VCs and Cloud – Are They Leading Us Down the Wrong Path?

David Linthicum writes in a post on InfoWorld today about “How VCs are leading us down the wrong path for cloud computing.” In this, he gives three reasons for this premise, but provides little in the way of substantiation for this position. We started a twitter discussion but David suggested I respond in a post – here it is. Regarding definition challenges, which David points out, I will focus on the tools and solutions for Infrastructure as a Service – since that seems to be what he’s getting at.

David Linthicum’s “Cloud computing investor mistake No. 1: Assume a sustainable business model”

For this mistake he cites the financial ROI of cloud from the perspective of IT. Is cloud cheaper than internally-delivered IT? Maybe yes, but often no. At least not on the surface. Assuming that some fairly large % of your infrastructure needs are static (e.g. opposite of elastic), and that some chunk of this is moving along nicely. Will the same VMs, which are very stable and always on, be less expensive in a cloud? Probably not. But that’s not even the point. Even if you believe that most of the value of cloud is how it supports innovation, then the ROI discussion gets a lot stickier. But that’s not the point either.

This point is very focused on external clouds from service providers. Here is the key point David makes:

“it’s clear to me that the high subscription fees many cloud computing providers charge have to fall over time as the prices for enterprise hardware and software fall as well. That means the expected ROI may not be there for cloud computing — and even if it’s there at first, it could degrade significantly over time.”

I don’t follow.  If subscription prices fall at the same rate as SW and HW, then wouldn’t any ROI calculation stay the same?  Actually not.  In fact, the cloud model gets even better due to the labor arbitrage of moving from 50-100 servers per admin to thousands in the cloud (assuming public cloud – several hundred in the private cloud) while the cost of labor increases.  I was at a customer this week who quotes > 6 months to provision a physical server, and several weeks for a virtual server.  This is due to manual processing of work orders that have an average SLA of 3 weeks.  3 weeks????!!!!   Now, let’s fire up that same server on a public cloud with a nice portal, even one integrated with access management (etc.), in 5 minutes, with no manual processing.  Or this can be on a private cloud with the same process model.

Lastly, how is this a problem with VCs?  Few VCs I know want to invest in capital-intensive service provider businesses.  Most new clouds are coming from existing service providers, not VCs.  The biggest cloud provider is also the world’s largest online retailer – Amazon.  Many of these guys know how to compete in commodity markets.  Again, how is this an instance of VCs leading us down the wrong path?

David Linthicum’s “Cloud computing investor mistake No. 2: Have little understanding of the technology in the context of an emerging market”

Funding innovation in emerging markets is the business of venture capital. Admittedly, the flock behavior referenced by David is a challenge. It was with the Internet, open source, Java funds, etc. A few early investors make bold bets and some win – then a lot of VCs will start dropping money into the new new thing. Some will be winners. Most will fail. That’s the nature of venture investing. As Bob Davoli at Sigma stated last year in Mass High Tech...

“Do you know how much money people are going to lose in the cloud?” he asked. “Billions.”

Okay, so VC investments pan out less than 50% of the time (or whatever). How is it their fault if an IT buyer doesn’t appreciate the risks of buying new technologies and bets wrong? I got an email from a very widely known “cloud” startup (maybe now a growth company) the other day responding to a request I made about his interest in another piece of new technology I came across. His response? “We don’t feel comfortable deploying untested technology into production.” In other words, let me know when it’s proven and I’ll look at it. This wasn’t some grizzled IT veteran – the guy’s a Silicon Valley entrepreneur in his 30’s (and I bet 80% of you use his innovation). Some IT shops know that taking a risk can pay off, but the smart ones know how to mitigate the risks of new technologies and avoid too much reliance on a business that might fold before their next round is funded.

David Linthicum’s “Cloud computing investor mistake No. 3: Buy into cloud-washed technology”

Cloud washing. It’s everywhere (“Cloud Power!” – ugh!). Often it’s from big established tech companies. Sometimes it’s from older VC-backed companies who reposition themselves for the cloud to “catch the wave.” Perhaps even some new startups with technology that really is not very cloudy do this too. Who cares? Honestly, if you’re an IT buyer and you purchase kit from your vendor just because it has the word cloud on the data sheet, you suck. Truly suck. You should be fired you suck so bad.

Honestly, shouldn’t you start with an understanding of the business problem you’re trying to solve, how that translates into feature and technology requirements, and then search the market for the solution that best meets your real needs? Who gives a flying donkey that “cloud” is not in the name of the product. Are you really that easy to fool? Don’t blame VCs for because some people are too lazy or unskilled to do their job properly.

I guess this leads to David’s concluding line:

“Go cloud — but do it wisely, not by following the VC flock.”

That’s good advice in any market.  Go cloud – but use your judgement, analysis and common sense.  In other words, don’t be some vendor’s puppet.  Okay, on this we agree.

(c) 2011 CloudBzz – this post originally appeared on CloudBzz.com.  For more of John’s thoughts on the cloud, visit CloudBzz.com.

Advertisements

One thought on “VCs and Cloud – Are They Leading Us Down the Wrong Path?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s