Analysis of IT news

Wednesday, April 23, 2008

The impact of cloud computing

Cloud computing is starting to pick up, and as a result starts to have an impact on the dotcom industry.

The much touted advantage of cloud computing is that it is leveling the field between incumbent giants and startups as far as scalable Web architecture goes. With cloud computing solutions such as Amazon's Web Services (AWS), any startup now can enjoy a scalable Web architecture - without having to buy and maintain all the hardware. Startups pay by the consumption and can add extra virtual machines within minutes as they need more. So instead of focusing on making sure the website can carry the load when the dotcom gets known (or even making sure the servers are up and running), the development team can focus on the actual development of their website. If you remember Friendster, one of the big problems the company faced was the scalability of its Website. Many users got turned off as it could barely support the load of its success.

In other words, Cloud computing erodes yet another competitive advantage on the Websphere. Google might have a superior Web architecture, a small competitor can now level the field by using Amazon's AWS to provide a competitive service that will scale just as well. It may not be enough yet to compete with such a massive application as Google's Web search, but can definitely compete with other Google services.

But the other impact is that cloud computing decreases the need of VC money for dotcoms. First of all, no need to invest in expensive hardware upfront, the whole point of Cloud computing is to pay as you go. Icing on the cake, Amazon doesn't even require *monthly payments* up front, allowing to pay its Web services bills *after* the monthly revenue arrived. So theoretically a company can face a sudden spike of activity without having to get into debt (provided it converted this activity surge into cash quickly). Startup SlideShare even made a presentation called "Using [Amazon] S3 to avoid VC". This is at least as big a change as the technical competitive advantage (or lack of) startups now enjoy.

But why would a startup flaunt snubbing venture capitalists? Three reasons. For entrepreneurs who are in for the money, avoiding involving VCs means getting a larger share of the pie when they cash out. For entrepreneurs who are in for something else, well, VCs aren't always their best friends. For instance, VCs nowadays don't want to finance the next Google, it would take too much time. They want instead to finance the next Google acquisition - a lot of money made quickly. Too bad for the entrepreneurs who are passionate about their products and for whom money is not their main drive. Too many VCs have been known to kick them out when they don't need them anymore. The last reason is that for any entrepreneur, going through countless interview to try to secure VC money is a tedious and time-consuming process. So if you can avoid it, why not?

So the conventional wisdom is that cloud computing allows dotcom to bypass VCs. And it's not unreasonable to predict that many dotcom will. This is where I can see a backlash.

If you remember the beginning of the Web, the conventional wisdom was that the Internet changed everything, that the middleman was dead, etc. Except this wisdom turned out to be not totally true. If a promise is too good to be true it probably is...

Today, some startups might be better off without VCs. Imagine if Mark Zuckerberg hadn't needed any VC money to start Facebook. He wouldn't today face the pressure to justify his company's insane "market valuation". When VCs behave as money guys their influence is short term and thus seldom good for the company in the long run.

But VC can also behave as businesspeople (at least some do). The good venture capitalists also provide contacts and sometimes sound business advise. Want to hire key talent? VCs can help. For instance, Eric Schmidt initially didn't want to meet with the Google boys as he saw no interest in Web search (he saw it as a commodity). But he reluctantly agreed because he didn't want to anger John Doer, a partner at the famous Kleiner Perkins VC company and Google backer. The rest is history. That's for this specific reason that some now successful Web companies looked for VC money. Not that they needed the cash but because they figured they wanted the connections.

Last but not least, the fact that one might need less money for hardware doesn't mean one doesn't need any money to be successful. Without getting back to the dotcom bubble craze, some money is sometimes require to get known or grow quickly to reach a critical mass (Amazon's "Get Big Fast" mantra of the '90s).

So several startups might get cocky and snub VCs, only to discover they can't bring their startups to the next level alone with a small budget. On the other hand, we might see more Google popping up...