The State of Cloud Software Spending

Battery, a VC firm, backing more than 450 companies like Amplitude, Affirm, Confluent and Coupa, released its 46-page “State of Cloud Software Spending” report for enterprise buying behavior. Here are curated highlights:

The Enterprise Tech Spend Sentiment Index
The Battery Ventures Enterprise Tech Spend Sentiment Index is a score between 0 and 100, based on budget, spending trends, budget outlook (data, security, AI/ML, dev tools, etc.) and approval times.

An Index score over 50 signals bullish buyer behavior, with enterprise buyers still active and driving adoption of new technologies. An Index score below 50 signals bearish buyer behavior with a more conservative outlook. We saw a 5.2-point decrease from September’s Index score of 55.4, a modest drop that can be attributed to cooling technology markets and increased budget oversight.

In Q3 2022, the score was 55.4 & is now down to 50.2 in Q1 2023.

This suggests moderately bullish behavior from enterprise tech buyers, who are expanding their tech stacks but approaching contracts more conservatively:

  • More companies compressing budgets, but no significant increase in companies decreasing spend by over 10%.

  • More conservatism in technology strategy, given economic unpredictability (9% change from Q3 2022).

  • A strong 1-year and 5-year outlook on budgets across data, AI/ML, security and dev tools, despite a paring back in some categories, including dev tools.

  • Slowed approval times for companies, as enterprises become more diligent on technologies they adopt, particularly those that create dramatic organizational change

  • Less than 15% of CXOs are looking to decrease budget across four core categories; some slowdown relative to less than 10% in Q3 2022 Battery Survey.

Priorities for CXOs to reduce Budget:

  • Vendor Consolidation is at 93%
  • Optimize SaaS Licensing is at 82%
  • Reduce Workforce 54%

Top Cloud Spend Categories over the next 12 months:

  • Cloud Infrastructure (Hyperscaler)
  • Data Warehouse (Snowflake)
  • Enterprise Security (ZS, CRWD, S))
  • Enterprise Apps
  • Automation

Cloud Software Spending is Not Immune, But It is Resilient

  • Enterprise tech outlook is more optimistic than recent headlines might suggest

  • Enterprise technology budgets remain relatively inelastic, despite increased oversight

  • 46% of CXO respondents expect to increase their total technology budget for 2023, despite continued macro headwinds

  • While overall hiring has slowed, there is still robust demand for key technical roles

  • Spending slowdown is short-term; mid-term and long-term spending demand remains intact

  • Strong budgets for those with over $500M in annual spend – 46% of budgets are
    increasing, 31% are remaining flat and 23% are down.

My Take:
While spending may face pressure in some areas in the short term, I found it uplifting and it confirms my belief that - no surprise - digital transformation is here to stay and a only matter of time until companies reopen their budgets.

Enterprise Security (ZS, CRWD, S) and Data Warehouse providers (Snowflake) are still a top priority in the next 6-12 months. In contrast, developer tools like DataDog and Collaboration tool providers like Asana and Monday (?) should face stronger headwinds.

Still, all investors in the latter categories and with a longer time frame than 6 months should do (more than) okay:

Read the full report here [PDF].