This VC says the cloud market is about to get 'harsher' as startups are forced to compete with each other instead of legacy players: 'Goodbye Gold Rush, hello Hunger Games'


Rory O'Driscoll, Scale Venture Partners

  • The cloud market has grown rapidly in the last two decades, and Rory O’Driscoll, partner at Scale Venture Partners, thinks the market is about to experience a slowdown. 
  • As cloud increasingly becomes the norm, O’Driscoll thinks the next phase of cloud will have cloud companies competing with each other, rather than with legacy players who have on premise software, which has been the business model up until now.
  • O’Driscoll has been investing in enterprise software for the past 25 years and actively invested in the software as a service trend from the beginning as enterprise software moved to the cloud.
  • He lays out three strategies for startups to compete in this new environment. 
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The cloud market has been growing for the last two decades. It’s led large companies like Amazon, Microsoft, and Salesforce to new highs and opened a huge opportunity for new players to disrupt the existing software market.

However, that growth is expected to slow in the next three to five years, as cloud increasingly becomes the norm, argues Rory O’Driscoll, partner at Scale Venture Partners. O’Driscoll thinks the next phase of the market will see cloud companies competing with each other, versus trying to take market share from on-premise software.

O’Driscoll has been investing in enterprise software for the past 25 years and actively invested in the software as a service trend from the beginning. He was an investor in cloud companies like Box, Docusign, and ahead of their respective IPOs, and holds several board seats at such firms.

In a recent conversation, O’Driscoll told Business Insider that from his very close perch, a major tipping point in the industry is approaching: By 2021, he says, the majority of all software revenue across the industry will be derived from the cloud, rather than the more traditional approach.

At that point, he said, cloud companies will not be able to rely on the old model of taking market share from legacy vendors — they will have to compete directly with other cloud companies. 

“There will still be lots of opportunities to build, to take market share from on prem, but that will be decreasing and more and more it will be about competing with other cloud companies. That’s going to be qualitatively harder to do,” O’Driscoll said. 

In a blog post on the topic, O’Driscoll was a little more colorful: “Goodbye Gold Rush, hello Hunger Games.”

How to succeed

The way for startups to compete successfully going forward is to build automation tech that simplifies the process of working across all of the very many cloud services required for getting a job done.

“The sweet spot will be going beyond the cloud, which is building on top of the cloud and focusing more on software that does the work for us and automates the work, and that leverages AI to not only move business processes from on premise to the cloud but to actually remove those business processes and do the work for us,” O’Driscoll told Business Insider when we spoke in November. 

He thinks large cloud companies, like Salesforce, will start to feel the pressure when they can’t grow anymore in the core markets they are in, and have to turn to new markets to keep growing. Companies in that position will start to bundle products together, in the same way Microsoft does when selling its software, he added. 

That creates an even greater challenge for startups looking to enter the space. Instead of competing with legacy players, startups will have to contend with cloud behemoths who are “in an adjacent market that wants to add your product and take your market,” O’Driscoll wrote in his blog post. 

This dynamic is already playing out with the competition between Slack and Microsoft Teams. Microsoft bundles its Teams workplace chat app for free in with its other Office 365 productivity software, and is therefore making it harder for Slack to gain market share and keep growing. 

Three possible roadmaps

O’Driscoll said he has three strategies for new startup founders to follow in what he calls this new, “harsher cloud” environment that will develop in the next five years. 

  • The first is to enter an existing market and win against legacy players. One example of a success story with this strategy is video conferencing company Zoom, O’Driscoll said. Zoom took on legacy players like Cisco (WebEx), Microsoft, and LogMeIn. 
  • The second is tacking an area where cloud software has not really caught on. Some of those areas are “many industry verticals, most SMB’s, and the parts of the cloud that are being carved out of the wider telco industry,” O’Driscoll writes. 
  • The third is focus on building software that uses new technologies like artificial intelligence for automating tasks. This software can be built on top of cloud apps and is meant to let users do more with the software, O’Driscoll said. 

This last strategy, O’Driscoll said, is already happening in the workplace, and companies that can build in that space will be the best-positioned to compete in a crowded market.

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