PeakSpan’s Infrastructure Software Outlook
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We are coming off a blockbuster year in 2021 for Infrastructure Software (broadly defined) across both public and private markets. The picture is certainly more sober in 2022; however, our enthusiasm for the innovation and opportunity we see broadly across IT, data infrastructure management, automation, cloud infrastructure, DevOps/dev tools, and more only continues to grow and will persist for years to come. Whether it’s the direct result of virtually every company becoming a software company, supply-demand imbalances for talent, accelerating digitization of vertical markets propelled by the global pandemic, or the ebbs and flows of generalization versus specialization, we remain bullish in our outlook for Infrastructure Software and wanted to provide a perspective on the themes we believe will endure in the years ahead.
1. Middleware and Orchestration are Prime Real Estate. It should come as no surprise to readers of this blog that the world has seemingly become a battle of market share between the infamous and seemingly infinitely resourced behemoths of the technology infrastructure world, namely Amazon, Google, and Microsoft. Given that the combined market cap of those three giants alone is greater than 20% of the US GDP ($4.4T), it is most prudent to talk about their “subsidiary businesses” as independent units. Our team has been fascinated with a new category that has emerged as a result of the sheer scale and magnitude of the cloud footprint built across the three giants (would this be an infrastructure SaaS blog without mentioning the cloud in the first paragraph?). What we have observed is that directly competing with the infrastructure is not only nearly impossible — it's also not a very prudent business decision. However, enabling optimization of these large engines for specific use cases is something that the “big three” will never undertake given their scale. This orchestration layer has become critical as the average enterprise subscribes to multiple vendors and needs the ability to prioritize, sequence, and deploy these engines in real-time engagements where they can be best utilized, with the greatest yield and the lowest cost. Enterprises may optimize around use case, cost, or computing requirements — whatever it may be the PeakSpan team believes this category of middleware and orchestration will be one to watch.
2. Rising Demand for Verticalized Automation Solutions. The world we live in is dynamic and constantly forcing business leaders to adapt. Within the new world order — there is a broader theme that will resonate with all business leaders who are reading this blog, especially in light of the current economic environment: “Do more with less.” The challenge that all high-skilled businesses are facing is that they are resource constrained, yet still subject to the same top-line objectives. Now, your average infrastructure software blog might simply go on to make the point that this is leading to an explosion in the need for enterprise automation. While that may be a very level (albeit boring) observation, we at PeakSpan see something else. The issue with simply stating that enterprise automation is in demand is not that it is incorrect, but rather, it is the fact that at its core, such a claim implies that software is in great demand…something that has been the case for the past several decades across market cycles. What our team has been specifically observing is the emerging trend of retooling. For our sci-fi readers, think iron-man suit, not C3pO (critical distinction). What does this look like in the context of SaaS? We are seeing the proliferation of vertical RPA platforms which enable non-technical business users to upskill and augment their skill set. This democratization of technical decisions and business intelligence is enabling companies to do exactly what we noted above… that is, to do more with less in the context of their respective nuanced use cases. These platforms which enable workflow automation, intelligent decision-making, and augmented analytics for business users are here to stay. In our opinion, they are more resilient than platforms that posit a complete and horizontal end-to-end robotic solution. We all know the infamous statistic…”85% of AI and machine learning projects fail to deliver, and only 53% of projects make it from prototypes to production”(1). The reason we believe that these picks and shovels vertical RPA platforms are the solution, and not a new problem is because they are not enterprise-wide multimillion-dollar transformational projects — but in fact, just picks and shovels tools to turn business users into the next Tony Stark’s…and that is an ROI every business can benefit from.
