The Other CFO: The Rise Of The Cloud Economist
Among the set of 50 public software companies we analyzed, the average total enterprise value to 2021E gross profit multiple (based on CapIQ at time of publishing) is 24-25X. In other words: For every dollar of gross profit saved, market caps rise on average 24-25X the net cost savings from cloud repatriation. (Assumes savings are expressed net of depreciation costs incurred from incremental CapEx if relevant).
The Other CFO: The Rise of the Cloud Economist
I bet when you hear about cloud, you brush it off as the domain of the CIO. It is my belief that for the modern 'digital CFO', the cloud is a key strategic tool that CFOs should embrace, and not just for cost savings. Cloud is much more than an IT play. AWS Cloud has the ability to change the enterprise business model in a way I believe is revolutionary."
Enterprises have been under increasing pressure to fend off digital disruptors. Business agility has become increasingly sought after in the wake of the COVID-19 epidemic. The ability of an enterprise to manage change and foster business agility is dependent on people, process and technology. The CFO has a unique role to play in leading the enterprise from state of low frequency change to one of high frequency change. AWS Cloud is a key tool to enable high frequency change. Investment decisions can be turned from big bets, to many smaller projects and/or software changes. In addition, without stranded assets, refactoring your IT environment to accommodate changes becomes a much simpler proposition. High-frequency enterprises embrace cloud computing as a flywheel for frequent value delivery. AWS Cloud can be thought of as a set of standardized building blocks that enable infinite possibilities. Likewise, because the IT environment is not tied to a specific set of hardware, the infrastructure never needs to be refreshed. This will reduce or eliminate technical debt that is holding the organization back.
Lastly, we turn to sales and marketing expense (S&M), which is the most important operating expense for cloud investors and founders to pay attention to. Sales and marketing expense is the income statement line item that captures sales expenses, sales compensation, content and brand marketing, demand generation, and customer success expenses related to sales, among other costs. This represents the highest cost centers in cloud companies, representing over 50% of the total revenues brought in every year, even at maturity, as salespeople and marketing talent scale more linearly with revenue growth.
The Cash Conversion Score (CCS) is another metric that we often use to evaluate whether or not the capital that cloud companies raise and consume is generating a meaningful return. As the ratio of the ARR to total capital invested into a company minus cash, the Cash Conversion Score is effectively the return-on-investment of each dollar ever invested into a company. For both founders and investors, the Cash Conversion Score is, therefore, a powerful proxy for returns. If a company has a CCS of 1.0x, one dollar of investment into the business yields one dollar of topline recurring revenue. If we assume that the average cloud company gets a 10x revenue multiple (more in-line with historical norms vs. the 23x revenue multiple of ^EMCLOUD today), the one dollar of revenue multiplied by the 10x multiple equals $10 of enterprise value. Every dollar put into the company is getting a 10x return. Similarly, a company with a 0.1x CCS would only return the capital invested. ROI is not driven by Cash Conversion Score directly, but CCS indicates multi-year trends in a couple of incredibly important things, including product-market fit and a scalable sales and marketing organization. It is therefore a core KPI we track in evaluating cloud businesses.
Round size is the other major lever that cloud companies can toggle when structuring a fundraise. Knowing how much to raise at each stage of growth while balancing the tradeoff of dilution and runway is a tension that you will likely have to grapple with.
This document was written mostly with commercial SaaS and cloud-driven commercial organizations in mind. But, Cloud Unit Economics can be applied to other types of organizations. While most companies measure their success in revenue or profit, a public sector organization (e.g., federal, state, or local government) or nonprofit does not. Instead, value is typically measured in terms of the success (or failure) of the delivery of civic goods or services.
Even as enterprises embrace the many benefits of the cloud, managing the cost of cloud computing can be a challenge. According to Gartner, over 60% of IBM infrastructure and operations leaders report significant public cloud cost overruns that negatively impact their budgets.
