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Summary:

Cloud computing has been a key enabling factor in the latest generation of web startups, letting them start with small amounts of capital and scale quickly in response to demand. From a startup’s perspective, cloud is more of a pricing innovation more than a technological innovation.

Cloud computing has been a key enabling factor in the latest generation of web startups, letting them start with small amounts of capital and scale quickly in response to demand. Startups don’t care about a lot of the factors that slow adoption of cloud computing. New startups don’t own anything yet, so they don’t have a legacy investment in physical infrastructure. They also don’t have IT departments, who often have a stake in the old way of doing things. So, if you want to see what the future of IT infrastructure looks like, look at what startups are doing today.

Cloud computing is more of a pricing innovation more than a technological innovation. After all, cloud computing is really just virtualization (a la Xen or VMWare) that’s hosted by somebody else. The technology isn’t such a big deal. The mind-blowing thing is the ability to pay for computing like it is a utility. This offers two big advantages over owning and operating your own hardware, and even over renting servers by the month.

Advantage 1: Success-Based Scaling

When something is a utility, you pay for it based on the amount you use. System use is hopefully related to revenue-generation (if not, be afraid! This means your startup doesn’t have a business model), so cloud computing costs fluctuate in tandem with revenues. If you have big infrastructure costs this month, it’s because you have big revenue this month. This is a big advantage when compared to dedicated hosting, where you’d pay for the maximum capacity that you might need this month. A startup can do “success-based scaling,” and have many months of minimal costs (and no revenue), before finding product market fit and starting to grow rapidly. As it grows, it will have real infrastructure costs (possibly higher than with dedicated hosting), but it will also have revenue that it can use to pay for those costs.

Success-based scaling reduces the risk of launching a startup, and reduces the capital required to do so. A startup might never find product-market fit, or it might be a hit for a few months and then turn out to be a flash-in-the pan. With cloud computing, you can quickly scale up to meet demand, and you can scale back down just as quickly.

Advantage 2: Cash-Flow Positive Infrastructure

When something is a utility, you pay after using the service, instead of before you use it. Think of the difference between when you pay your rent and when you pay your phone bill: that’s the difference between dedicated hosting and cloud computing. For a business, the chance to delay paying for something until later is a big deal. Because revenues typically take time to collect, the business normally has to have a fair amount of cash on hand to continue to function while it waits to be paid. Even a very profitable startup that is growing rapidly might have trouble paying its bills because it simply hasn’t collected the cash from its customers yet!

A simple example will make this clearer. Imagine a small startup that is making money with Google AdWords. With dedicated hosting, the startup would have to pay the “rent” for their servers at the beginning of the first month of operations. But the money from AdWords won’t hit their bank account until the third week of month two! That’s 50 days of time, or two full months of infrastructure, that has to be paid for before the can get paid by AdWords. Contrast this with what would happen if they hosted on Amazon Web Services (the biggest provider of cloud computing). The bill for the first month of operations is due at the end of the first month, not the beginning. The credit card payment for the money spent at Amazon is due toward the end of the next month, several days after the money from AdWords has arrived in the account.

Advantage: Startups

What these two advantages mean for the startup using cloud computing is that its business has the potential to be inherently cash-flow positive. When your infrastructure costs track how many customers you have, and when you can collect money from those customers before you have to pay vendors, your need for outside capital dramatically decreases, and the risk of running out of cash goes down dramatically.

Cash is the oxygen of business, and cloud computing allows companies to inhale the oxygen (by collecting revenue) before they exhale (pay their vendors). No wonder that in the last few years, web-based startups have grown like weeds even as the broader economy collapsed!

I look forward to reading your thoughts in the comments below. Next week I’ll be writing about the “pitfalls of cloud computing.” And if you have a cloud computing horror story, please email me at jon@slideshare.com to share your experiences.

Jonathan Boutelle is Co-Founder and CTO of Slideshare, a web site for presentations that relies heavily on cloud computing. Previously, Jonathan was a principal at Uzanto, (a UI consulting firm) and worked as a software engineer at CommerceOne (a B2B enterprise software firm) and Advanced Visual Systems (a 3D graphics startup) You can find his presentations on cloud computing at slideshare.net/jboutelle, and his Twitter is @jboutelle. He also blogs at www.jonathanboutelle.com.

Photo courtesy Flickr user crazyneighborlady

By Jonathan Boutelle

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  2. Great post, but I have to disagree with your statement “cloud computing is really just virtualization”

    That’s like saying a computer is just a CPU. Like a CPU, virtualization or the hypervisor is useless without the tools (SW)and peripherals that go with it.

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  3. Abso-freakin-lutely. Dead right.

    I built my site using App Engine, and if I write better code, I pay less for resources. It’s an incredible way to do business.

    (Also, you might want to substitute Adsense in for Adwords in your post).

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  4. As a technology company you are handing the keys, blueprints and direction of your business to your “cloud provider”. Not something to be taken lightly. I wonder if Google or Facebook could have grown to current form on a cloud.

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  5. Absolutely right. In today’s startup world, where majority of startups are about App Development (either for the iOS ecosystem , Android, Amazon services or Facebook), cost to market costs are negligible. This is also where the opportunities lie for ‘enablers’ of Apps and Cloud.

    This is exactly the reason why we just launched a specialized cloud storage platform that provides ‘designed from scratch’ encryption on storage, versioning etc with IDrive EVS. With this, startups will be able to develop backup, sync, storage and sharing apps that require high level of encryption and versioning capability with minimal cost and time.

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  6. One thing to consider when factoring in costs for your startup. While you can save quite a bit of money, more-so time perhaps, going the cloud route, a bigger expense is marketing. Its harder to stand out in the noise now a days. Expect to pay much more than you realized in marketing costs. Hopefully your model includes some sort of viral marketing, if not expect to pay big bucks.

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  7. For now and it seems the still in the immediate future, cloud computing would still be just for businesses, startups and the big ones.

    I wonder how and when will cloud computing reach the home, and will it also be part of the month’s utility bills?

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  8. Jhay: I think cloud computing is already making its way into households. I for one hardly use client-based software on my home pc. I do my banking online, listen to music on Spotify, use Google Docs for spreadsheets and text, Picasa for photos, LinkedIn, Twitter, Facebook… it looks like finally, 15 years after Larry Ellison’s NC, the network really is the computer.

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  9. Great comments guys!

    RE: Reuven. I originally wrote “virtualization + REST APIs that access resources (S3, SQS, etc)”. I would stand by that statement.

    RE: Frank. You have to depend on somebody. Cloud-computing infrastructure vendors are going to be better at providing and managing infrastructure than you will ever be, whether you’re a bootstrapped startup (without the talent or cash) or a Fortune 500 company (where 10 meetings need to happen before a new server can be deployed). If you try to do everything yourself, competitors who outsource their infrastructure will move faster than you and eat your lunch.

    Jhay: cloud computing per se unlikely to penetrate consumer market. Consumers don’t typically rent servers, so a better way to rent servers doesn’t help them. Online backup is the only example I can think of that would bely that trend.

    Dave: thanks. I always get them mixed up. ;->

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  10. SalesArmyKnife Tuesday, August 17, 2010

    A first class article. This is a business management issue, nothing to do with quality of code or anything else technical, just the good old fashioned tar pit of cash management. Steady growth can be fed this way, but rapid scaling will still require the money lenders to step in. Beyond the lean start up is the stick-thin start up!

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