Mark Odendahl
All right. So Matt, welcome to the podcast.
Matt Hedberg
Hey, thanks a lot Mark for having me. The RBC private tech conference was just a great event this year. It was our second year back in person. We had nearly 40 software, internet, FinTech and ad tech companies there – just a lot of really interesting conversations that we had, a lot of leading technology companies that we think really shape the future of the technology space. So a lot of really fascinating discussions, and I really look forward to, you know, talking about some of those today.
I don't think we could start a podcast in the technology industry right now without leading with AI, without digging into generative AI. Just how important do you think nailing down an approach to generative AI is to the future of many of the companies you met with?
Matt Hedberg
Yeah, obviously Odie, it's a great question and one that comes up literally in every conversation that we have these days. And it was very timely for our conference here, it came up in every single conversation with the private companies that we spoke with, and candidly, all the public companies that we talked with in other forums. Nearly every management team that we spoke with predicted that Gen AI will disrupt various aspects of both their business, their industry, as well as how customers leverage software. And, so, having really an approach on generative AI we think is super important. And I think, you know, what we heard from a lot of management teams, is, you know, this is an evolving topic, they're listening to how customers, you know, want to consume or leverage generative AI. And I think, you know, ultimately, these management teams, the point was, they're thinking about how they can introduce it to their own product stack to perhaps leapfrog competition. And so we got the sense that there was a lot of focus on how do you productize it, you know? How do you come up with an individual way to monetize it, because ultimately, we think investors are really looking for a way to see it show up in both growth and perhaps even profitability as a cost saver. So, we think that as the future evolves, investors want to see tangible evidence of generative AI. And a lot of these companies that we talked to whether it was a cybersecurity company, an internet company, an ad tech company, they're all thinking about it. And we think as you know, as the months and, and years progressed, it's just gonna become more and more entrenched. And candidly, we think a lot of the generative AI technology is coming from these private companies, these smaller, innovative startups… versus some of the, you know, public companies that are perhaps a bit older and have been around for a bit longer. And so, yeah, we look to the private companies, some of the innovators in the space and so it was a real timely event. And, you know, we heard things from cybersecurity, right, you know, not only are our bad actors leveraging generative AI to write code, but software security companies are leveraging generative AI to come up with a more effective way to stop malware.
Even in like vertical software companies, like the lending market for construction, you know, how can you leverage generative AI in that instance, and we heard some really, really unique things that ultimately, are going to continue to percolate up through the industry over the next several years.
Mark Odendahl
So with the talk of AI comes the talk of the importance of data. Well, how the conversations go as companies try to best utilize their data sources?
Matt Hedberg
Yeah, it's so when we talk about generative AI, we say we generally think there's two fundamental tenets of success. One is having a cloud native platform, and two is having unique datasets. And so it really dovetails into your question, Mark. And we think data is absolutely fundamental to nearly everything today. And it's a topic that we've talked about many, many times on many different instances, in this case, as it relates to generative AI, we think it's super important. We think having some unique datasets will allow these large language models - or LLMs – to be trained, and offer companies really unique insights into merging both public and private data. And so we heard from a lot of these private companies, you know, these are generally all cloud native platforms that we heard from, about how they can leverage these large datasets, not only does it make the platform stickier, and it allows for easy cross module sell. But also, in the context of generative AI, we think that's really where the innovation is going to come out of. And so, you know, companies, whether you're talking about a cyber company, or you're talking about a FinTech company, or internet companies, like it's about these large datasets, and I think, you know, the delta between several years ago, when a lot of these were on premise models, they're just a lot harder to train these LLMs when you're leveraging on premised datasets, and so yeah, we think the core of having a cloud based platform and unique datasets is really critical. And we heard that consistently from all the companies that we spoke with. And so I was really encouraged to hear from these private companies, you know, the focus on the sort of the two most important aspects, and then we'll come down to the ability to monetize it. But having these unique datasets we think, allows them to become more strategic and disruptive, you know, candidly, and I think, you know, that could have ripple effects to public companies, when it comes to disruptors, disrupting disruptors or when it comes to potential m&a opportunities. That unique data set offers a critical moat that we think offers a real differentiation today and that was really, really exciting to hear at the conference.