Engineers and Ops team members, such as Lead Software Engineers, Principal Systems Engineers, Cloud Architects, Service Delivery Managers, Engineering Managers, or Directors of Platform Engineering, focus on building and supporting services for the organization. Cost is introduced as a metric in the same way that other performance metrics are tracked and monitored. Members of these teams consider the efficient design and use of resources via activities like rightsizing (the process of resizing cloud resources to better match the workload requirements), allocating container costs, finding unused storage and compute, and identifying whether spending anomalies are expected.
Though many executives report not fully trusting cloud technology, the use of the cloud is on the rise and is now almost prescriptive in an enterprise. According to the study, 99% of respondents use at least some cloud services in their organizations.
Health spending accounted for 17.8 percent of GDP in 2015, and this share is expected to increase over the next 10 years as the population ages, medical prices rise and other economic conditions come into play, according to the report.
According to Wainer, the PC era was IT-centric, capex-driven and characterised by IT maintenance and long lead times. "During this era, IT dictated everything on users in order to maintain control," he said. On the other hand, the cloud era is user-centric, opex-driven, on demand and is driven by innovation.
Before embarking on the journey to the cloud, he says enterprises must assess objectives, requirements, existing investments and readiness of the organisation. "After making the assessments, they should create a well-designed strategy and plan that leverages existing resources as well as new private and public cloud services."
Everyone is worried about inflation. Yet Amazon's economists reckon this won't affect the company as much as other businesses. They expect the price of Amazon products to rise less than 3% next year and then drop in 2024.
If a recession does occur, Amazon economists don't think the company will endure much pain. The company gets about 60% of its revenue from higher-income consumers who are less affected by higher unemployment and other recessionary outcomes.
Robert Bryce 0:04 Hi, everyone. Welcome to this episode of the power hungry Podcast. I'm Robert Bryce. On this podcast, we talk about energy, power, innovation and politics. And I'm pleased to welcome Bjorn Peters. He is the co founder and CFO of a Canadian company, a Canadian Nuclear company called dual fluid energy, Bjorn. Welcome to the power hungry podcast.Björn Peters 0:23 Thanks for having me. It's a great honor. Well,Robert Bryce 0:27 we'll, I hope you think so when we get done. So you wear many hats, Bjorn. And I didn't warn you, but guests on this podcast introduce themselves. So I'm talking to you largely because of your activism in Europe and in particularly in Germany around nuclear. But if you don't mind, imagine you have about a minute or so to introduce yourself to a people group of people who don't know you, please go ahead and introduce yourself.Björn Peters 0:53 Oh, but I'm a physicist and an energy economist by training, I come to the to the Energy Policy via being an investor at Deutsche Bank for for renewable energies, mostly. But I found out that this was that there was lots of issues around the energy transition. So I started getting into the policy space. And since about 10 years, I'm publishing and writing about energy, about the German energy transition. And so that is, I'm a political adviser to some to the, to those who listen, andRobert Bryce 1:37 you need more of those, you're gonna listen in Germany, no.Björn Peters 1:41 And it's sad for my for my daily living. I'm a consultant to some companies, I help them becoming bankable. And I've gone into the startup scenery more and more, and I was co founder of two fluid energy. And that is a company that tries to really reinvent nuclear in a in a very drastic way, in reinvent the business model of nuclear energy, and so I find this even more. I can change more when I'm successful in a dual fluid energy than if I'm a politician, I believe.Robert Bryce 2:25 Good. Okay. Well, let we'll we'll get to dual fluid. But since you're German and you're in, you said, you're outside of Frankfurt. Now you live outside of Frankfurt. I wanted to get your update on what's happening in Europe. I've written about Europe, I've talked a lot about it. And there the from where I sit, the European energy crisis only seems like it's getting worse. But then I'm not there. So tell me what, give us the update on what's happening, how you see what's happening in Germany, and more broadly, in Europe now, around gas supplies, electricity, the future of nuclear, etc. Give us a quick update, please.Björn Peters 2:59 Yeah, the thing is that this energy crisis started in the first half