3. The Benefit Of Verticalization and Specialization. Software in 2022 is very different from what it was 20, 10, or even 5 years ago. The proliferation of software in the world has manifested in applications that span every aspect of daily modern life. The million-dollar question has become, “How can software do it all, and well?” The simple answer is it no longer can. For years, horizontal software companies rose to the top of wall street by creating solutions that were able to reach the widest audiences and solved collective business needs (think Oracle CRM or QuickBooks). The world is no longer in the dark ages of software – and in this new age of enlightenment, enterprises exhibit a lot of variabilities, end customer focus, analytics, data structures, customer engagement, technology footprints, purchasing motions…the list goes on. Given it is not reasonable to create software unique to every company, the next best way to capture the nuance is to focus on building software solutions vertically. While each company is unique — the needs of companies within the same vertical exhibit little variability while sharing the same nuances that horizontal software providers can no longer satisfy. To put this simply — is it possible to thread in a screw with a hammer? Yes. But given the choice between that hammer and a screwdriver, we would argue at least, that the latter approach is what companies are now in demand of.
4. Citizen Developers and No-code / Low-code Platforms Are Here To Stay. We discussed the main drivers behind enterprise automation above– namely, the need to empower the long tail of non-technical resources within the enterprise amidst a shortage of highly skilled technical labor. Enterprises need to enable and democratize technological creation, development, and ideation within their existing employee base. This philosophical approach to retooling can apply across almost all modern industries, however, we see specific opportunities at the intersection of verticalization and automation. The setup is quite simple: vendors selling into this space are tapping into a large user set within the enterprise, and they are driving greater outcomes and increasing operating margins by tapping into newly created efficiencies within existing workforces. Up to this point, we have hopefully substantiated enterprise demand given labor market constraints, discussed why retooling is a no-brainer ROI solution, and even proposed that vertical solutions are best poised to gain traction given their nuanced solutions. What we have yet to discuss, however, is delivery methods. Our team believes that the platforms which enable non-technical business users to create their own workflow automation in a platform purpose-built for their verticals are those who will WIN in this category. These no-code / low-code platforms enable business users to create through drag-and-drop UIs and empower individualized and automated app development as it relates to individual workflows. We believe that the marriage of no-code / low-code development and verticalized automation will be extremely resilient as the future of work is redefined.
5. Modern Device and Employee Management for Virtually Connected Enterprises. According to a recent survey, 74% of professionals expect remote work to become standard(2). The next generation of the modern work setting has now emerged, and employees have made themselves clear — they are not going back to the old status quo. We are keeping a close eye on the emergence of workforce tools proliferating to facilitate this transition into a hybrid work setting. Technologies that re-equip IT, customer support, service desks, onboarding, team communication/collaboration, and security will gain traction quickly in this rapidly evolving environment. Companies that aim to maintain parity, continuity, and the same level of fidelity in managing their distributed workforces face an uphill battle. Moreover, accomplishing this parity amidst magnified complexity both physically (beyond 4 walls) and technologically — while simultaneously resourcing teams to succeed — will be no small task. Those who can succeed will be very well rewarded by customers and markets alike!
6. The Rise of the CIO. We would like to dub 2022 the year of the CIO. The modern CIO has increasing influence not only in the boardroom but also across the entire business organization. It comes as no surprise that business models are shifting toward digital-first processes and services, nor should it come as a surprise that IT is playing an increasingly critical role outside of traditional infrastructure. CIOs are now tasked with propelling innovation across the enterprise and will be accountable for a larger role in devising long-term business strategies and outcomes. By 2024, 25% of traditional large enterprise CIOs will be held accountable for digital business operational results, effectively becoming “COO by proxy.” Best-in-class infrastructure and services will become necessary in order to quickly adapt to evolving business needs, and CIOs will now view organizational infrastructure akin to an App Store set up to equip the organization with the tools necessary to succeed and drive best-in-class customer experiences.
7. Blockchain Applications Outside of Cryptocurrencies. Blockchain and cryptocurrencies are not synonyms, but rather blockchain is simply the decentralized ledger that enables the existence of cryptos. At PeakSpan we want to highlight the value blockchain brings through the immutable transfer of data, and a secure ledger of the action. Take the state of Illinois for example, which has launched a blockchain initiative to leverage a distributed ledger when tracking birth certificates, voter registration, SSNs, etc. Companies like Medicalchain are placing patient data on-chain, meaning the records are secure and verifiable allowing for anonymous, but accurate drug trial candidate acquisition. If that’s not enough, prominent delivery service DHL has been using a ledger to track its shipments and ensure the utmost integrity in the transactions. The pattern becomes clear, any process that requires trust between two or more parties can become stress-free and hyper-efficient using the blockchain. Whether it’s shipping companies using smart contracts to verify shipments (block array), the government using ledgers to prevent election fraud, or startups securely storing 100% of an individual’s DNA data on-chain to learn more about the human genome (Nebula Genomics), blockchain is behind them all. We believe that blockchain will begin to impact processes within all of our focus areas, and we are keeping a keen eye for infrastructure software applications that are soon to emerge including the vendors providing the picks-and-shovels supporting this vector of innovation.
