Welcome to Mostly Cloudy! Today: the thinking behind Microsoft’s sweeping partnership announcement with the London Stock Exchange Group, Coupa falls into Thoma Bravo’s clutches, and why enterprise startups that need funding are looking at down rounds.
Headquarters of the London Stock Exchange Group, photo courtesy Wikimedia Commons.
Taking orders
One oddity over the last 15 years of cloud infrastructure development was the reluctance of the financial services industry to get on board, after it spent billions in the late 1990s and early 2000s building out impressive arrays of the latest and greatest information technology equipment and software. Now that reluctance is a thing of the past, and cloud providers are jockeying for position to control the next decade of financial services spending.
Microsoft’s ten-year deal with the London Stock Exchange Group, which includes the purchase of a 4% stake in the organization, could drive as much as $5 billion in revenue over the lifetime of the deal, the company said Monday. That includes a commitment of $2.8 billion in spending on Azure and other Microsoft services, and at first glance it might look like Microsoft just bought some cloud revenue with that investment, much as it was hoping to do by flirting with TikTok and Pinterest in recent years.
That take isn’t entirely wrong, given that as the cloud late adopters start cutting deals the competition for market share among the Big Three will become even stronger. But the LSEG deal fits neatly into Microsoft’s vertical cloud strategy, which could help it generate revenue far greater than the amounts involved in this deal.
Those cloud late adopters need help moving their workloads onto cloud servers, and in response cloud providers (led by Microsoft and Google) have amassed purpose-built packages of services designed around the specific needs of different industries. Manufacturing companies have much different IT requirements and challenges than retail companies, for example, and companies of all stripes have responded to this approach. (Need proof? AWS followed suit.)
Financial services companies have particularly unique needs around performance, data storage, and analytics, because people are particular about their money. Working with LSEG could allow Microsoft to build new financial-services cloud products that could serve companies that have similar needs but don’t operate at the same scale, and generate more business overall than it will rake in directly from its new pals in London.
The market for cloud infrastructure services exploded over the last decade because of the flexibility enabled by cloud tools, which allowed developers to build anything they wanted. Over the next decade, flexible services might not be as important as simple and reliable services that can fall neatly into operations where stability is job number one.
Clipping Coupas
To the surprise of very few, Thoma Bravo announced it had acquired Coupa Monday, although the purchase price of $8 billion was a little disappointing to Coupa investors who, like most investors, were hoping for more. The high-flying pandemic-fueled days enjoyed by enterprise software stocks clearly came to an end this year, and the hangover seems likely to extend in 2023.
But at what point does Thoma Bravo’s roll up of enterprise software companies start to look a little uncomfortable? Regulators have already signaled an interest in taking a closer look at “interlocking directorates,” which forced multiple Thoma Bravo partners to step down from the boards of Solarwinds and Dynatrace.
Thoma Bravo isn’t shy about touting its reach: “Today, our firm’s private equity software portfolio includes 70+ companies that generate over $24 billion of annual revenue and employ over 85,000 colleagues around the world,” the company declares on its investments page, although with the caveat that it doesn’t control all the companies in that portfolio. That’s almost as much as Salesforce recorded in its last fiscal year, and Thoma Bravo’s portfolio might grow faster than Salesforce in 2023.
It’s not surprising that there are a lot of unprofitable enterprise software companies previously valued on unsustainable growth rates crashing back down to earth right now. But like most private equity companies, Thoma Bravo’s strategy relies on cutting costs at those companies to improve margins.
That trend is not going to help fix the software supply-chain security problem.
Around the enterprise
Dataiku raised $200 million in new funding, but at a lower valuation than its previous round, which seems like it’s getting to be a real trend …
…after hot security startup Snyk was also forced to accept a lower valuation to close a $196.5 million round of funding.
Oracle beat Wall Street expectations again for its last quarter, leading Larry Ellison to say a bunch of ridiculous things on its earnings call that were dutifully parroted by reporters who should know better by now.
Microsoft reportedly bought DPU maker Fungible for $190 million, which could add a vital piece to its custom silicon strategy.
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Thanks for reading — see you later this week!