of 2021. And it's in I believe it is entirely policy made. We were facing very low winds, in particular in Western Europe. And the answer was burning more gas in order to provide sufficient amount of power. In Brazil, there was a drought, so not enough hydropower. So what they did, what did they do? They bought LNG and burned it in the in the power stations. So this scarcity of gas was building up until mid 2021. And I was actually giving an interview somewhere, saying we are in the we will seen an energy crisis here. I couldn't imagine how severe it could get actually. And then came the Russian war, and the scarcity was building up and up. And even in Germany, we didn't order more gas. I don't know why. It's, I think that's a miracle. So usually, when you think if you consume more gas, you just order more. Putin was saying, well, we delivered exactly what the Germans were ordering. And I have no reason to doubt this. So maybe the wrong people were were ordering. And so came the shift from 2021 to 2022. And we had about quadrupling in power in gas, and of course related in carbon markets.Robert Bryce 4:36 So carbon is linked quadrupling in pricesBjörn Peters 4:39 between beginning of 2021 and 20. End of 2020. And yeah, sorry. Yeah, the prices were cut quadrupling. And as everyone with a clear mind knows that prices are scarcity signals and high prices mean high scarcity. So the scarcity was Building up nearly a year ago. And then came the Russian invasion of Ukraine and the loss of pipelines for whatsoever reasons. I mean, that's, we can discuss these separately, but we effectively lost them. And now we are really in the middle of very severe winter, our guest storage is full, actually, we acquire guests at insane prices, driving markets up all over the world. But that's good when you're when you have deep pockets, you can do it. And now we have to pray for a mild winter, because if the wind is getting cold, then the gas supplies will not be enough. And we have to, we'll have to make tough decisions.Robert Bryce 5:52 So let me follow up on that. Because I testified before the US Senate last fall's pointing out that Europe was already having problems. So what do you how do you respond to the people who are saying about the European energy crisis? And I had to guest on recently say, Well, why is Europe in an energy crisis? And he said Vladimir Putin, is that true? Does it can Europe blame all of its problems on Putin?Björn Peters 6:15 Absolutely not. I mean, the all the reasons that we are in this crisis are policy made. The one was the the the increasing reliance on weather related energy forms. And if you depend on the weather, you need to understand what it means. But nobody asked that questions. The right questions about the spatial temporal behavior of weather and whether it fits to our energy needs. AndRobert Bryce 6:40 if you don't mind, because I think this is just such a key point. I mean, that, here's how I view it beyond it. To me, it's very simple. If we're facing more extreme weather because of climate change, why in the world, would we make our electric grid depend on the weather? I'm seeing this too simply, am I just because I'm from Oklahoma, and I slow that this was a dumb idea.Björn Peters 7:00 Actually, I don't share the the the the the premise that extreme weather is getting more more frequent, and if so on a very slow scale. But even the the the elementaries of what is weather and how what how, how broad are the distributions of possible weathers, we have never bothered to understand, I mean, we are actually lacking some sort of a statistical metrology that deals with the full distributions of what weather actually is. And then if you if you take certain weather parameters, such as the wind speed at 100 meters hate and the solar irradiation, that is the determinant, those are the determining factors for for a renewable energy system. They have might have other specifics. So the the we know from the Bible that there may be seven set years and several seven meager years. But we have no clue whether there are seven years with good wind and seven years with bedwin. Because nobody ever bothered asking the question.Robert Bryce 8:15 That's a great point that these and that the changes in these weather patterns could be far more sustained than anything we've seen before. And this was one of the points, I think, a great point that you made just a moment ago about that the gas storage in Europe was falling already last year because of low wind speeds. Right. And this was, and then by February, then when when Putin invaded Ukraine, storage was very low. And he had a strategic advantage just in terms of the gas supply. Is that fair? Fair analysis?Björn Peters 8:45 Absolutely. So with the this reliance on gas, I mean, we had it already 20 years ago, when we started the fast build out track of solar and wind energy,Robert Bryce 8:55 under the