In the cloud: what startups need to succeed

As large enterprises make their forays into cloud computing, there are plenty of opportunities for startups to find and exploit niches

With Google's recent launch of its App Engine, and with the likes of IBM and Amazon having staked claims, cloud computing is clearly a major development in the IT landscape. The benefits are obvious, enabling enterprises to scale rapidly with a level of performance previously available to only the largest companies -- all without adding equipment, software or staff.

It's early in the game -- consistent definitions aren't even agreed upon in the industry. Is utility computing really in the cloud? What about managed services? The major companies in the category will certainly drive the definition of cloud computing. But as usual, expect start-up companies to disrupt it.

So far, the market entrants have played to their strengths. Amazon is leveraging its tremendous computing capabilities by providing customers with a virtual computing environment via EC2. Salesforce is riding its software-as-a-service (SaaS) wave with -- dubbing it "platform-as-a-service" -- giving developers tools for creating business applications on-demand and without software. Pile on offerings from Sun, Yahoo, Ariba and more, all doing what they do best.

That still leaves plenty of room on the field for start-ups to do something different, which is what they do best. Unlike slow-moving market leaders, early-stage companies have the uncanny ability to identify beachheads adjacent to the market opportunities being established by the big boys. And more than that, they know how to move fast, growing right along with the niche market need they've chosen to address, turning that into a legitimate market which, in retrospect, looks obvious to everyone else. So what might be those beachheads in cloud computing?

To find their entry point, entrepreneurs will first need to determine what, in the enterprise infrastructure, can be cleaved off, or outsourced -- something the other players are not addressing yet. Cloud computing start-ups should work to find enterprise computing requirements that meet the following criteria:

  • Computing needs that are not core to the business but are still required to support it. By that token, any enterprise computing requirement that relies on IT time, energy and budget for such processing needs as algorithms, heavy analytics and the like is one that enterprises would be likely to hand off to a vendor. For example, a financial institution calculating portfolio risk, or an enterprise trying to understand the optimal marketing mix for a campaign by using statistical and simulation analyses, could benefit from a cloud computing model.

  • A cyclical business that has predictable spikes. Certain businesses that can predict their busy seasons with great accuracy would greatly benefit from a cloud computing model that allows them to scale up processing power only when they need it. An online retailer that sells gift items probably only exceeds capacity in the holiday season. An entertainment content Web site can predict demand for download bandwidth will increase with the video release of popular movies. These are the kinds of businesses that could benefit from overflow provisioning offered by a cloud computing start-up.

  • A company where a business buyer is eager to bypass the IT department. CRM was revolutionized by SaaS because suddenly a sales or marketing executive could make a purchasing decision, entirely avoiding the IT department. Just as on-demand software is sold into the enterprise to meet a business need, cloud computing represents an opportunity for a business computing need to be met outside of the enterprise. To stay competitive, enterprises need to launch new services or initiatives quickly but IT often slows the process down due to the multiple demands on their time. A business buyer could be up and running much faster by buying directly from a start-up offering the capability.
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    Sounds easy, right? Not so fast. Start-ups with a good go-to-market strategy still need to find their market. To be successful in cloud computing, especially to gain first-mover advantage, small companies need to prove they have broad market applicability -- and specifically -- customers who are willing to pay. Proof will be found not in the small-to-medium business market; it has to be gained in the enterprise market. If start-ups can't scale up with the capabilities, reliability and redundancy a large enterprise requires then they're just playing on a cost basis rather than bringing about business transformation. And if they can't find a high-margin sales model, they run the risk of losing to more capital-rich competitors. The real challenge for start-ups is that they must find a way to prove their case before burning up their cash.

    Technology will continue to trend in favor of entrepreneurs interested in pursuing these opportunities. Bandwidth is becoming less expensive and networking infrastructure is increasingly efficient, making it much more realistic for enterprises to outsource infrastructure or processing without as much latency. And that will only improve over time.

    Big companies -- even market leaders -- take a long time to turn the boat; they always have and they always will. Visionary entrepreneurs who understand the complex computing requirements of the enterprise are in a unique position to sail out ahead of the behemoths. First movers are going to be able to grow their businesses more rapidly, gaining more sustainable, higher valuations that will open up opportunities down the road for acquisitions or public offerings.

    What sounds like pie-in-the-sky today just may be the cloud computing leader of tomorrow.

    Elefant is a founding partner of Opus Capital focusing primarily on Internet and software investments. Previously, he was a senior associate at Lightspeed Venture Partners and Battery Ventures, and director of international sales and marketing at Radius.