Mark Odendahl
So moving on, you know, the development of the public cloud over the last few years has really accelerated the ability for new companies to be formed. And, you know, cloud and cloud technology was discussed in every presentation. Hyperscalers, like AWS have dominated so far, but today's environment is pushing companies to keep a closer eye on costs. Can investors or vendors expect much change in the cloud environment?
Matt Hedberg
Yeah, so it's a great question. And really, you know, after the generative AI question, the question on cloud optimization, and really, the cloud migration path is obviously extremely topical to both public and private companies and obviously, institutional investors. You know, we think, you know, coming out of COVID, this migration to public cloud resources will continue. Obviously, we're in a period of time now, where customers are looking to, perhaps optimize cloud spend become a bit smarter around it. And we think it's really good hygiene, candidly. A lot of the hyperscalers are actually helping customers, optimize some of the spend that came out of COVID. And we think that is a really good practice. So, we heard it from a number of private companies that they are, you know, offering tools, for instance, to help customers optimize cloud spend, not that we're going back to on premise. But rather, we're taking a much more, I think, long term pragmatic view of the right methodology of leveraging public cloud spend, and in some instances on premise spend. And so this notion of hybrid cloud, we think continues to reign supreme. And it we think, over time, yes, we will continue to see a migration toward public cloud. But it could come at a bit more measured pace. And I think ultimately, that that positions customers to really feel better about the long term trajectory of leveraging both public and private cloud spend. And so really being smart about cloud spend, we think is the new normal. We think this optimization trend just becomes part of the fabric that IT executives think about when they're when they're rolling out new applications. Some should reside in the public cloud, some should reside on premise, then really that ability to flip between the two and leverage data in migration data in motion, as well as funneling this into large language models from a Gen AI perspective, is super important. And so yes, while the institutional investors are concerned currently about the rate of cloud cost optimization, my main takeaway was that this is a part of the healthy progression to additional cloud spend. But yes, hybrid cloud has been the new normal remains the new normal. And that ultimately, this this progression, though to cloud spend, likely continues. And just to double click on that Gen AI perspective, again, we think, you know, unique cloud data sets are key to unlocking Gen AI technology. And so we do think that, you know, although we're going through this period of cloud cost optimization, ultimately, these large datasets continue to move towards, towards the cloud. And so yeah, it's becoming, I think, a new part of the investment fabric that both customers and companies and investors are thinking about.
Mark Odendahl
All right, it can't talk to Matt Hedberg without talking about security. You're one of the leading analysts in in cybersecurity on Wall Street. What do you hear from your fireside chats as it relates to security, innovation? Customer spend in that area?
Matt Hedberg
Yeah, yeah. The punchline Mark, is that it remains as robust as ever. Right? And we touched on a little bit ago when we talked about Gen AI, right? You know, hackers leveraging cogeneration tools to create more effective malware and so effectively, anybody, you know, theoretically could create malware with the ability to leverage Gen AI. And so yeah, cybersecurity was alive and well, at the conference, we had a number of leading vendors and investors that we spoke with at the conference. And, you know, some executives, the you know, I think when we think about some of the more interesting data points, we heard this notion about Microsoft, right? They are a juggernaut in cybersecurity remains very topical for both public and private companies when we think about the competitive landscape. We hear from several executives that, you know, today, Microsoft is anywhere between 15 to 20 billion in cybersecurity revenue, which is surprising to a lot of folks. We heard that, you know, they're on a path to becoming a much bigger cyber vendor, perhaps up to $50 billion. And, you know, I think there's ramifications when we hear that. But what we heard was that these, these cyber vendors are learning to live in that ecosystem of Microsoft becoming a bigger player. And this notion of multi cloud, I think, still lends itself to some of these individual unique cyber vendors. The other topic that we heard was that the big get bigger, and I think this is an important theme, and it certainly resonates with Microsoft. But we also heard public vendors like Palo Alto, CrowdStrike, Fortinet, Z-scaler, will continue to gain share this notion of customers wanting to do more with less is something that we've talked about in the past. And that could relate to, you know, the application space within software. But in this case, in cybersecurity, I think this notion of trying to reduce the number of vendors is very relevant with a lot of customers, and so big getting bigger. Now, we also heard from a lot of these innovative cybersecurity startups, they're offering a lot of unique capabilities that candidly, some of the bigger public vendors don't have to offer today. And so, while innovation is high, and it remains robust in the private company space, and we think over time, you know, a lot of that will migrate its way to the public companies out there. But yeah, the punch line is that the cybersecurity industry remains alive. And well, we continue to think the big get bigger. And that includes Microsoft, but also this idea that trying to navigate that environment with Microsoft getting bigger is an important consideration for both companies and investors.
