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Today’s post is by Annika Lewis, a Venture Capitalist who focuses on the data infrastructure world. I met Annika two months ago and have enjoyed learning how she evaluates companies.
Today, she brings us that lens on an enterprise data company set to IPO, Snowflake.
After a Tech IPO drought in the first half of the year, it feels like we are now caught in an avalanche with companies set to enter this hot market.
To help you shovel out of this deluge, I’m here to give a rundown of one of these companies: Snowflake. Here’s who they are and why I am strongly long-term bullish.
TL;DR - Snowflake builds a game changing product - supercharged data warehouses. They play in the early days of a massive market. I believe they can 10x in 10 years. Warren Buffett does too. ‘The Office’ gifs are used.
Snowflake calls themselves a ‘Cloud Data Platform.’ While that may win buzzword bingo, what does that actually mean?
In short, Snowflake builds supercharged data warehouses.
Ummmmm…still lost. Break it down for me, please.
Okay. Let’s say you’re a paper company called Dunder Mifflin.
Like any business, you have questions you need answered to run things more effectively.
How many reams of Avery Inkjet Paper did we sell at the Scranton Branch in July of 2020?
What payment method are our highest-grossing customers in Nashua using?
Why have our online sales of post-it notes decreased over time? Did Jim drop the ball?
And so on, and so forth, times a gajillion.
Every business creates an enormous amount of data, whether they realize it or not. Snowflake helps businesses store and access that data for analysis.
Data is often stored in tables, like the one below: lists of rows and columns that contain information. Could be numbers, could be text.
Simple enough, right?
Now picture that table, but with hundreds of columns and millions of rows. Now, imagine you have thousands of those giant tables. All those tables need to get stored somewhere.
You also need the ability to query these tables - which basically means asking the tables questions using code, so they can give you the answer. Hey table, how much did I make in sales last year?
This need isn’t new - companies have needed to store and query data for decades. But Snowflake isn’t quite like what’s been out there before.
Snowflake built their software on the cloud from the ground up. Previous data stores required at least some level of local, aka “on-premise” storage. This means a couple things for Snowflake customers:
Dunder Mifflin doesn’t need to buy any hardware or software to run Snowflake. It really is true SaaS.
Dunder Mifflin can scale up and down their data processing and storage needs instantly, which is a huge relief for David Wallace. Black Friday sale unexpectedly crushing it? Boom, let’s fire things up right this second.
While this may seem dry and boring on the surface - I find it fascinating. Snowflake’s product is truly game changing.
Let’s get into why.
Keeps it simple, stupid
If you’ve had to interact with a database before, or even an Excel spreadsheet, you realize one thing: it can get real messy, real fast. It takes a ton of effort to keep the data up-to-date and useful.
Snowflake just keeps it simple. Basically, they’ve done all the behind-the-scenes dirty work (“infrastructure management”, in data speak). It helps whoever’s managing Snowflake at Dunder Mifflin to avoid a lot of headache.
While this might sound small, in enterprise data, this is a big deal - and nobody has done it quite like they have.
Gives users freedom
Before Snowflake, most companies used other data warehousing solutions. These solutions fall into two main buckets:
With most of the world starting to move to cloud-based infrastructure, the modern providers are the more obvious, direct competition.
As an independent company, Snowflake offers a level of separation from the Amazon’s and Google’s of the world. They give their customers - who are probably using AWS, GCP, or Azure already for other cloud services - more flexibility as well as bargaining power. Bye-bye, vendor lock-in.
Recipe for success
In recent months, I’ve been hearing of more and more companies making the switch to Snowflake. But don’t take my word for it, check out how much their revenue has grown in the past two years:
Source: Canalyst. I use their pre-IPO models to get a head start on my analysis.
In Fiscal Year (FY) 2019, they did $97M in revenue. In FY20, that more than doubled to $265M! Even better, they are on track to nearly double revenue this year too - they’ve already done $242M in the first six months of FY21. Sheesh!
These are growth rates that most companies at their stage can only dream of.
So, I feel Snowflake is a game changer and on a path to capture a good portion of their market. That said, how much more room do they have?
I believe Snowflake is still at the beginning of their road. In their S-1, they write,
We believe the addressable market opportunity for our Cloud Data Platform is approximately $81 billion as of January 31, 2020.
And clearly, the market is growing from there. How much? Well...the amount of data being produced is exploding. From the S-1 again,
The rise of cloud-based workloads has led to a proliferation of connected devices, applications, and social media, resulting in an explosion of digital data. According to IDC [International Data Corporation], there will be 175 zettabytes of data by 2025, representing a CAGR of 27% from 33 zettabytes of data in 2018.”
I’m of the belief that data is critical to making the best possible business decisions, and that the most transformative innovations of our lifetimes will be the result of advanced applications of data.
We’re just scraping the tip of the iceberg.
While the points above are the key reasons I’m bullish on Snowflake, there are two cherries on top that bolster my confidence.
First, the company has shown they can bring in the right leaders to execute. At each phase of the company, they’ve had a different CEO. In fact, none of the company’s founders have been a CEO! Snowflake was founded in 2012 by three data warehousing experts: Benoit Dageville, Thierry Cruanes, and Marcin Zukowski. Investor Mike Speiser, former Microsoft exec Bob Muglia, and former Servicenow CEO Frank Slootman, have all led the company as CEO at different phases.
Secondly, there’s potential for network effects. This idea is definitely a bit of a long shot, but it’ll be big if it plays out. Basically, in addition to sharing data internally within an organization, Snowflake also enables users to share data with other parties who also use Snowflake. Now this is special - if enough companies see value in using external data, it could kickstart a virtuous growth cycle. As more users join, more external data is available within the Snowflake ecosystem. This makes joining Snowflake more valuable and then the cycle repeats.
Risks, but not dealbreakers
Like anything I invest in, there are a few risks I plan to monitor.
Big tech copycats
This one is a meme at this point. Like any successful tech company, Snowflake’s main competitors are some of the biggest, most well-capitalized companies on the planet.
What do they have that is truly differentiated and not replicable by the big guys?
This is something I’ve thought a lot about, and to summarize my thinking: It’s the same story we heard with Zoom. “Google Meet’s product is going to catch up to it in no time, and they already have the distribution.”
Big Tech is often playing a very different game - what Snowflake does is such a small portion of what they do. I’m not convinced the core priorities align.
Path to profitability
Like most young public tech companies these days, Snowflake is not profitable. Last fiscal year, Snowflake lost $358M. That’s an operating margin of -135%. Ouch!
I trust Snowflake is on a path to profitability though. They’ve steadily improved their margins each quarter in the last year.
Snowflake is expected to IPO with a market capitalization up to $24B. Bears will worry they’re unprofitable, have not-quite-SaaS-level-gross-margins, and long sales cycles - and they’d be 100% right.
To me, in spite of those immediate truths, the pros outweigh the cons. I’m a long-term believer, and patience will be key here.
To sum it up:
The company is gangbusters executing with a modern, best-in-class product
The market is large and growing
And if that isn’t enough, freaking *Warren Buffett* is investing. He pretty much never invests in IPOs, unprofitable companies, or technology. Snowflake breaks all his traditional rules, but he’s HERE FOR IT.
And I am, too.
Thanks for reading,
Editor’s Note: If you have any comments or questions, feel free to reply to this email! I’ll forward it to Annika.
This content is for informational purposes only. Neither Annika nor Anuj are financial advisors. This post should not be relied upon as legal, business, investment, or tax advice. Your use of the information contained here is at your own risk.