The firm, which now has over $4 billion in assets under management, invests across all stagesRead more...
The firm focuses exclusively on investing in the global cloud business application market
The cloud has had a profound effect on the business and technology sectors. By cutting down the cost of hardware, and giving companies a simpler, more effective way to store their data, it has led to an explosion of innovation around the world. That revolution has only really begun, though, and there is a ton of opportunity for younger companies trying to make their mark in the cloud app space.
Cloud Apps Capital Partners is a venture fund that is, as its name suggests, squarely focused on investing in this sector, helping companies, especially those in the early stage, get funding and access to some of the top names in the space.
On Monday, the firm, which launched in 2015 with a $53.7 million fund, announced the close of its second fund, which was oversubscribed at $87 million. The firm now has over $140 million under management.
Led by former Salesforce.com executive Matt Holleran, Cloud Apps Capital Partners makes the majority of its investments in what it calls the "Classic Series A" round.
"The companies we invest in create applications that groups of business users use. We like our companies to really work on behalf of, and be the most important application provider to, a specific title and business. As a result, we make investments in companies that have around two to 10 people in general and are pre-visible traction. In addition to the capital, we think we can be helpful to them in sharing our business process and business model knowledge, our network of executives and our partnerships. That’s what we at Cloud App Capital Partners think of as the Classic Series A," Holleran told me in an interview.
One of those investments was in a company called Propel, which offers Product Lifecycle Management solutions.
"Product Lifecycle Management is the fourth largest global software category today. On-premise software has really not yet moved to the cloud, and the business problem of Lifecycle Management is, let’s say you are the product team responsible for the next Apple iPhone, even though it’s not a customer. That team has to collaborate on chip sets, what screen, what power supply, all the documentation associated with what goes into that phone, and then communicate that out to its global manufacturing and supply base," said Holleran.
"We invested $2 million in the company, and I’m pleased to share with you that they’re now building, we think, a great category defining company moving the global PLM market to the cloud. That’s an example of the Classic Series A, and it’s an emerging category leader."
The firm has, however, done some late stage deals, such as Zuora, ServiceMax, HootSuite and CrowdStrike, but those are companies where the team has known for years. For example, Tien Tzuo, CEO of Zuora, worked with Holleran when they were both at Salesforce.
"Those are companies that are global. They are category defining companies that, in many instances, we’ve known since they were super small and have been helping them along the way. Those are some that are at global scale and with Zuora and ServiceMax we’re pleased to have been part of billion plus exits," he said.
For its second fund, Cloud Apps Capital Partners plans to invest in roughly 10 companies, which is the same number of investments it made out of Fund I, but it will put slightly more money into its upcoming investments, both initially and long-term. The first investment will be $3 to $4 million, in a Classic Series A it might be $3 to $6 million, and over the lifetime of an investment the firm might invest around $12 million.
"We also like the A1/A2 strategy, which we have worked with a number of companies in our portfolio on and plan to do later, where we may then lead another $3 or $4 million financing, and bring in other seed investors or value-added angels into that syndicate as well. As a result, collectively that Series A financing could $6 to $10 million with a syndicate that we lead. We like that model quite a bit, as do our entrepreneurs," said Holleran.
Besides its category of investment, another ting that sets Cloud Apps Capital Partners apart is that 90 percent of the capital for Fund II is from university endowments and large foundations and "institutions that are committed to the asset class and that’s what’s needed to help these companies build big businesses over six to 10 years."
"A college endowment that’s been around for 200 years, they expect around for another 200 years, and so, as a result, for them they recognize and appreciate that, to get to a public scale company, like a Zuora, it may take 10 years, but the outcome is global category leading company that’s very valuable. You want to make sure that the investor base that you have has the same kind of horizon to help these companies to be very, very successful," Holleran told me.
"Often times with newer firms, or new funds, there’s a lot of individual capital which can work very well, but I think the entrepreneurs do appreciate the institutional capital."
The evolution of the cloud space
In the last few years, Holleran told me that he has seen the global cloud business app market expand exponentially so that now it is being used by businesses of every size in nearly every country.
"What’s different now is that there’s 180 plus countries all over the world, where small, medium, large and enterprise clients want to use cloud business application. That’s different than when Salesforce.com or Netsuite or Oracle got started and they were only really in the developed economies with the right kind of Internet access. Now, when the whole world of businesses can be customers, that opens whole new markets for standalone companies, and, as a result, we think there will be many more than the 40 plus publicly traded cloud companies than there are today. Because there are a lot more business titles that should have companies built around them," he said.
That expansion is thanks to the evolution of Internet access for users all over the world, which has unfolded since Salesforce emerged in the late 90s, but also because of the competition between the major cloud providers.
"It's also because of what we affectionately refer to as the 'cloud wars.' Between Amazon’s cloud and Google’s cloud and Salesforce’s cloud and Microsoft’s cloud, they now building out data centers all over the world at a pretty frenetic pace, and that means great application reliability and great application speed all over the world. You take those two things together, and the fact that cloud business applications are just a much better value proposition than on-premise, I think that’s why it’s now 180 plus countries versus eight or 10."
As for where the cloud business app space goes next, that actually folds into Cloud Apps Capital Partners' investing strategy.
"First and foremost, we look at the title of the executive that our portfolio companies will serve. For example, in the case of ServiceMax, that is the VP of Field Service, and he or she owns many hundreds of thousands of people and maybe billions of dollars in parts and services all over the world and a big PNL, a big business that they’re running. That’s mission critical stuff. In the case of Propel, they support the VP of Engineering, the VP of supply chain, and they have a lot people who really rely on the application," said Holleran.
"So we look at those kinds of titles and we think there are many more titles, VPs, directors, managers, that deserve great business applications from entrepreneurs who really understand the problem, and then can easily be integrated in their other systems, Salesforce.com or others, which we know a little bit about, from having started and led the app exchange there. We think the future of the cloud business application market is finding the right titles, finding the right teams that really support them and help them to build their business on it and to support those titles all over the world."
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