Why data infrastructure remains hot into 2023 even as the economy cools

Despite the economic downturn, a crowded market and high valuations, there’s a once-in-a-lifetime opportunity upon us. We don’t mean the buzzy concepts like the metaverse or NFTs or Web3. Instead, we’re talking about data infrastructure.

The term infrastructure doesn’t typically generate a lot of excitement. But it’s nevertheless one of the most interesting investment sectors, now thanks in part to the pandemic. 

The prize for a startup that becomes an integral part of the data stack is massive. There is an opportunity for a winner-takes-all outcome, as well as the potential to build a decacorn, or a startup with a market capitalization of $100 billion.

And even if that doesn’t pan out, startups could still be acquired by one of the existing data infrastructure mainstays like Snowflake, Fivetran, DBT, Tableau or Looker. For example, Streamlit, the three-year-old startup that developed an open-source project for building data-based apps, was acquired by Snowflake for $800 million in March 2022. That’s not a shabby outcome.

Why companies are doubling down on data infrastructure

Let’s revisit 2020. The pandemic accelerated a shift to remote work, telehealth, zoom calls and Netflix streaming. It also skyrocketed demand for last-mile delivery of Amazon packages. Combined with supply-chain constraints, consumer behavior was forever altered.

From a business perspective, the COVID-19 crisis rapidly accelerated the adoption of analytics and AI. More than half (52%) of businesses accelerated their AI adoption plans to help alleviate skills shortages, boost productivity, deliver new products and services and address supply chain issues.

For example, snack giant Frito-Lay ramped up its digital and data-driven initiatives, compressing five years’ worth of digital plans into six months. They delivered an ecommerce platform, Snacks.com, in just 30 days and leveraged shopper data to predict store openings, shifts in demand and changes in tastes to reset product offerings all the way down to the store level within a particular zip code.

But when pivoting quickly to meet new needs, many businesses realized their existing data stacks couldn’t cut it. They faced challenges with long turnaround times to untangle and set up infrastructure, as well as slow response times to new information — not to mention incredibly expensive journeys to insights. 

Businesses now need to move to a sustainable operating model, replace long-term commitments with plug-and-play flexibility, evolve from one-off analytics to operational business intelligence and lead with data governance rather than considering it an afterthought. In other words, businesses need a modern data stack.

And data infrastructure is here to stay for a simple reason: Companies will always need data and consumers and businesses will only generate more of it. The amount of data created and consumed worldwide in 2022 will be in the range of 97 zettabytes, or 97 billion terabytes, and it is growing more than 19% year over year. In addition, the power of data in determining a company’s success will only increase moving forward — as will the number of tools for aggregating, connecting, storing, transforming, querying, analyzing and visualizing that data.

Where VCs are placing their beta

Pitchbook reported that the top 30 data infrastructure startups have “raised over $8 billion in venture capital in the last five years at an aggregate value of $35 billion.“ Data infrastructure is unique in the sense that there’s a data pipeline, where data moves throughout the various parts of an organization. This involves aggregating and connecting data, storing it and making computations, transforming it and ultimately visualizing it.

This means investments in data infrastructure companies remain intriguing despite an overall slowdown in VC investments — and, as a result, startups are uniquely positioned to weather the economic downturn. 

According to Hansae Catlett, VP at Bessemer Venture Partners: “Many data infrastructure startups have an opportunity to become part of the modern data stack. There will always be room for a startup that can fill in a key technical hole of the stack that remains open or solves a key business problem. As re-platforming continues to unfold, opportunities exist to even unseat recently established players like Snowflake and Looker as part of the canonical data stack. Data infrastructure advancements are driven by secular trends — cloud adoption, growth in data — so despite the downturn, we believe this momentum will persist.”

That’s why VCs are placing their bets on both sides: data infrastructure technology and business applications. 

Data infrastructure technologies include next-generation Snowflakes, real-time processing for analytical and operational needs and machine learning (ML) toolkits. Business applications encompass data analytics that empower business users to act like data scientists and data analytics for specific verticals.

Unicorns and M&A on the horizon

Given the massive opportunity for a winner-takes-all outcome in data infrastructure, valuations will continue to be high. That’s because those startups that become locked into this new ecosystem early—even if they are just a small piece of the overall whole — will inevitably become the go-to provider for everyone else who uses the data stack. That also means there’s ample potential for a return, even at the unicorn valuations we’re seeing now.

Data infrastructure will also likely see more M&A in early 2023 because this economic climate will create a do-or-die situation for many companies. There’s a lot of great technology being built, but not all of today’s startups can mature into standalone companies.

Meanwhile, there are many niche problems across the data stack and those problems might not be large enough for a top data infrastructure company. But, they can still present exciting opportunities for new companies to incorporate into their products. 

According to Noel Yuhanna, a Forrester VP and principal analyst, Snowflake originally started with supporting tools presenting data to non-data specialists.

But recently, the platform has expanded to support broader-use cases, including data science, data engineering, and other forms of analytics.

Yuhanna adds: “We find that organizations don’t want 10 different platforms to support various initiatives, but an integrated data platform that can support multiple use cases across multiple personas.”

It’s only going to get hotter and hotter. Those who have placed early bets on infrastructure are going to see huge returns, especially as M&A heats up now through 2023.

Rekha Ravindra is a principal with Rsquared Acceleration.

Originally appeared on: TheSpuzz