Cloud computing for SMBs

Cloud this, Cloud that - the word cloud is clearly an overhyped word and reminds me of the beginning of the hype around hosted models and ASPs (application service providers) in the late 90s and the term SAAS today.  Anyway, as I look at announcement after announcement released about cloud computing platforms, one thing is pretty clear to me from an investment perspective.  First, I am not going to invest in the next hot cloud computing infrastructure service that will compete against Amazon, Rackspace, Microsoft, and every other large tech vendor in the world.  This is suicide and far from capital efficient.  Secondly, while everyone looks in the consumer space, I want to look at how software companies can deploy new enterprise-based applications in the cloud, particularly for small/medium sized businesses.  In other words, show me the arms merchants with a recurring revenue model and frictionless sale and I will definitely be interested.

Some of the companies that fit this parameter include Rightscale (founded by Thorsten von Eicken, a cofounder of former portfolio company GoToMyPC) and one that I am looking at in the email archiving and compliance space which has a number of OEM partners reselling its service. Rightscale is an on-ramp to Amazon EC2 and other clouds and provides automate systems management.  It kind of reminds me of a next generation Tivoli or Openview.  The beauty is that the whole sales cycle is quite frictionless and all web-based which means an oppotunity to scale quickly.  There are a number of other recent players I have seen including one for BI in the cloud (not exactly sure what the killer app here is yet) and many others.  Of course the trick here is not to get enamored with the word "cloud" but to really understand the business problem that is being solved and why leveraging a cloud computing platform offers better economics, scale, and competitive advantages.  As I dig deeper into some of these companies, it is clear to me that software purpose-built from the ground up to live in a cloud has a huge advantage since it is hard to retrofit off-the-shelf software to leverage all of the benefits offered by Amazon, Rackspace, and the like.  Secondly, many of the better companies have built some slick tools and services to solve difficult problems like how to make customers feel like they have their own privated, dedicated systems while still keeping costs low.  Finally, from a go-to-market perspective, a number of the companies I have spoken with have not gotten the question of whether or not they could scale as they quickly point to their backend provider and move to the next objection.  So, if you have an application targeted at the SMB market that is taking advantage of cloud economics, please feel free to contact me.

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This post was written by who has written 358 posts on BeyondVC.

12 Responses to “Cloud computing for SMBs”

  1. John Gannon Nov 17, 2008 at 12:46 pm #

    Ed – I think infrastructure as a service is an interesting area as well. With greater data portability and encapsulation via technologies like data deduplication and virtual machines it becomes much easier to outsource infrastructure functions like disaster recovery (DR). DR is an area where SMBs have been really underserved by the incumbents and where purpose-built clouds could create a great deal of value. Would be interested to hear your thoughts on that.

  2. botchagalupe Nov 17, 2008 at 2:23 pm #

    I am a huge fan of RightScale but to say they are next generation Tivoli/OpenView is a stretch. In your initial argument you state that you are not interested in investing in ventures that might compete with today’s infrastructure giants. Rightscale, might (I hope not) be in that category. One of the big questions in the IaaS space is will/if/when will these guys move up the stack to a PaaS or fabrix vendor. Amazon’s recent announcement of autoscaling, LB, and monitoring might be indications of things to come. Some might argue that RS is going horizontal to address this but what’s to stop the Flexi, RackSpace, and Gogid’s in doing the same.

    In the end, it is my opinion that rightscale will utimatley become the “place to be” IP guys for clouds. In other words a services compnay on steriod. If the VC’s can get over that, then there could be money to be made.

    John
    Johnmwillis.com

  3. Ed Sim Nov 17, 2008 at 4:16 pm #

    John-u r right-it will be interesting to see what other services and add-ons that the cloud hosting providers develop. On the one hand it is great to leverage Amazon, but on the other hand startups always have to watch out for some of that functionality getting built into their partner’s framework. It will be an interesting arms race over time but my view is that Rightscale will continue to stay ahead of the curve with better tools and functionality such as offering autoscaling and dynamic configuration mgmt which Amazon is not offering. In addition, there may be opportunities in the future to allow customers to auto provision some resources from one cloud to another or have data out on a couple of different services. This is a fast changing environment and will be fun to track

  4. Ed Sim Nov 17, 2008 at 4:18 pm #

    John-I agree and I have looked at a few of those companies. As for disaster recovery it depends on how the service is built from the ground up and what economic and feature/functionality advantage customers may get from a cloud based deployment. In addition, the go-to-market strategy is quite important in terms of leveraging OEM partners. DR is quite a competitive market

  5. Isaac Garcia Nov 18, 2008 at 2:14 am #

    A little self-promotion but it speaks directly to your blog. Over at Central Desktop, we just released (tonight) our Enterprise Edition of Central Desktop that is geared toward the “M” in the SMB.