8. The Continued Prevalence of API-Based and -Centric Company Innovation, API-First Delivery Will Continue to Dominate. It is no secret that the consumption of data is at an all-time high. In fact, in 2021 2.5 quintillion bytes of data were created and consumed daily! (3) We are consuming this data through applications across an amorphous landscape of endpoints and devices — from laptops to IoT devices to smartphones. Companies have no option besides adopting an API-first strategy that breaks down platform “services” into individual and self-standing microservices. This approach allows development teams to work in parallel, reduces the costs of app development while reducing the risk of app failure, and enables the addition of new capabilities or services without re-architecture or “starting from scratch”. In fact, in The 2021 State of the API Report 49% percent of respondents said that more than half of their organization’s development effort is spent on APIs (compared to just over 40% last year) (4). Our team is closely monitoring the emergence of tools that enable and accelerate this transformation for companies and developers. From process automation such as auto-generation of API documentation to lifecycle management of your API portfolio and interdependencies — we believe a new category of API enablement tools will emerge.
9. PeakSpan’s Lens into Web3. A continuation of the naming scheme Web2.0 was given, Web3.0 looks to advance on its predecessor bringing innovation into a decentralized economy. While centralized companies like Meta enable a simple UX, they fully control who can access their networks, what features are offered, and what prices will be paid in markets they dominate. This fosters a difficult environment for startups as they look to disrupt markets in which centralized players can simply change the rulebook overnight. From a high level, Web3 places these controls into the hands of the users by allowing contributors to own the platforms, using open-source code, immersion through the metaverse, and keeping the data in their hands instead of a centralized server. While we could run through the details, to keep with the narrative of open collaboration, we recommend reading a16z’s web3 landscape. At PeakSpan a cornerstone of our philosophy is challenging the status quo. Whether it’s facilitating the metaverse through VR experiences, or a dApp focused on enterprise clients, that doesn’t stop us from finding high-performance companies pioneering infrastructure technology in the new era of identity, data ownership, and digital trust.
10. Self-Service and Product-Led Growth Ecosystem Tools. 58% of companies surveyed in Gainsight’s 2022 PLG Index already have a product-led growth strategy in place, and 47% plan to double their investment. The traditional model based on marketing and sales funnels is no longer sufficient for modern SaaS companies; across startups to tech behemoths, teams are always searching for ways to reduce support costs, decrease customer acquisition costs, and of course increase retention! This holy triumvirate has ushered in what is now being dubbed as a “hybrid” product-led sales motion. Our team at PeakSpan is closely monitoring the proliferation of the tech stack that is emerging and growing across the PLG chasm! From measurement, engagement, and tracking, to pricing and billing there is an incredible ecosystem of tools being developed to enable greater scale, the virality of product adoption, frictionless sign-up, and usage! Best-in-class teams are creating tools to track where customers fall off in engagement, get user input on common at deployment, and deploy quick start guides around complicated topics to walk users through step by step. We believe that companies who are able to handle the end-end needs of PLG-based design/architecture are well positioned to disrupt this market and will be in high demand as companies continue to mature in this arena!
It’s encouraging to note that some of the most enduring and innovative businesses (Uber, Okta, WhatsApp, Airbnb, etc.) were founded amidst times of economic uncertainty and challenges. Constraints foster innovation; 2022 is certainly no different. Our outlook remains positive, and we’re excited to support Infrastructure founders, entrepreneurs, and teams in their pursuit of achieving the best risk-adjusted outcome for their respective businesses. The market opportunity is robust, and we’re particularly excited about innovation being propelled across these themes and the scarcity value it’ll create for the years to come.