot larger. 

“It is possible to grow faster by investing capital into products and go to market [sales tactics] and so these businesses are growing faster than ever before,” Deeter said. “They used to take 10 years to get to $100 million in revenue and now they do that in three or four years.”

There’s risks for those rewards

This is evident with companies like Canva, a design company that’s taking on established players like Adobe Photoshop and Microsoft PowerPoint. Canva has raised two rounds of funding this year, both led by legendary tech investor Mary Meeker. After its latest $85 million Series E round, the company was valued at $3.2 billion. 

CEO Melanie Perkins told Business Insider at the time that part of raising two rounds in a year was interest from investors. The company also plans to use that money to grow, Perkins said at the time. 

Then again, another example is UiPath, a company that creates automation software. It grew extremely fast in a short time. It raised $568 million at a $7 billion valuation in April, less than a year after it raised a $225 million Series C round that valued the company at $3 billion.

However, raising and growing at that rapid pace doesn’t always pay off. In October, UiPath turned around and laid off 400 people, just six months after that last funding round that valued the company at $7 billion, and forced out a new CFO that tried to rein in spending, Business Insider previously reported. 

Investors don’t see funding amounts or valuations going down anytime soon though. As long as capital is easy to access, founders will look to raise as much as they can, Lemkin said. And as investors look for decacorns to place their bets on, all companies will look to raise over $300 million on their way to an IPO, he added. 

Got a tip? Contact this reporter via email at pzaveri@businessinsider.com or Signal at 925-364-4258. You can also contact Business Insider securely via SecureDrop.

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