Mark Odendahl
So we just ran through some themes from the conference, obviously generative AI, the data that's important for that, the cloud environment and cybersecurity, let's zoom out a little further. What do you hear about the macro environment for Software companies? Or tech companies in general?
Matt Hedberg
Yeah, it's obviously relevant for institutional investors, and really, anybody when they think about the health of the IT environment. What we heard from a lot of the of the private companies there was that, you know, demand remains fairly stable. Right? I think, you know, we didn't hear a lot of acceleration, you know, perhaps pockets in cybersecurity here or there. But that demand environment remains fairly stable. We have published a number of reports summarizing the past several learning cycles, and that's generally been the theme as well from public software companies. Certainly there are pockets of weakness. We saw that on the April earnings season, but tthe environment remains fairly stable. Now, I will say that there were some exceptions to that. We talked to a number of vertical software companies at the private company tech conference, and that's where we actually heard more robust demand signals, which is really, really interesting to me. We often think that vertical software is one of the more interesting investment capital worries within software. And the reason is, is a lot of these private companies are going after markets that have been untouched or less touched by public software companies trying to unlock value in smaller verticals or niche verticals that say Microsoft or SAP or Oracle aren't touching. And in that instance, we heard a very strong demand trends, candidly, and a lot of that is these companies are trying to infuse technology into underserved categories. And so vertical software seemed to be a rather robust area of spend. And it's something that, you know, we're seeing that in public companies, too. We're seeing strong results from vertical software companies like Bentley or PTC, companies like Viva, companies like Guidewire. And so it was really encouraging to see similar trends in private company software. And, you know, and candidly, we've talked about software eating the world, you know, for the last decade, it's alive and well, right. And I think that was especially prevalent within vertical software companies. And so, yeah, I do think that the demand signals remain somewhat mixed in private software company lands, which sort of mirrors the public software peers, but that there certainly are pockets of strength, which is encouraging. Ultimately, I think investors are looking for the second derivative, we do a lot of work on the mosaic theory of job postings which seem to be stabilizing as perhaps a precursor to more robust demand trends, cloud cost optimization, which we talked about previously, you know, that could start to show signs of stabilization. So I think there's an there were certainly some encouraging green shoots that came out of the conference. But nonetheless, I want to be clear, there was certainly, you know, areas of caution areas of, you know, sort of uncertainty, as this year progresses. But I do think that that software remains alive and well was the key theme and where it can unlock value and underserved categories, that's where we're seeing still very, very healthy growth.
Mark Odendahl
You and I haven't mentioned this yet, but the you know, the conference was very timely to talk funding, you know, we had in the United States, we had a bank fail, that specialized in funding VCs that probably has relationships with a lot of these companies. So what was the general? You know, no specifics, but what was the general feel around funding for these private companies?
