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In CloudFlare’s latest earnings report, the management team highlighted the strength of enterprise buyers within their customer base.

I wondered if this were broadly true. Do public software companies with largely enterprise customer bases benefit from superior growth to their peers with mid-market or SMB focuses?

Enterprise & Mid-Market public companies have seen a relatively constant decline in growth rates through the last six years. SMB businesses benefited from a post-Covid surge when the US re-opened - a phenomenon that seems to abate with time.

I’m watching public company earnings to identify early trends in the software market to inform startups’ plans for 2023. Yesterday, Cloudflare announced earnings. I’m adding Cloudflare to the list of tracked companies for this series.

CloudFlare’s annual growth rates haven’t slowed in the 5 quarters, unlike Microsoft, Google, & Amazon’s growth rates.

Amy Cortese published “Venture Capital, Withering & Dying” in the New York Times on Oct 21, 2001. I came across it during a Google search & reading through the article. It’s a powerful reminder of history’s rhymes.

With some market indexes off 50 percent or more and with uncertainty growing after the terrorist attacks on Sept. 11, investors have become much more discriminating.

So far this year, 29 venture-backed companies have tried initial offerings, compared with 252 in 2000. There are also fewer mergers and acquisitions.

During this recession, startups will fall into one of four categories which I wrote about in June.

But, I missed something in this post : the advantages are compounding, which is the reason the biggest will continue to win share.

It’s also the reason changing strategies can be expensive.

This is the time in the startup cycle when big balance sheets become strategic advantages.

First, companies with bigger balance sheets can sustain higher monthly burn rates, which fuels growth.

I’m watching public company earnings to identify early weaknesses in the software market. Yesterday, Google & Amazon announced earnings which completes the picture. Growth will continue to slow this year.

A year ago, AWS, GCP, & Azure averaged 44% annual growth. Today, that figure has dropped to 27%. Amazon also guided to lower growth rates in the future.

Amazon: We expect [customer] optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens.

In his most recent earnings conference call, Microsoft’s Satya Nadella said “Every product of Microsoft will have some of the same AI capabilities to completely transform the product.” Today, Microsoft Teams launched AI features in Teams for a fee. Teams will summarize meetings, create chapters in those meetings, extract tasks, translate in real time, & develop templates for future meetings.

Incumbents have lept onto advances in generative machine learning more aggressively than any trend in recent technology history. Mobile, cloud, social - startups led each of those waves.

100 years ago, fluorescent lamps & suspended ceilings topped the list of hottest trends in office design. In 1928, San Antonio’s Milam Building claimed the honor of the first office skyscraper with air conditioning.

Twenty-five years later, window-encased skyscrapers with internal glass walls distinguished the modern office. Employees ensconced in the Lever House & the Seagram Building in New York enjoyed more daylight at work than any other Manhattanite.

Another generation would pass before the open office plan bulldozed walls separating managers & employees. Robert Probst conceived & George Nelson designed the Action Office - the iconic aluminum, wooden veneer, & black plastic desks of the 1980s.

I’m watching public company earnings to identify early weaknesses in the software market. Yesterday, Microsoft announced earnings.

The transcript highlights the major trends in software of 2023. Below, I’ve listed those trends with data & excerpts from the earnings call transcript.

1. Enterprises Have Slowed their Spending, Decelerating Further in December:

Growth is down 15 percentage points or about a third in a year.

The current wave of layoffs, a difficult component of the innovation boom/bust cycle, differs from the previous years’ dynamics.

B2B companies have reduced headcount to a greater extent than at any time since 2020.

In the last three years, B2C startups’ ratio of layoffs have dwarfed B2B layoffs. In 2020, B2C companies cut 8.8x the number of B2B employees. 3.8x in 2021, & 6.9x in 2022.

Most massive software companies structure themselves with an office of the CEO, which allocates capital to different business units. Within each business unit, a general manager operates one or more products.

There are three paths I’ve seen to achieve this scale:

1. The dominant path of the last ten years: focus on a single product until the company is roughly at $100m in ARR, then build adjacent products. Snowflake, DataDog, Zendesk, CrowdStrike etc.
2. Build a financial holding company acquiring lots of small businesses & use the profits to acquire more businesses. Constellation Software.
3. Develop multiple products from Day One. This is called a suite strategy: Zoho published a history of the 2-4 product launches per year, which illustrates the idea.