    The product is the same code-base (we are pure multi-tenant) as our standard product but is packaged with a few additional features and bolts that “enterprises” require such as a Workflow Engine, Salesforce.com Integration, Deeper API access and an SLA.

    They main point here – is that we feel that we have a substantial advantage over a lot of players in the mid-market that are doing well, but still focused on selling on-premise solutions to the mid-market.

    While many of them tout SaaS – they are not SaaS in the purest sense and it will effect their long term scale.

    I look at the difference between PURE SaaS and On-premise SaaS as the difference between SF.com and Rightnow. Both are great companies – but SF.com is off of the charts in success beyond Rightnow. While many might attribute this to Benioff’s hype machine – I attribute it to his undying dedication to PURE SAAS. It has allowed SF.com to scale in ways that Righnow has NOT been able to replicate.

  6. gregg dourgarian Nov 18, 2008 at 10:09 am #

    The Cloud Is So Yesterday
    True value creators have moved on from this tech-talk about the cloud. We make use of its benefits so thoroughly that it merits no more discussion than electricity. Why restrict platform discussion to technology…isn’t that what Ed is getting at here?

    Gregg Dourgarian
    CEO, Tempworks Software

  7. jdrive Nov 18, 2008 at 11:41 pm #

    Great points, Ed. We have begun spending quite a bit of time in the space as well. We should catch up one of these days.

    Jim

  8. Justin Leavesley Nov 19, 2008 at 1:22 am #

    Hi Ed,

    Completely agree with your point about not competing against utility cloud computing. Highly capital intensive, I discuss the economics more at link to blogs.talis.com

    More interestingly I think is what the rise of cloud computing does to the defensibility of both SaaS offering and enterprise computing as the open source community starts to take advantage of it?

    Rather than having the option to purchase support, consulting and education, why wouldn’t open source companies move into service provision on the cloud as an option for you. Kind of and end user RightScale service for their specific offering (even using RightScale maybe)

    SalesForce.com is great but it also a massive lock-in play. Open source built from scratch for cloud services backed up by service companies seems to me to be a great threat to many SaaS models today.

    The capital required and the complexity of scaling all provided a protection for SaaS from the open source effect. Utility cloud computing make all that available on a marginal basis. More SaaS players and less lock in. Maybe defensibility comes from creating direct network effects instead?
    link to blogs.talis.com

  9. Paul Kamp Nov 20, 2008 at 11:27 am #

    Ed,

    Excellent points. Often there is too much focus on the buzz words and not enough about how a technology solves a business problem for a large number of customers.

    An example of this was back in the 90s with search. There were lots of companies doing search, Ask Jeeves, AltaVista, Yahoo, etc. However, the “business model” was to monetize the eye-balls by generating a web-site that was “sticky”.

    Along comes Google (and actually before them Overture) and they change the business model by directly monetizing search. People should not lose sight that technology is actually there to solve a problem. It is the job of the business to find a way to charge for that service appropriately.

    BTW, there are huge opportunities in the cloud, but there is also a lot of hype too. Good luck cutting through the hype.

  10. Ross Cooney Nov 21, 2008 at 2:13 pm #

    Ed,

    We provide an email filtering service to SMB’s through a group of resellers and xSP partners. We released the service a year ago with only four ‘real’ servers in a datacenter in Newcastle-upon-Tyne. We plugged it into AWS in September last year and moved four of our ISP partners to the AWS network. Earlier this year we setup a partnership with Flexiscale to give us some backup power. We used these providers to ‘bootstrap’ our business into month-on-month cash positivity. We are now using that cash flow to buy our own servers. Due to a few strikes of good luck we now have a network of 50 servers located in Newcastle and Liverpool. Before buying the new servers we used cloud computing providers to run our network, now we use it for scale. Basically, we used cloud computing to bootstrap our business so that we could afford to transition to our own network. All this without VC funding.

    Investing in the cloud might be interesting, but, investing in companies that use the cloud to lower startup costs could reap larger rewards.

    Ross Cooney
    Web: http://www.emailcloud.com
    Blog: http://www.spoutingshite.com

  11. Jeff Hardy Nov 22, 2008 at 2:02 pm #

    Last week I presented on a panel discussion at PubCon in Las Vegas on the topic of Cloud Computing–on behalf of my employer SmarterTools. I am wrestling with the mis-conceptions and distortions of this “Cloudy” issue. My presentation got a lot of response–my email and phone have been very active ever since. So much so that I felt compelled to extend my points in an article:
    link to smartertools.com

    It is vital that–as this concept matures and exhibits its revolutionary potential–we remember what Cloud computing is and, more importantly, what it is not.

    Be well,
    Jeffrey J. Hardy

    http://www.smartertools.com

  12. John Gannon Feb 11, 2009 at 3:09 pm #

    Re: go-to-market…maybe one leads w/offsite backup (tape reduction/elimination) and then deliver value added services on top once you have the data in the cloud…

    link to johngannonblog.com

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