under you're speaking about Germany, and it with the energy vendor here specifically or broadly in Europe,Björn Peters 9:00 but it's not so solid, all Europe did similar things. We were just a little bit ahead. So the investment markets for solar and wind energy were particularly good, we've paid half of the learning curve of the global solar market in the in the first years of the of the century. That is, so we played an even more important role, but we have a renewable energy directive in Europe as well. And so the this reliance on on weather dependent energies, how I call them because that's the probably the more appropriate term that has spread all over Europe. And it has become a goal in itself without asking what you really can achieve with it. Initially, we wanted to decarbonize the grid, but whether weather dependent energies could actually do that Job. There were very superficial studies around it. And still until the very date. In many scientific institutes, you have studies that say, Okay, we test one, we test this that system for one year. And if it works, it's okay. But the trick is that in in weather, you need to understand the longest doldrum, and the longest period of cloud covered skies. And this is totally eras, irrespective of climate change. Climate change is then an additional risk factor. Because we don't, we'd say we don't know the state, but we don't know how it evolves. And whether whether it gets better or worse through climate change. This really,Robert Bryce 10:50 I'm sorry to interrupt again, Bjorn. But that's just a great point. And it's one that I hadn't thought about in the way you've couched it that there wasn't sufficient understanding of you say, the wind doldrums, or the cloud cover and how long those can last. So independent of what the climate may do in the future, we weren't there wasn't sufficient understanding of what's happening or what the potential occurrences are. Now I did. That's a just a great point. And I hadn't, well, I hadn't thought of that. So yeah, that's, that's great.Björn Peters 11:18 I'm also prepared, we're going away in a blind blind flight. And we don't know whether our plane will land aware and and or whether it will crash or whatever. And that's, that's one point. And actually, the second very important point of policy implications on this crisis is the defund movement. So starting about 567 years ago at Wall Street, and being popular a little bit everywhere around the globes, I was working in asset management at the time, and people started pulling out money out of fossil fuel companies. And that is very crucial in in previous times, in a time where gas is missing on the market, some people have some companies, upstream companies will say, OK, let's start drilling more. And we will end with within months, they would have reacted to the high prices and would have made a huge profit out of it. But now they are defunded, and there is not enough money in the sector. So the sector couldn't respond quickly enough. And then I believe in the US we have a few specific topics there with the Biden administration, not not granting sufficient land for for children. So all of this crisis that we're facing is really policy made. And it's not falling from the heavens.Robert Bryce 12:50 Well, then, so just follow up on that, then we'll so I want to talk about you've recently published in September, you published a very good paper called the Global renaissance of nuclear energy. You also published a paper in about the German electricity market, and what would happen with nuclear plant if you extended the life of six nuclear plants in in in Germany? And what effect positive effect are in that would have in terms of lowering prices, but before we get to those, so give me the prescription, then you've laid out, you've said this is all this is all policy made? This disaster is all due to policy. It's not due to Putin, Putin, Putin accelerated it, but the policy decisions were already causing the crisis. So what's needed? What should happen right now, if I made you, it made you the energy minister of all of Europe, and you'd have the decision making authority? What would you do? Well,Björn Peters 13:39 it's very simple, actually, in short term, what you can do when some good is scarce, you produce more of it. And we have still serious plans of shutting down nuclear power plants all over the Europe, cold coal power plants. I mean, it's not good for our carbon footprint, but these errors were made years ago. So we won't have the option to steer it back. Because what is happening if there's really if energy is scarce, people will stop burning everything to have heat in their home. And for the pollution situation. You can see this already in in Warsaw, where air quality has deterred very much so it's really going badly there. And 40% of Poland Poland, Polish people don't know how to get their their homes warm at t