Matt Hedberg
Yeah, you know, it's, it's a great question, right, especially with the cost of debt going up. You know, it's very topical. And I think what we heard from a lot of these vendors, because we did have several VCs and private equity firms in attendance is funding is still alive, certainly in areas where there's an increased focus. And you can imagine what I'm going to say next, generative AI remains obviously a hot topic from a funding perspective, there's a lot of VC dollars going at the generative AI space funding next gen technologies. And so, you know, that remains clearly an area of focus, I think vertical software remains an active category where funding is being raised and pushed into some of these technology companies. And, so I think, you know, it has to be the right categories, what we heard, deals with funding rounds are still getting done, there is a difference in valuation, you know, which we've talked about previously, you know, deals are still getting done at high valuations, where, if it's in the right category, deals are getting done elsewhere. Not at sort of the same valuations that we've seen previously. But that's part of a healthy, you know, approach, I think, to the future of tech spending, I think the question remains is, you know, how are these companies being funded? And how are they being built? And I think, you know, that that that question of what does the next wave of private companies look like is a really relevant question. And I think that would be a really nice segue to your next question, because it really dovetails nicely...
Mark Odendahl
Let's do an advertisement for your recent primer. So Matt recently published a, along with his partners on the tech team, a primer on software, and the title of the report was the 10x software club, who's in it, and how do you get there? And so Matt, what, what was your purpose in in publishing this primer?
Matt Hedberg
So, the point of the report is, on this 10x Club, was really to illustrate that in prior funding cycles, prior deal cycles, it was all about growth, and profitability wasn't necessarily in focus. And investors were quite willing to apply high valuations to companies that have very high growth, but really no path to profitability. And the point of this report was to illustrate some rather interesting findings that it's not all about growth anymore. You know, previously, we saw public software companies trading at 40 to 50 times forward 12 months sales, and obviously we're not there anymore. But when we look at some of these companies in the 10x, so this is 10 times forward 12 month revenue, we found some interesting trends. And that again, it's not all about growth. We saw companies, a lot of them are vertical software companies like SanSara, like Clearwater Analytics, like, like ANSYS, like Altair, that are all trading at very high software multiples as sales multiples, but also have very high profitability levels. And I think that's a really interesting thing, to think how investors are attributing value and this view that profitability matters we think is an enduring characteristic coming out of the last several years of this economic cycle that we're in. So we think it's a very healthy thing. There's ramifications on the private side, right. Going back to the prior question, I think a lot of these VCs andPE firms are talking to private companies about like, you need a path to profitability. You also, you know, there's clearly a focus on disruptive growth, but also this view that, you know, money isn't free, and there has to be a view towards profitability. And we think by showing that some of them are valuable software companies on the planet, also have strong profitability is a really interesting thing when we think about this next wave of private companies coming to market. And I think the question is on a go forward basis, you know, are we going to get more into a growth cycle where profitability sort of, you know, takes a step back to stock based comp not become the hot topic that it once was. And although when we get more into growth cycle, I think, you know, growth will matter. I do fundamentally believe that when institutional investors are presented with an investment thesis on the public side of the market, there has to be a view towards profitability. And I think that's a very healthy dynamic and ultimately leads to I think, more enduring software valuations and really this long term compounding nature, software eating the world software being disruptive, generative AI, big data, cloud, cybersecurity all really is involved in this idea of profitable growth. And ultimately, that was the point of the report. And it had a lot of positive feedback from both public and private companies as well as investors. And so yeah, it's an important question. And I'm glad, I'm glad it was certainly relevant in our private company conference as well.
Mark Odendahl
So Matt, I just want to thank you. I want to congratulate you, and all your partners on the research team and technology for a great conference, I want to also say congratulations to the entire RBC Capital Markets team that put this event on for the second year, it's grown to be a very important event for RBC in the Los Angeles area where RBC has a growing presence. And so just a fantastic event. Fantastic primer. Matt, I really appreciate your partnership. Thank you.
Matt Hedberg
Yeah, thanks. So thanks a lot, Mark. It was it was just a great event. It was great to see so many companies and investors in attendance. And, you know, I just I'm really encouraged with the where the private tech market is going. And as a precursor to next year, we mark it on your calendars. We'll be back in LA in the spring of 2024 with the next wave of private companies, and it's just it's such a great event for the firm and for the LA area. And so yeah, thanks again from from all of us on the research side. We really enjoy being part of this and look forward to next year as well.