It became clear in 2023 that the incredible growth in enterprise tech spending during the early years of the pandemic was a mirage, rather than a new baseline. Layoffs, spending cuts, and the quiet desperation of countless startups trying to justify their early 2020s valuations were everywhere this year, and Redpoint's Scott Raney isn't sure how quickly the good times will return.
"I expect things to get better from here, but I don't expect things to snap back," Raney said in a recent interview. "I feel like I'm the old man when I say this, but there are a lot of people who just haven't been around for that long who are just waiting for it to get back to where it was, and it's probably not going to get there anytime soon."
Redpoint backed several winners during the last decade in enterprise software, including Stripe, HashiCorp, and LaunchDarkly. As also became clear in 2023, the current decade seems poised to reward companies that best implement AI in their products and services and pursue new approaches to marketing open-source software.
During our conversation, Raney touched on the current macroeconomic environment for enterprise startups, whether the big platform companies might actually have an advantage during this cycle, and the shifting role of open-source software in building a business.
This interview has been edited and condensed for clarity.
What does the macro environment for startups and enterprise tech spending look like after the last 12 months?
I think it's important for us to recognize that almost two years ago now, there was a reset in terms of how tech companies are being valued and that has (had) a ton of ripple effects across the industry.
There really are two primary effects that we've seen. One is how companies are valued, and what that then means in terms of what they need to accomplish to be able to get funded at levels at which they'd like to get funded. Most companies raised a ton of money back when they could, and they're sitting on a lot of cash still. They did one round of cutbacks to be able to extend runway and they're trying to grow into a business that could allow them to be valued in the ways in which they were valued, maybe in their last financing.
And coupled with that — perhaps definitely more concerning — is the fact that enterprise buyers have kind of dramatically cut back on their spend. We saw at kind of the peak of the bubble (that) spend on IT was pretty profligate. There were lots of things going on, enterprises throwing around a lot of money at a lot of different projects. And they've tightened their belts.
You're either one of those priorities or you're not.
Maybe there used to be 10 big priorities, and there used to be money that flew down to a bunch of different functional groups. Now, I think a lot of that spigot's been cut off and that functional groups and IT groups have probably trimmed back their priorities meaningfully. And you're either one of those priorities or you're not.
It's been, by and large, a pretty challenging time for a lot of these companies. And I don't even think we felt the real pain yet. Because most of these companies are sitting on top of so much money that (they're) not faced with the existential threat of going out of business or facing really, really difficult financings. That reckoning is likely to come at some point next year. And I think that'll be a difficult time.
I expect things to get better from here, but I don't expect things to snap back. I feel like I'm the old man when I say this, but there are a lot of people who just haven't been around for that long who are just waiting for it to get back to where it was, and it's probably not going to get there anytime soon.
A lot of people I've talked to think that a lot of the benefits of AI are going to be captured by the incumbents. Walk me through how you're thinking about that: Are there types of AI startups that you think have promise? Are there types of AI-related technologies that smaller, more nimble teams have an edge on? There are a lot of people who think that the big companies are going to eat this market up in a large part because of the resources and the data that they're sitting on.
I think that is a perfectly valid point of view. I think it's incomplete. I think that there are absolutely going to be cases and examples where that is true. But I can tell you every day we're meeting companies who are going right after the incumbents that have every one of the advantages you talked about, but their products are superior, because ultimately it comes down to execution of the products. It's not just about the data, because, honestly, leveraging the foundational models, that can alleviate a lot of the data advantages incumbents have.
Time and time again, it's been shown that a small group of really talented people focused on doing one thing and aligning an entire company around doing that ultimately would build a better product.
It's about the blocking and tackling and the execution of building a world-class product. And I just happen to believe that time and time again, it's been shown that a small group of really talented people focused on doing one thing and aligning an entire company around doing that ultimately would build a better product.
One of the areas in which we perceive there to be a lot of opportunity is going to be in the picks and shovels that are going to be required to allow developers to build world-class AI applications. Going after enterprise developers and saying, "what can we do to help you take advantage of this wave of AI to build applications that will allow you to extract the value that is going to be created to benefit your business." In the way that the previous-generation investments we made in companies like Stripe, and Twilio and HashiCorp, and things like that, we believe there's a wave of companies that are going to be created that are going to be doing the same thing for these types of applications.
I want to shift gears a little bit to ask you about open source. You mentioned HashiCorp; obviously, they're not the only company that has reevaluated their approach to open source in recent years, but maybe one of the most recent. How are you thinking about investing in companies that are built around open-source projects these days? Has that changed?
We're absolutely wildly optimistic about the future of open source and what it means, and it's an enormous part of the way that we think about investing. I think it's a very powerful force for advancing software and software development.
What's happened is there's gradually been a move away from foundation movements, foundation open source — like the Linux Foundation, where software is donated to a foundation and then businesses are built around that — to company-driven open-source projects. If we go back and look recently at the Confluents of the world, the Elastics, the HashiCorp's of the world and others where companies are the driving force behind the open-source movement, in conjunction with a very vibrant and important community, it has just gotten to the point where there are different ways of thinking about the creation of these businesses and capitalizing on these opportunities.
(In) the foundation model, you can have multiple companies and try to build open core around what that (project) does. In these company-driven ones, the companies that are behind these projects are basically saying you can't create a competitive company, but you can use the software as open source in any way that you want to.
I think the important thing here that we keep in mind is that it's open source, and developers still have the ability to use the software as an open-source piece of software. We're incredibly bullish about the future of open source and what it means, and I think the most important pieces of software that are going to be created that are going to fly in an enterprise infrastructure stack are going to be open source in nature.
When you look at open source startups, would you advise them to just sort of start with something like the Business Source License, rather than going Apache out of the box and then five years down the road, doing the Lucy-with-the-football thing and changing the way that works?
I would disagree with your characterization of the Lucy-with-the-football thing. So I don't agree with that premise of the question, but let me see if I can answer the first part of your question.
I think every situation is unique, and it really depends on the software, where it sits in the stack, what it is interoperating with, what problems it is solving, etc., and ultimately figure out what is the right answer for this company.
I would say, increasingly, entrepreneurs are reaching the conclusion that the company-driven movement is one that they find more attractive and more appealing in part because they have more control over and more influence over how this plays out. When you turn it over to a foundation that the problem is at that point in time, there's a committee. And if you think about innovating and pushing forward, there could be the perception that that slows things down. But I would tell you in certain situations, that is 100% the right answer.
There's no right or wrong here, there's no one answer. The trend is clear. But that doesn't mean that that's universal, and that for every situation, that is the right answer.