At Flybridge, we periodically dive deep into areas in which we see significant market growth and investment opportunity. Recently, we did so in the whole field of Cloud Computing and thought it would be interesting to share some of our thoughts. I would also like to thank our great summer associate, Ravi Inukonda, who worked with me over the last few months on this effort.
If you have been following trends in enterprise IT as of late, you have been unable to miss Cloud Computing and all the bad puns that normally accompany such commentary (“Forecast Mostly Sunny for Company Opting for Cloud Computing” or “Future bright for cloud computing” being two such examples).
While the ideas are not new - IBM called it Utility Computing back in 2002 - the Cloud Computing trend really gained steam over the past couple of years. The momentum is more than marketing, as the advent of Cloud Computing has really been enabled by advances in server/CPU architectures, storage and networking subsystems, open source software adoption and most importantly virtualization, all of which were perhaps too nascent to truly enable the cloud until recently. In addition to the technical advances, the current economic environment has furthered these trends, as customers look for ways to reduce capital expenditures and increase the efficiency of their IT operations. As a result, we now believe that Cloud Computing is at a tipping point and that it represents a fundamental architectural shift that will create numerous opportunities up and down the enterprise IT landscape. Past tipping points include the shift to client server architectures, enabled by more powerful PCs and widespread adoption of LANs, and the shift to Internet based three tier enterprise applications, driven primarily by the adoption of the web.
Given that Cloud Computing is used so frequently as an adjective, it is worth a quick segue to define the term and architecture. Simply put, cloud computing is infrastructure or applications that are delivered as a massively scalable service that is elastic in its ability to quickly scale up and down, where the complexity is abstracted from the end user, that are paid for in some form of a by the drink utility model. Taking this down a level, we think about clouds along two dimensions.
- From an architectural approach, cloud computing services tend to be Infrastructure as a Service, for example Amazon's EC2 compute platform, but also including other compute, networking and storage infrastructure; Platforms as a Service, for example Salesforce.com's Force.com platform, that allow developers to rapidly build and deploy clound-based applications; or Applications as a Service (SaaS), such as Netsuite's ERP and accounting applications.
- The other dimension is whether these services are offered to customers as public clouds by third party organizations, private clouds in an enterprise's own data-centers or as a hybrid of the two.
Does that mean that all the promising opportunities are already covered or are there big white space opportunities for new companies? We think there are a few trends and themes that offer great promise, each one of which can support numerous successful companies:
- Enable enterprise data centers to be more cloud like. CIOs of large companies that we speak to are generally concerned about control, security and delivering a good, reliable service to their end-users. The first two issues lead to a generic concern with seeing any of their mission critical or sensitive applications hosted in a public cloud. That said, the mere existence of services such as Amazon's Web Services puts pressure on their ability to deliver a good service to their end-users as they fundamentally change expectations. If a user can have a full server OS, storage and networking provisioned on AWS in minutes, the current enterprise service level of weeks or months to provision the same looks pretty weak. As a result, enterprise CIOs that are responsible for data centers will over time look to manage and operate these data centers much in the same way as a public cloud. This will, therefore, create opportunities around management, provisioning, billing, access control and other technologies that allow a private cloud to be effectively operated. As an aside, there will also be an opportunity at the networking layer as the deployment of cloud architectures in enterprise IT data centers will create the need for high speed, low latency, low power, non-blocking network switches.
- Bridge the cloud and enterprise boundary. The advent of public cloud infrastructure will create opportunities for companies that bridge the divide and smooth the transition between private and public clouds. While there is a risk that the Platform as a Service vendors will view this as their domain, witness Amazon's recent VPC announcement there are many services such as backup and email archiving that benefit from a combination of on-premise and cloud based software that will be outside of the domain of the platform providers. The other approach that we see promise with along this front are applications and platforms that support cloud-bursting, in other words an application that runs most of the time in an enterprise data center but under heavy load relies on the public cloud for scalability.
- Provide tools to better manage cloud environments. Any time there is a fundamental architectural shift in the enterprise IT landscape, it has created opportunities for new companies to move more quickly into the space than incumbent vendors with installed bases to protect and legacy applications to support can. These companies have generally focused on systems management, network management, security and the like. This trend is already underway in the cloud market and can been seen in the success of companies such as RightScale and New Relic. In addition to tools for the management of the cloud, we also believe that new infrastructure services, such as horizontally scalable databases written solely for cloud applications, will see great adoption as more applications are written from the outset to be run in the cloud.
- Develop SaaS applications for vertical markets. While there may not be much whitespace in major horizontal application markets, there are many vertical market niches that can support the creation of very large companies. In these markets, a start-up can build deep domain knowledge around the problem set and offer its applications in a cost-effective manner (often leveraging public clouds for their infrastructure), making their solutions easier to adopt, maintain and extend as compared to traditional enterprise applications in the same field. We are seeing this with the success of our insurance SaaS company, FirstBest Systems, but there are numerous other examples in the healthcare IT, bio-medical research, energy and other fields.
- Create companies that are enabled by the Cloud. One of the aspects of cloud computing that excites us the most is that it is a huge enabler of innovation. Cloud computing makes it so easy to develop and deploy applications that it levels the playing field for start-ups versus large, well capitalized, competitors. As an entrepreneur, I can now buy access to world-class data center infrastructure for dollars an hour that would have previously cost me millions to purchase and deploy. As a result, savvy start-up executives can look to create companies that would have previously been too capital intensive to contemplate. This is especially true if the computing need of such applications, for example software testing (see SOASTA for one such provider) or financial modeling are intermittent for any one customer but relatively smooth across many such customers.
Given the benefits of a more flexible, dynamic and efficient IT environment, Cloud Computing, under this name or new ones to come, will see significant adoption across the enterprise IT market over the next several years. This will create many opportunities for savvy entrepreneurs, so if you have ideas or thoughts, please let us know!